A refresher course on REITs!

1. REIT 101
“A PRACTICAL VIEW OF A COMPLEX TOPIC”
MARKS PANETH LLP
MICHAEL W. HURWITZ, MST, CPA
REIT GROUP LEADER
C: 646.499.0634

2. REIT 101
“A PRACTICAL VIEW OF A COMPLEX TOPIC”
AGENDA
• Choice of Business Entity
• Historical Background / Overview of REIT’s
• REIT Structures and Subsidiaries
• Operating in a REIT Compliant Manner
• Federal & State Tax Considerations
• Other: Tax Teasers and Planning
• Q&A – informal discussions

3. INTRODUCTIONS TO TAXES
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Objective of tax law is to raise revenues efficiently and equitably for
the operations of the federal government – Congress designed tax
laws to promote certain desirable real estate related activities such
as construction and rehabilitation of housing for low income
households, historic structures and yes even ownership of real
estate!! Many provisions are the result of political interests and
strong lobbyists…

4. • Internal Revenue Code (IRC): tax legislation combined into one
single immense title / section of the federal statutory law
• Internal Revenue Service (the Service): collects federal taxes and
clarifies the Treasury Regulations
• U.S. Treasury Department: issues regulations, rulings and notices to
provide additional guidance of the IRC [Suntex Marina is in the
process of getting a few Private Letter Rulings pertaining to what is
real estate (expanded definition) and what is qualifying rents (duration
of time)]
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INTRODUCTIONS TO TAXES (CONTINUED)

5. • Formation, ownership and duration
• Management of business
• Operational requirements
• Limited or unlimited liability
• Double taxation or pass through
• Raising capital
• Transferability of investment
DETERMINING FACTORS
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6. • C-Corporation
• S-Corporation
• Sole Proprietor
• RIC and REMIC
• Partnership and Limited Liability Company
• Real Estate Investment Trust (REIT)
• Other Exempt Entities (Pensions / Insurance Co.
/ Government Agency)
CHOICE OF BUSINESS ENTITY
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7. The purpose of the “check-the-box” regulations (Federal Form
8832) is to provide GP’s, LP’s, LLCs, LLPs and JV’s with a simple
/ certain way to determine their tax classification for federal
income tax purposes. The Treasury Regulations eliminate the
time-consuming process that was previously needed to obtain a
classification ruling.
CHECK-THE-BOX REGULATIONS
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8. • Office
• Industrial
• Data centers
• Student housing
• Manufactured homes
• Shopping centers (retail)
• Health care facilities
• Self-storage
• Hotels
• Cell towers / billboards
• Timber
• Financing / Mortgage
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TYPES OF BUSINESSES OPERATING AS REIT’S
These real estate operating companies are really fully-integrated
organizations doing business in various sectors; including
MARINA PROPERTIES AND TRANSMISSION LINES!

9. • REIT Legislation Enacted in 1960: federal law that authorized REITs;
described as mutual funds for real estate
• Tax Reform Act of 1986: REIT’s allowed to provide customary management
services without independent contractor
• REIT Modernization Act 1999: creation of Taxable REIT Subsidiaries
• American Jobs Creation Act of 2004: REIT savings provisions
• Protecting Americans From Tax Hikes 2015: significant reforms to the Foreign
Investment in Real Property Tax
• Private Letter Rulings
HISTORICAL BACKGROUND
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10. • In order for a company to qualify to be a REIT, it must comply with
certain provisions within the Internal Revenue Code [asset,
income, organizational and distribution requirements]
• Entitled to dividends paid deduction (DPD) that essentially
eliminates taxable income; a huge benefit that allows for pass-
through treatment
• Taxable income (retained by the REIT) in excess of dividends paid
deduction is subject to corporate tax
If deemed appropriate (time permitting as well) we will take a quick
perusal of a current copy of the Federal Form 1120 –REIT - also
discuss TRS and DPD a bit more…
OVERVIEW – WHAT IS A REIT
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11. • Stand alone | special purpose blocker REIT’s (public or private)
• UPREIT’s (most common)
• DOWN REIT’s
• Pair-Shared or Stapled REIT’s
• Use of Operating Partnership
• Use of TRS’s & QRS’s
REIT STRUCTURES
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12. TYPICAL FUND STRUCTURE
Fund or OP
- * -
Fund
Investors
- * -
Investment
# B
Investment
# C
Investment
# A
Local JV
Partners
- # -
Local JV
Partners
- - #

13. TYPICAL REIT STRUCTURE
REIT
OP
Fund II or
SMLLC - *
Fund I or
SMLLC - *
Fund III
or SMLLC
- *
Shareholders:
Money for
Common &
Preferred
Stock
Limited Partners:
Contribute Properties on
a tax deferred basis in
return for OP Units or
Partnership Interests
Taxable REIT
Subsidiary
General Partner
Managing MemberFund
Investors
- * -

