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Real estate firms push to avoid notice in Obama tax rewrite

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 Lobbyists for the largest real estate investment trusts in the U.S. are working to shield the industry from paying corporate taxes if President Barack Obama and Congress agree to a tax code rewrite.

The industry, which includes Indianapolis-based REITs Simon Property Group Inc. and Duke Realty Corp., is guarding against a potential proposal from the Obama administration that would impose new taxes on partnerships and similar companies with more than $50 million in gross receipts that are currently exempt from corporate income tax. The National Association of Real Estate Investment Trusts has spent $1.1 million this year lobbying Congress on issues that include a tax overhaul, while the Real Estate Roundtable has spent $1.5 million.

REITs, which are companies that own, operate and sometimes finance real estate projects, reported a total equity market capitalization of $461 billion as of July 31, according to the National Association of Real Estate Investment Trusts. The administration would be overlooking a significant revenue source that could be used to offset lower corporate rates if it ignores these firms in shifting tax-status rules, said Henrietta Treyz, a vice president at Height Analytics, a Washington, D.C., research firm.

“If you carve out REITs, how much money is Treasury really raising?” she said. “If you carve out this revenue-raising proposal, what are you left with?”

Obama is expected to propose revisions to the U.S. tax code as early as September. Sandra Salstrom, a spokeswoman for the U.S. Treasury Department, declined to comment on what might be included in the plan, including whether it would affect REITs.

One of the main questions about Obama’s tax proposal and those being developed in Congress involves the treatment of so-called pass-through companies. These are firms structured as partnerships or S corporations that accounted for almost one-third of all income reported on individual returns in 2009, according to the Tax Policy Center, a Washington-based nonpartisan research organization. The profits pass through to individual tax returns, allowing owners to avoid paying the corporate income tax, regardless of the firm’s size.

Though REITs and pass-through entities don’t have to pay most corporate taxes, they are structured in ways that impose different requirements on their owners.

Treyz estimates that it will cost the Treasury $125 billion per percentage point over 10 years to lower the corporate tax rate from its current 35-percent maximum. Pass-through entities are a place to look for money to help cover the forgone revenue.

“This is all about the concept of broadening the base,” she said. “That doesn’t just mean people making less than $8,000 a year paying taxes now. That means getting more companies to pay into the corporate tax.”

Tony Edwards, the senior vice president and general counsel of the National Association of Real Estate Investment Trusts, said his industry has some fundamental differences from pass-through entities. While pass-throughs may retain some income, REITs are required by law to distribute at least 90 percent of their taxable income to shareholders each year. Any remaining income is taxed at the corporate rate, so most REITs return 100 percent of taxable income to shareholders.

That creates market pressure, he said.

“Since REITs must distribute virtually all of their taxable income, they need to periodically go back to the market to raise more capital,” Edwards said. “If they have not been good stewards on behalf of their shareholders, it becomes difficult to raise more money.”

Though REITs don’t pay a corporate tax, their shareholders can’t take advantage of the 15-percent tax rate for dividends that Congress passed in 2003. REIT dividends are treated as ordinary income.

“REIT dividends are already disadvantaged versus C corporations with respect to taxes,” said Jim Sullivan, the managing director of REIT research at Greenstreet Advisors, a research firm in Newport Beach, Calif.

Sullivan said the REIT industry’s current tax structure is central to its business model.

“It’s extremely important in the sense that the REIT industry was built upon a promise that in return for no corporate income tax, REITs would have to give out most of their income to their owners,” he said. “It’s easy to see how changes would hurt them.”

Edwards said Congress and the administration should revise the tax treatment of REITs only if they also shift the tax status of mutual funds, where income is also exempt from tax.

“Congress has patterned REITs on mutual funds, so any imposition of a corporate level tax on mutual funds would raise a similar tax policy issue with respect to REITs,” he said.

Martin A. Sullivan, a former Treasury Department tax economist, said political disagreements over broader questions associated with tax policy will likely protect REITs from being required to pay corporate taxes.

