September 01, 2014 | By Keith Martin in Washington, DC

REITs are getting new attention after an IRS ruling to a telecom company.

Arkansas telecom company Windsteam Holdings Inc. said in a securities filing in late July that it plans spin off its fiber optics and copper lines, real estate and  ther fixed assets into a separate company that will qualify as a real estate investment trust or REIT. It said it received a favorable private letter ruling from the IRS about the transaction. 

The REIT will lease the assets back to Windstream.

The move is expected to save Windstream more than $100 million a year in taxes. The company had $6 billion in revenue in 2013. About $650 million in annual earnings would be shifted to the REIT through rents to lease back the assets. 

A REIT is a corporation or trust that is not taxed on its earnings to the extent the earnings are distributed each year to the owners. It must hold at least 75% of its asset value in real estate and cash. It must also satisfy separate 75% and 95% income tests: at least 75% of its gross income each year must be rents from real property, interest on loans secured by mortgages on real property and other types of income tied to real estate and at least 95% of its income must come from real estate plus passive sources like dividends and interest.

About 1,100 REITs file tax returns with the IRS. Most are not publicly traded. 

The Windstream ruling may cause phone and cable TV companies, electric and gas utilities and chains like fast-food restaurants and big-box stores to take another look at spinning off real estate assets into a REIT and leasing them back. However, there may not be much benefit to utility shareholders if the regulators require any tax savings to be passed through to ratepayers. 

Cell tower operator American Tower Corp. converted into a REIT in 2012 and has had $1.2 billion in tax savings since then. Iron Mountain, a data center company, said in late June that it received a favorable IRS ruling that will allow it to spin off its real estate assets into a REIT. The IRS released a redacted private letter
ruling in early June that lists services that data center companies can provide tenants and still treat rents paid by the tenants as entirely for use of real property. The services include installation, “cross-connect” services — data centers own wires and cables that connect and interact with the tenants’ computer equipment — and “remote hands” services. Examples are rebooting a server or changing a backup tape without having to log into a tenant’s computer.

The ruling is Private Letter Ruling 201423011. A number of data center companies have set up REITs, including CyrusOne, CoreSite Realty Corp., Digital Realty Trust and DuPont Fabros Technology Inc. Several others are in the process of doing so.

Despite the potential new interest, REIT initial public offerings were down significantly in the first half of 2014. There were 15 new IPOs of REITs in 2013 valued at nearly $5.7 billion. There have been just two REIT IPOs valued at $103.2 million through July 2014.