IRS provides temporary relief for REITs with option of paying dividends in stock

In order to qualify as a REIT for federal income tax purposes, generally a REIT must distribute at least 90% of its net taxable income to its stockholders. If a REIT is unable to distribute 90% of its net taxable income then it will be subject to federal income tax at the applicable corporate rate. Only taxable distributions may be counted towards satisfying the 90% requirement.

A stock dividend will not generally be treated by the IRS as a taxable distribution. However, in December, the IRS issued Revenue Procedure 2008-68, which provided that a stock dividend issued in lieu of cash dividend by a publicly-traded REIT will be treated as a taxable distribution that may satisfy the 90% requirement.

Revenue Procedure 2008-68 states that a distribution of stock by a REIT will be treated as a taxable distribution equal to the value of the cash that could have been received by the stockholder, provided that the following requirements are satisfied:

• The stock is publicly traded on an established securities market in the U.S.
• The distribution is declared with respect to a taxable year ending on or before December 31, 2009.
• Each shareholder may elect to receive its dividend in either cash or stock of the REIT of equivalent value, provided that any limitation instituted by the REIT on the amount of total cash available is not less than 10% of the aggregate distribution.
• If too many shareholders elect to receive cash, each shareholder electing to receive cash is entitled to a pro rate share of the cash corresponding to their respective dividend, but in no event will any shareholder electing to receive cash receive less than 10% of their dividend in cash.
• For shareholders participating in dividend reinvestment plans (DRIP), the DRIP applies only to the amount of cash the shareholder would have received absent the DRIP.

This new revenue procedure will permit cash-strapped, publicly-traded REITs an opportunity to preserve capital in 2009. Already, a handful of multifamily REITs have announced plans to distribute stock as part of their dividends.

Sources: NYTimes, IRS Revenue Procedure 2008-68

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Barney Frank Requests Assistance for the Commercial Real Estate Industry

In an entry I posted on this blog on December 23rd, I mentioned that the commercial real estate industry was seeking a bailout. Apparently, Congress was listening.

The Wall Street Journal last night reported that House Financial Services Committee Chairman Barney Frank (D-MA) introduced H.R.384, entitled the TARP Reform and Accountability Act of 2009. The bill is intended to reform the Troubled Assets Relief Program and includes a provision encouraging the Fed and the Treasury to extend a $200 billion debt-relief program targeted at consumer debt to commercial real estate.

But the industry is pushing for assistance above and beyond that requested by Chairman Frank. In a letter to lawmakers, it urged them to create a seperate facilility for commercial real estate:

"Many steps are needed to address this issue, but the first and most significant action would be for policy makers to request that the Treasury Department provide, at a minimum, $20 billion in TARP funds to revive the broader private commercial mortgage markets."

Information on the H.R. 384 can be found here.

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Apartment Owner Sued for Common Area Second Hand Smoke

In a ruling issued earlier this week, the 2nd District Court of Appeal in Los Angeles ruled that a 7-year old asthmatic girl had standing to file suit as a tenant against an apartment owner over secondhand smoke in outdoor and common areas of the community, such as swimming pools, barbecues, playgrounds and dining facilities. (Birke v. Oakwood Worldwide, 09 C.D.O.S. 409).

The suit was brought by the girl’s father, a California civil litigator, who claims that the court’s ruling establishes a national precedent. As reported in law.com, the girls’ father asserted that: "This is the first time," he said, "that a court anywhere in the country -- and I can say that with some certainty because we did the research -- has ruled that outdoor secondhand smoke can constitute a public and private nuisance." http://www.law.com/jsp/article.jsp?id=1202427433265

Noteworthy is that a concurring judge in the opinion indicated that he would have also let the case move forward under the federal Americans with Disabilities Act. Can you imagine the possible wave of class action suits against apartment owners lurking in the wings under the ADA for injuries caused by second hand smoke?

This case underscores the need for apartment owners and managers, to the extent they have not previously done so, to consider imposing a clearly defined smoke free policy on their entire communities, including outdoor and common areas. If adopted, the policy should be specifically included in the community’s form apartment lease and associated rules and regulations, as well as conspicuously posted in the community’s common areas.

(This entry posted by Pamela V. Rothenberg, a member of Womble Carlyle's Real Estate Development group.)

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