16A — September 17 - October 21, 2021 — Owners, Developers & Managers — M id A tlantic Real Estate Journal
www.marej.com
O wners , D evelopers & M anagers By Ashley Kettler, CPA, Withum A Foray into non-traditional real estate investment trusts
eal estate investment trusts (REITs) can serve more industries than just real estate. When you hear the term “REIT” most people think of tra- ditional RE- ITs, such as office, indus - trial, residen- tial, or retail properties. Today, non-traditional RE- ITs are gaining popularity in industries outside of real estate. You might be wonder- ing how a REIT gets around various testing and the rules of being restricted to owning real estate. Here are a few other industries that can benefit from forming a REIT and how. Cannabis REITs The marijuana industry is on the rise as New Jersey recently became 1 of 19 states (including D.A.) to legalize recreational marijuana in addition to dozens of states that have medical use laws. A cannabis REIT can serve as a funding source providing much needed capital through a leaseback transaction. The marijuana company would sell its real estate to a REIT, then lease back the property at an arms-length rate. This gives R Ashley Kettler
the company an influx of cash for its operations, in addition to passing off some operational burdens of owning a building. Companies can also enter into a loan with the REIT to buy or build out their real estate, similar to mortgage REITs. The REITmakes money on the loan interest and the company has another way to finance its building, a plus considering the challenges marijuana com- panies face trying to secure a lease with various zoning and legal restrictions. What’s considered arms- length? The recommendation is to have a transfer pricing study done. Hotel and Lodging REITs A previous Withum article covered impermissible tenant service income so you might be wondering how a hotel REIT gets around those rules. REITs must derive their income from rents, not from operating a secondary business. Strictly speaking, operating a hotel would not qualify as permis- sible income for a REIT. In a hospitality REIT, the REIT simply owns the building and land, rents the property to a taxable REIT subsidiary (TRS) who then contracts with a third-party independent con- tractor (IK) to run the hotel operations. When leasing to
a TRS, the lease needs to be an arms-length transaction. The lease can be structured to receive a fixed base rent plus a percentage of gross revenue. Note that percentage of net revenue is not allowed for a REIT as that is construed as being involved in the opera- tions of a company. Healthcare REITs Hospitals, medical offices, medical research facilities, and senior care facilities fall into this category. Like hotel REITs, healthcare REITs are prohibited from directly operating a facility. Instead, the REIT leases the property to a TRS (through an arms- length transaction), which contracts with a third-party independent contractor (IK) to operate the healthcare facil- ity on behalf of the TRS. The IK must be in the business of managing unrelated health- care properties. It is important to note that both lodging and healthcare facilities cannot be run by a TRS directly. Storage REITs These could include self- storage, cold storage, or docu- ment storage. Cold storage REITs own temperature-con- trolled warehouses and are crucial players in the food industry. Storage REITs can- continued on page 28A
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