Real estate investment trusts (REITs) create unique planning opportunities for private equity funds and other private investors seeking to invest substantial capital resources in U.S. real property. Structuring Real Estate Joint Ventures with Private REITs, written by Scott L. Semer of Davies Ward Phillips & Vineberg LLP and Michele J. Alexander of Wachtell, Lipton, Rosen & Katz, addresses how the goals of these investors are achieved by entering into joint ventures using non-publicly traded or “private” REITs. 

This Portfolio provides a source of guidance for tax practitioners advising clients investing in U.S. real estate through or with a private REIT. It includes a discussion of the unique issues that a private REIT confronts in complying with the qualification requirements under the Code, including issues relating to forming the REIT and ensuring that the REIT earns qualifying income, while obtaining an ownership structure that serves the business objectives of the joint venture participants (including management of the property by a significant participant in the joint venture).  

The authors address issues that are unique to UPREITs and DownREITs, issues that arise in taking a public REIT or UPREIT private, and issues that arise in selling or otherwise exiting from a private REIT.  

In addition, it addresses the particular issues that foreign investors face, including withholding, the branch profits tax, issues under U.S. tax treaties, and issues for foreign governmental investors under §892 of the Code. 

Structuring Real Estate Joint Ventures with Private REITs allows you to benefit from:

• Hundreds of hours of original research on specific tax planning topics from leading practitioners in this area
• Invaluable practice documents, including tables, charts, and lists
• Plain-English guidance from world-class experts
• Real-world and in-depth analysis that lets you explore various options
• Time-saving access to relevant sections of tax laws, regulations, court cases, IRS documents, and more
• Alternative approaches to both common and unique tax scenarios 

This Portfolio is part of the U.S. Income Portfolios Library, a comprehensive series that includes more than 200 Portfolios, which cover every federal tax topic with expert, in-depth analysis, and offer commentary on a wide range of federal taxation topics, including Compensation Planning, Deductions and Credits, Partnerships and Corporations, Special Pass-Through Entities, Corporate Reorganizations, Real Estate, Procedure and Administration, and more. 

Detailed Analysis

I. Introduction

II. Summary of REIT Requirements

Introductory Material

A. Management

B. Transferability

C. Taxable as a Corporation

D. Ownership Tests

1. 100 Person Rule

2. Closely Held

E. Income and Asset Tests

1. Income Tests

a. 95% Gross Income Test of § 856(c)(2)

b. 75% Gross Income Test of § 856(c)(3)

2. Asset Tests

3. Definitions and Special Rules

4. Mortgage Secured by Partnership, LLC or Single Member Entity Interests

a. Partnership Interests Outside the Safe Harbor

b. Single Member Interests

III. Issues with Private REITs

A. Use of Partnership to Hold All REIT Common Shares

1. Promote

2. Free Transferability

3. Managed by Directors

4. Stapling

5. Withholding

B. Related Party Issues

1. Closely Held Test

2. Satisfying the Independent Contractor Test of § 856(d)(3)

a. Non-Customary Services

b. Management of Lodging Facilities and Health Care Properties

(1) General Rules

(2) Attribution Rules

3. Satisfying the “Eligible” Independent Contractor Test of § 856(d)(9)

4. Master Lease Structures and § 856(d)(2)(B)

a. Reason for Master Lease Structures

b. What Constitutes “Rent”

