MGM's REIT Could Be Model for Avoiding IRS Challenges

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Oct. 30 — MGM Resorts International may have found a tax-free way to form a real estate investment trust without IRS scrutiny and maintain some, but not all, of the tax benefits.

The “captive REIT,” which the casino company announced Oct. 29, will be 70 percent owned by MGM, meaning the company will pay corporate-level tax on the portion it owns. While this model is less tax efficient than a complete spinoff, MGM will maintain more control over the properties, a common concern among corporations thinking about transferring real estate holdings to a REIT, Robert Willens, a tax consultant in New York, told Bloomberg BNA.

MGM is separating the assets through an initial public offering sponsored by the company, which is a response to recent Internal Revenue Service challenges to REIT spinoffs, Brian Egger, a senior gaming analyst at Bloomberg Intelligence, said Oct. 30.

Gaming companies have been under pressure from investors to unlock real estate value and save on taxes by separating the operating unit and the real estate property into two companies, in what is commonly referred to as an OpCo/PropCo transaction. Penn National Gaming Inc. started the trend in 2013 when it spun off most of its properties into a REIT, prompting others including Pinnacle Entertainment Inc. and Caesars Entertainment Corp. with property inside C corporations to consider similar structures.

Play Under Review

Tax-free spinoffs under tax code Section 355, like Penn National's, have come under review at the IRS. The agency said in September it was studying the taxability of REIT spinoffs in situations where the newly formed company would lease the properties back to the operating company. While the IRS considers issuing regulations, it won't grant private letter rulings to those looking to make deals (178 DTR G-3, 9/15/15).

“Until recently, companies may have relied on private letter rulings, which are no longer an avenue,” Egger said.
MGM's REIT conversion “eliminates issues with the IRS. It's not subject to the uncertainty if you did it as a spinoff,” Willens said. “I bet Macy's and McDonald's are studying this closely.”

Copycat Companies?

Macy's Inc. and McDonald's Corp. are among retailers and restaurateurs that have said they are considering transferring their stores to a REIT. Darden Concepts Inc., the owner of Olive Garden and the Capital Grille, has a REIT spinoff scheduled for November in what some investors and analysts see as a race to complete the deal before the IRS issues regulations that could alter the tax-free nature of the transaction (204 DTR G-7, 10/22/15).

MGM sidesteps potential IRS ruling changes, Willens said, comparing this REIT conversion's structure to what some energy companies do by transferring some assets to a master limited partnership. The market will typically value assets placed in a tax-advantaged vehicle more highly, which translates to a higher stock price for the parent company, he said.

“This solves all sorts of problems,” Willens said. “This could easily be the model for future OpCo/PropCos.”

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