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Sears, Pinnacle Entertainment Look At US REITs

Wednesday, November 12, 2014

Sears Holdings and Pinnacle Entertainment have become the latest US companies to announce that they are considering establishing real estate investment trusts (REITs), to unlock tax advantages that have been considered by some companies as an alternative to a corporate inversion.

REITS do not pay corporate tax as long as at least 75 percent of their total assets are "real estate assets" and/or cash; at least 75 percent of gross income comes from real estate-related sources; and at least 90 percent of their taxable income is distributed to shareholders annually in the form of dividends.

Restructuring as a REIT has become more viable since the Internal Revenue Service (IRS) began, over the last year, to accept more non-traditional real estate assets as qualifying for inclusion in such trusts.

In June 2013, the IRS informed interested parties that it had established an internal working group to study the legal standards the IRS uses to define "real estate" for the purposes of the REIT provisions of the US tax code, and then, in November last year, interested companies were informed that the IRS would resume issuing its rulings.

The agency's subsequent acceptance that non-traditional real estate assets may be held in a REIT appears to have encouraged more American corporations to consider converting, or at least spinning-off assets, into REITS. The IRS has already accepted, for example, wireless communication tower structures, power distribution systems, forest land, pipelines, railroads, refrigerated warehouses, billboards, data centers, and boat slips as qualifying REIT assets.

In its Form 8-K to the Securities and Exchange Commission on November 4, Sears Holdings said that it may sell 200 to 300 retail stores to a newly-formed REIT and lease them back. "The company would continue to operate in the store locations sold to the REIT under one or more master leases," it said. "In the event such sale-leaseback transaction were to occur, the company would realize substantial proceeds from such sale."

"If the company determines to pursue such a sale-leaseback transaction," Sears added, "the company expects to distribute to its shareholders, on a pro rata basis, rights to purchase shares of common stock or other equity interests of the REIT."

On November 6, casino operator Pinnacle Entertainment also announced that, subject to a favorable response from the IRS, which the company expects to receive by the end of 2014, it has approved a plan to pursue a separation of its operating assets and its gaming entertainment real estate assets through the creation of a newly formed REIT, with substantially all of the assets being leased back.