c. Unrelated Master-Tenant Structures

(1) Qualifying Lease Payments

(2) Avoiding a Disqualified Tenant

C. Tax-Exempt Joint Venture Partners

1. Pension-Held REITs

2. Dividend Distributions by Non-Pension-Held REITs

a. No Property Subject to Debt

b. Property Subject to Debt

D. Preferential Dividends

1. Distribution of Property

2. Definition of “Class”

3. Administrative Issues

4. Sliding Scale Management Fees

E. C Corporation Issues

1. Built-In Gains

2. Distribution of C Corporation Earnings

F. Prohibited Transactions

1. Property Described in § 1221(a)(1)

2. Safe Harbor

3. Property Held for Rental

4. Exit Strategies

5. Sale of Single Property

6. Sale of Partnership Interest

G. Personal Holding Company Issues

IV. Venture Structures with REITs

A. Single Private REIT as Acquiror

1. Section 351(e)

2. Section 351(g)

3. Section 357(c)

4. No § 704(c) Allocations

5. Treatment of Capital Gains/Depreciation Recapture

B. REIT as Partner: UPREITs and DownREITs as Acquirors

1. Reason for UPREIT

2. Structuring Contributions of Property to UPREIT Partnership

3. Ensuring Economic Equivalence Between OP Interests and REIT Shares

4. Partnership Anti-Abuse Rule

C. Avoiding Gain Recognition by Partner Contributing Property to UPREIT or DownREIT

1. Potential Gain-Triggering Events

2. Tax Protection Agreements

3. Tax Protection and Future Acquisitions

4. Structuring Contributions of Partnerships

a. Nonrecourse Debt

(1) Minimum Gain

(2) Section 704(c)

b. Form of Acquisitions

(1) Assets-Up

(2) Partnership Merger

(3) Acquisition of Partnership Interests

5. Allocating Nonrecourse Liabilities

a. Tier One

b. Tier Two

c. Tier Three

d. Initial Allocation of Liabilities

e. Subsequent Reallocations of Liabilities

f. Tax Protection Agreements

6. Issues with DownREITs

D. Acquisitions of Public UPREITs and Other Targets

1. Structuring Considerations

2. Tax Consequences of Acquisition Form

a. Forward or Reverse Merger

b. Partnership-Level Treatment

3. Bootstrap Acquisitions

a. Desirability of a Pre-closing Distribution

b. Post-closing Liquidation/§ 332(c)

c. Tax Consequences of a Pre-closing Distribution

(1) Dividend vs. Redemption

(2) Effect on Earnings and Profits

(3) Pre-closing Distribution as Additional Purchase Price

d. Sale of Property in Connection with Acquisition

e. Debt Financing

4. Continuing REIT Requirements

5. Intentionally Terminating REIT Status

a. Section 331

b. Dividends-Paid Deduction

c. Stock Purchase and Liquidation Respected as Separate Steps

6. Cashing Out UPREIT Unit Holders

7. Acquisition of C Corporations

E. Exit Scenarios

1. Distribution of Property

2. Sale of Property/Distribution of Proceeds

3. Sale of Shares

V. International Issues

A. FIRPTA

1. In General

2. FIRPTA Provisions Specifically Applicable to REITs

a. Domestically Controlled REITs

b. Section 897(h)(1)

(1) Section 897(c)(1)(B)/Section 331 as Override to § 897(h)(1)

(a) Notice 2007-55

(b) Interplay of § 331 and § 897(h) Prior to Notice 2007-55

(i) The “Cleansing Rule” of § 897(c)(1)(B)

(ii) Arguments in Favor of § 331 Prevailing Over § 897(h)(1)

(2) Section 332 Liquidations

(3) Section 897(h)(5)

3. Distributions of USRPIs

B. Section 892

1. Effective Practical Control

2. Agreements with Other Shareholders to Acquire REIT Shares

3. FIRPTA/§ 897(h)(1)

C. Withholding

1. Capital Gain Dividends

2. Partnerships

3. Distributions in Excess of Earnings and Profits

D. Branch Profits Tax

1. General

2. Dividends and Sale of REIT Shares

3. Section 897(h)(1) Distributions

E. Treaties

1. General

2. Tax Exempt Investors

F. Cross-Border Financing - § 163(j)

1. In General

2. Debt-to-Equity Ratio

3. Treatment of Pledges and Other Security

Working Papers

Table of Worksheets

Worksheet 1 Examples Illustrating Application of § § 318 and 856(d)

Worksheet 2 Sample Restriction Provisions in Tax Protection Agreement

Worksheet 3 Sample Break-Up Fee Savings Provision

Worksheet 4 UPREIT Structure

Worksheet 5 DownREIT Structure

Bibliography

Official

Statutes:

Legislative History:

Revenue Rulings and Revenue Procedures:

Other Announcements:

Other Authorities:

Cases:

Unofficial:

Treatises:

Periodicals:

1990

1993

1995

2003

2006

2007