REITS continue to draw attention. The comprehensive corporate tax reform bill that Dave Camp (R-Michigan), the outgoing chairman of the House tax-writing committee,
released as a discussion draft in February would effectively return real estate investment trusts to their roots as vehicles for investors to pool capital to invest in office and apartment buildings and other real property, but rule out their use to own cell towers, billboards, transmission lines and similar business assets.

A REIT must hold at least 75% “real property” or mortgages on real property. It can also hold some assets through a taxable subsidiary that do not qualify for be held by the REIT directly. The Camp bill would defined “real property” for REIT purposes to exclude assets with shorter depreciable lives than 27.5 years. 

Harold Hancock, a tax counsel to the House tax-writing committee, told a DC Bar tax section meeting in late October, “A number of [businesses were] engaging in spinoffs that were not started as a vehicle for everyday investors to invest in real estate but instead were actual operating companies that figured out a way to put real estate into
a REIT and then have the actual business operations be conducted in a [taxable REIT subsidiary]. We don’t like these types of transactions.”

The Camp bill is expected to serve as a starting point for drafting if the next Congress decides to take up corporate tax reform.

Hancock said timber is not treated as real property under the draft because the committee staff believes timber should be treated as inventory. He said the staff has  discussed the issue at length with the timber industry, and he expects the discussions will continue.

Meanwhile, Martin Sullivan, an economist who writes for Tax Notes magazine, estimated in September that 20 corporations that have spun off timber, casinos, data centers, prisons, cell towers and billboards recently into REITs or have announced an intention to do so, will save $900 million to $2.2 billion a year in corporate income taxes, assuming their earnings remain at 2014 levels. Sullivan said the estimates overstate the revenue loss to the government because they fail to take into account larger tax payments by the REIT shareholders, many of whom are individuals. REITs must distribute at least 90% of their income each year. Life Time Fitness Inc., which owns health
clubs, saw its stock shoot up 15% immediately after it announced an intention to convert into a REIT in late August. Sullivan said, “Expect announcements like this to continue” when a company can increase its market capitalization by $250 million “in a matter of minutes.”

REIT conversions can be expensive. Iron Mountain, a data center company that spun off assets into a REIT as of January 1, 2014, said in its latest financial statements that it expects to have spent $145 to $155 million on legal fees, tax work, advisory fees and similar costs to convert over the period 2012 through 2014, plus another $40 to $45 million in capital costs such as reprogramming information systems to operate as a REIT, plus another $15 million a year on REIT compliance. 

Equinix, a data center company, estimates its costs will run to $84 million over the same period, plus $5 to $10 million in annual compliance costs. Penn National, a casino
company that converted in 2013, estimated its cost to convert was $125 million. “I can’t overemphasize the complexity,” the CEO said