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Kardis, Lyden, Wise and Green on 2008 REIT Developments

While 2008 was a difficult year for many real estate investment trusts (REITs), there were a number of positive developments. In this Commentary, Phillip J. Kardis II, Thomas J. Lyden, Roger S. Wise, and Anthony C. Green summarize the top tax and securities law developments affecting REITs in 2008. They write:
     On December 9, 2008, the SEC [Securities and Exchange Commission] staff released their Financial Reporting Manual (an update and revision to their Accounting Training Manual). The manual includes changes in reporting for acquisitions by non-exchange traded REITs subject to Industry Guide 5. These REITs are now required to file financial statements satisfying Rule 3-14, no later than 71 calendar days after the acquisition is reported on Form 8-K, for acquisitions made during the distribution period if the acquisition constitutes 10% or more of total assets as of the acquisition date.
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     The Internal Revenue Service (IRS) issued two private letter rulings that provide guidance for REITs with respect to the ownership and management of healthcare facilities. First, "independent living facilities" that do not provide certain services, such as medication management or "assisted living," are not "health care facilities" and can thus be operated by a taxable REIT subsidiary (TRS) without disqualification. Second, a TRS can own a "health care facility" if the facility is operated by an independent contractor. PLR 200813003 and PLR 200813005.
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     In Revenue Procedure 2009-15, released on January 7, 2009, the IRS announced that under certain circumstances a REIT could treat stock dividends as distributions that give rise to a dividends paid deduction for the REIT. Generally, a REIT is not allowed to treat stock dividends as distributions in computing its dividends paid deduction. The revenue procedure provides relief to cash strapped REITs that could find their REIT status in jeopardy due to an inability to pay cash dividends and thereby satisfy the annual distribution requirements applicable to REITs. To be eligible for the relief provided by the revenue procedure, the stock of the REIT must be publicly traded, the distribution must be declared with respect to a taxable year ending on or before December 31, 2009, and it must be distributed pursuant to a plan under which each shareholder has the option to receive either cash or stock of equivalent value, such value being determined as close as practicable to the dividend payment date based on market prices for the shares of stock. A REIT is allowed to restrict the amount of cash paid as part of the distribution to 10 percent of the aggregate distribution. Thus, a REIT would be allowed to conserve cash by making 90 percent of a dividend distribution in the form of stock. If too many shareholders elect to receive the dividend in cash, each electing shareholder would receive a pro rata portion of the total cash available. Revenue Procedure 2009-15 applies to both REITs and regulated investment companies (i.e., mutual funds), and supersedes and restates Revenue Procedure 2008-68, issued on December 10, 2008, which applied only to REITs.

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