REIT conversions as a way to boost value

BVWireIssue #128-4
May 22, 2013

Valuation professionals know the challenge that businesses that combine real estate and operations pose. But there is another angle to consider. A recent New York Times article notes a small number of corporations have made an “aggressive move” to convert standard companies to real estate investment trusts (REITs) to avoid federal taxes.

Value increase: This strategy also appears to have a positive effect on value. A recent research report found that seven out of eight companies that became REITs in the bull market since March 2009 rose more after their conversions than another industry gauge, the MSCI U.S. REIT Index. The report goes on to say that “we see potential for a number of new REIT sectors in the future, including energy infrastructure (midstream pipelines, solar and wind farms, etc.), railroads, public infrastructure (private highways, bridges, ports, etc.), farmland, cemeteries and others.”

The IRS has become more liberal in its interpretation of “real property,” thus paving the way for more conversions. In a recent private letter ruling, the IRS allowed a data center and document storage company to convert to a REIT. Find an extended discussion of the recent IRS Private Letter Ruling 201314002, 2012 PLR LEXIS 1751 (April 5, 2013) in the June Business Valuation Update; the ruling is posted at BVLaw.

Watch out: The trouble is, this strategy could be seen as a loophole that needs to be closed. According to a report in the Wall Street Journal, Congress is scrutinizing the REIT exemption, which could bite the dust if the conversions push the envelope too much.

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