14. Taxable REIT Subsidiary (TRS) a corporate subsidiary of the REIT
that can provide the competitive services that tenant’s desire beyond
the “usual and customary” services - (ability to generate “bad
income” and convert it to “good income “ - dividends) does not have
to be 100% owned by REIT
Qualified REIT Subsidiary (a QRS) wholly owned subsidiary
ignored for Federal income tax purposes; as such the assets,
liabilities, income and deductions are deemed to be those of the
REIT’s (100% owned)
Single Member Limited Liability Company (a SMLLC) wholly
owned / disregard entity for Federal income tax purposes {PropCo.’s}
REIT SUBSIDIARIES
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15. • Organizational Tests
• Quarterly Asset Tests
• Annual Income Tests
• Yearly Distribution Tests
• Record Keeping Requirements
OPERATING IN A REIT COMPLIANT MANNER
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“Professional services rendered in connection with educating and
ensuring company operates in a REIT-Compliant manner”
Discuss quarterly and annual REIT test (and our checklists)!

16. If a REIT fails to comply with or satisfy certain REIT
Qualification (asset, income, organizational,
distribution) provisions, pursuant to IRC Section
856(g)(5), the REIT may be required to pay a $50,000
penalty for each failure - other penalties can be
imposed for negligence, substantial underestimate of
tax, reportable transactions and fraud…
NOTE: failure to satisfy will nevertheless be considered to have
satisfied the tests if reasonable cause and not willful neglect!!
FAILURE TO SATISFY REQUIREMENTS
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17. • Organizational as a U.S. corporation, trust or association
• Formed in one of the 50 states or District of Columbia
• Managed / governed by one or more trustees or directors
• Transferable shares or certificates
• Be beneficially owned by 100 or more persons (waived the 1st year)
• Not be closely held by individuals (the “5/50% Test” - attribution rules)
• Mailing of Demand Letters (just the mailing of…)
• Affirmative election to be taxed as a REIT
• Not be a financial institution or insurance company
ORGANIZATIONAL TESTS
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18. • 75% Test: 75% of the value of the REIT’s assets must consist of real
estate assets; including mortgages on real property (cash, cash items,
receivables and/or Government securities)
• 25% Test: Not more than 25% of the value of the REIT’s total assets
may consist of securities of one ore more Taxable REIT Subsidiary
(TRS); Pursuant to the PATH Act, 20% beginning in 2018
• 10% Test: A REIT cannot own more than 10% of the outstanding
securities (vote or value) of any single issuer (other than those
qualifying for the 75% and the securities of a TRS)
• 5% Test: Not more than 5% of the value of a REIT’s total assets may
consist of securities of any single issuer (other than those qualifying for
the 75% and the securities of a TRS)
QUARTERLY ASSET TESTS
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19. Debt securities that are owned by a REIT and qualify for the straight
debt safe harbor / exception are not subject to the 10% value test.
Straight debt means a written unconditional promise to pay on
demand (or on a specific date) a sum certain in money if:
1. The interest rate and payments are not contingent on profits, the
borrower’s discretion or similar factors
2. The debt in not convertible (directly or indirectly) into REIT stock
STRAIGHT DEBT EXCEPTION
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20. • 75% Test: Generally, at least 75% of the REIT’s annual gross income
must be derived from real-estate related income, more specifically:
“rents from real property”, qualifying interest on mortgage debt, gain
from the sale of non-dealer real property or mortgages dividends on or
disposition of shares in other REIT’s, property tax refunds, income and
gain from foreclosure property, qualifying points or fees and / or
qualified temporary investment income
• 95% Test: No more than 5% of the REIT’s annual gross income can be
derived from items other than those which satisfy the 75% test
mentioned above and other passive forms of income such as
dividends, interest and / or gains from the sale of securities
ANNUALLY INCOME TESTS
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”5% bad income bucket”