“First, there’s the general problem of raising any taxes that we’ve seen,” said Sullivan, who is now a contributing editor at Tax Analysts, a nonprofit organization in Falls Church, Virginia. “Then there’s the more specific but equally thorny problem of raising taxes on pass-throughs, which will be nuclear. And then you’d get to REITs.”
 

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  • So Many Tricks
    I'm in the investment real estate industry and I gotta tell you there are a lot of loop holes used to not pay federal taxes. But I assume that is also true in other industries. I'd love to see a "flat tax" or better still a national sales tax. But I don't think either will happen. The system is gamed for the lawyers, lobbyists and public officals to make money off these loop holes. The environmentalists want tax benefits for wind power, so the real estate folks get special tax treatment for REITS, and the oil companies get their goodies. Its a big game that cost taxpayer billions annually. Having just purchased a home, I'd hate to see the mortgage deductions go away. But a cap makes sense to me. Why reward somebody for a 2 million McMansion?
  • FairTax
    FairTax is only fair for 99.999% of the people. For the unfortunate 1 out of 100,000 that currently has access to a strong Washington lobby, they'll just have to find new ways to squeeze from the rest of the population.
  • Do you understand?
    Apparently you just don't get it. Families and entrepreneurs such as the Simons are not the only ones that own REITs. They are publicly held and many mutual funds hold shares in them as well. That means that nearly every person with any sort of pension, 401k, IRA, or investment account of any type probably has exposure to these companies and would subsequently be paying the tax. What you and the government fail to understand is that tax is always incident upon the consumer at the end of the day. It is Economics 101. Everything gets passed along, or as some would say, $hit rolls downhill.
  • The rich get richer, the poor get poorer
    These are the people who SHOULD be paying the taxes!!

    Yes, the Simon family gives hugh amounts of money to charities. But, giving it thru donations gives them a tax write-off.

    Need more be said?
    • Important to note...
      Patrick, REITs are not the "folks who helped create the real estate bubble". The real estate bubble was mostly a supply problem in residential real estate, particularly vast tracts of new suburbs. REITs rarely invest in housing projects (though, to be sure, some do). REITs mostly invest in commercial and industrial properties that provide an income stream, which non-rented residential properties do not provide (one payment up front is not what REITs want). But I do agree we needn't protect the people who caused the real estate bubble, so let's finally get rid of the mortgage interest deduction and reduce the budget to the highway administration! After all, those two things provided more blood to the real estate bubble than REITs ever did.
    • Tough patooties
      Wow, wouldn't it be just awful if those folks who helped create the real estate bubble and crashed the economy would have to pay their fair share? Wouldn't it? Huh, wouldn't it?

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    1. How can any company that has the cash and other assets be allowed to simply foreclose and not pay the debt? Simon, pay the debt and sell the property yourself. Don't just stiff the bank with the loan and require them to find a buyer.

    2. If you only knew....

    3. The proposal is structured in such a way that a private company (who has competitors in the marketplace) has struck a deal to get "financing" through utility ratepayers via IPL. Competitors to BlueIndy are at disadvantage now. The story isn't "how green can we be" but how creative "financing" through captive ratepayers benefits a company whose proposal should sink or float in the competitive marketplace without customer funding. If it was a great idea there would be financing available. IBJ needs to be doing a story on the utility ratemaking piece of this (which is pretty complicated) but instead it suggests that folks are whining about paying for being green.

    4. The facts contained in your post make your position so much more credible than those based on sheer emotion. Thanks for enlightening us.

    5. Please consider a couple of economic realities: First, retail is more consolidated now than it was when malls like this were built. There used to be many department stores. Now, in essence, there is one--Macy's. Right off, you've eliminated the need for multiple anchor stores in malls. And in-line retailers have consolidated or folded or have stopped building new stores because so much of their business is now online. The Limited, for example, Next, malls are closing all over the country, even some of the former gems are now derelict.Times change. And finally, as the income level of any particular area declines, so do the retail offerings. Sad, but true.

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