21. Rent generally will not qualify as rents from real property (excluded from rents) if:
1. Any rent that is determined on an amount that depends in whole or in part on the net income or
profits of any person from the property (note: rents based solely on a fixed percentage or
percentages of receipts or sales are not treated as dependent upon income or profits);
2. The REIT owns, directly or indirectly, 10% or more (vote or value) of the tenant; or
3. The REIT, itself furnishes services other than ordinary and customary property management
services (use TRS or independent contractor for providing impermissible tenant services)
Note: a REIT can provide “impermissible services” to tenants as long as they are de minimis
as defined by the IRC (less than 1% of all receipts from the property).
RENTS FROM REAL PROPERTY
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22. Any amount received or accrued by the REIT for rendering
services to the tenants of such property or managing or
operating the property. There are three exceptions that provide
ways in which a REIT can directly or indirectly render services to
its tenants with out causing the income to constitute
impermissible tenant service income (service department):
1. Use of independent contractor
2. Use of TRS
3. Unrelated business taxable income exception
IMPERMISSIBLE TENANT SERVICE INCOME
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23. 1. IK can not own directly or indirectly > 35% of REIT
2. If IK is a corporation, > 35% shareholder cannot own > 35% of REIT
shares
3. Relationship between REIT and IK must be arm’s-length; common
employee’s and/or officer’s will be scrutinized-transfer pricing / re-
determined amounts
4. IK must be adequately compensated for its services
5. IK must not be an employee of the REIT
6. The REIT must not receive income of any type (interest, dividends, rent
and other) from the IK
INDEPENDENT CONTRACTOR
(SERVICE DEPARTMENT)
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24. Pursuant to IRC Section 857(b)(6)(A), a REIT is subject to a 100%
tax on net income derived from a prohibited transactions. Generally
this includes net income from the sale or other disposition of property
described in IRC Section 1221(a)(1): property (dealer property)
primarily held by for sale to customers in the ordinary course of a
trade of business and not pursuant to a foreclosure. The legislative
intent behind this rule is to prevent a REIT from competing against
other retailers and retaining any profits from ordinary trade or
business activities.
PROHIBITED TRANSACTIONS: DEFINITION
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25. IRC Section 857(b)(6)(C) provides a safe-harbor for sales transactions:
1) REIT held property for not less than two years and
2) aggregate expenditures includible in basis (within two years prior to the sale)
does not exceed 30% of selling price and
3) a) No more than seven sales of property have been made by the REIT during the
tax year (the seven-sales test), or b) the aggregate adjusted basis of the property
sold by the REIT during the tax year does not exceed 10% of the aggregate
adjusted basis of all assets held by the REIT as of the beginning of the tax year, or
c) the fair market value (FMV) of the property sold by the REIT during the tax year
does not exceed 10% of the total FMV of all assets held by the REIT as of the
beginning of the tax year
Note: Pursuant to the PATH Act of 2015 items 3b) and c) above, were is increased
to 20%, provided that the aggregate basis or FMV of property sold by the REIT
during the three-year period ending with the current tax year does not exceed 10%
of the REIT's aggregate basis or FMV over the same three-year period.
PROHIBITED TRANSACTIONS: SAFE-HARBOR
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26. • If a REIT acquire property through a foreclosure, deed in lieu of
foreclosure, or upon eviction of a tenant in default, a REIT may be
able to engage in certain nonqualified activities with respect to the
property without jeopardizing its REIT status or incurring the
prohibited transaction tax (100%) by making a “foreclosure
property” irrevocable election
• Three year grace period to orderly liquidate the REIT’s interest in
such property producing bad income (extensions granted)
FORECLOSED PROPERTY RULES
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27. • In general, a REIT must distribute annually to its shareholders
dividends equal to at least 90% of its REIT taxable income (less
excess non-cash items) determined without regard to the
deduction for dividends paid and by excluding any net capital gain
Note: a REIT can retain its capital gains but, must pay tax on any
retained gains; the tax it pays on such gains will then be passed
through as a credit to its shareholders
• Must designate composition of distribution within 30 days of year
end on form 1099-DIV or with its annual report – ordinary dividend,
capital gain, unrecaptured section 1250, return of capital and / or
15% ordinary dividends from C Corporations
YEARLY DISTRIBUTION TESTS
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28. • Conversion to REIT – holding period to avoid C-level taxes
• Partnership issues – IRC Sections 704, 707, 731 and 752
• Depreciation expense – use of recovery ADS periods
• Thinly capitalized TRS’s – 163j interest expense
• Compensation – issuance of profits interests
• Calculation of earnings and profits (E&P)
• Operating in a REIT compliant manner
• Deal considerations
• Other
FEDERAL CONSIDERATIONS
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29. • Withholding of State taxes - nonresident partners of OP
• Recognition of Limited Liability Companies by States
• Capital stock, franchise taxes and other fees
• Business Trust REITs vs. Corporate REITs
• Unitary vs. separate filing requirements
• State apportionment factors
• New State Legislation
• Combined Filings
• State Audits
• Other
STATE CONSIDERATIONS
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30. • Recently finalized repair regulations and methodologies
• Debt financed distributions – interest tracing rules
• Deferred exchanges - 1031 Exchange (recycle $)
• Allocation waterfalls, promoted interests, targets
• Long-term incentive plans using profits interests
• Transfer pricing - arm’s length rents, loans etc.
• Unrelated Business Income Tax (UBIT)
• Financial Reporting issues
• Investor types
• Other
TAX TEASERS
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31. Any final thoughts?
Additional comments?
Take-a-ways?
Questions?
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STRATEGIC PLANNING CONSIDERATIONS

32. THANK YOU
1.800.ASK.MIKE
25 / 8 / 366
MARKS PANETH LLP
MICHAEL W. HURWITZ, MST, CPA
C: 646.499.0634