Cardin offers bill to let REITs add tenant services

Taxpaying subsidiaries of tax-exempt companies

Congress

April 30, 1999|By BLOOMBERG NEWS

WASHINGTON -- U.S. Rep. Benjamin L. Cardin introduced legislation yesterday that would make it easier for real estate investment trusts to provide telephone, cable, Internet and other services to their tenants.

The legislation, called the Real Estate Investment Trust Modernization Act of 1999, is similar to changes proposed in the budget President Clinton sent to Congress earlier this year.

Cardin, a Maryland Democrat, and the bill's co-author, Republican Rep. Bill Thomas of California, said forbidding REITs from providing these and other nonreal estate services to their tenants puts them at a competitive disadvantage. Cardin and Thomas are both members of the House Ways and Means Committee.

REITs are companies that own all types of real estate, from office buildings to apartment complexes, even prisons. They are exempt from corporate income taxes if, among other things, at least 95 percent of their gross income is derived from rents and mortgage interest.

They also are restricted from owning more than a 10 percent stake in companies that operate in businesses prohibited to REITs.

Cardin is proposing to allow REITs to set up taxpaying subsidiaries, through which they could provide nonreal estate services to tenants. REIT-friendly laws and courts in Maryland have lured about 63 percent of the nation's 200 REITs to establish charters in the state.

One of the stumbling blocks to simplifying REIT rules in recent years has been concern that these companies would enter new businesses and shield the earnings from taxes.

"This legislation would enable REITs to evolve while ensuring that they remain real-estate oriented," said Steven Wechsler, chief executive of the National Association of Real Estate Investment Trusts.

Clinton's proposal would loosen restrictions so that as much as 15 percent of REITs' gross income could come from nonreal estate services, up from 5 percent. The administration expects the proposal to raise an additional $137 million in taxes over a five-year period if it becomes law, according to analysts.

Analysts have said those who would benefit most from any changes to REIT rules would be the biggest companies, such as Equity Office Properties Trust, Equity Residential Properties Trust and Simon Property Group Inc.

These companies can use their large size to buy utility services, office products and Internet access at discounts and resell them to their tenants.

Pub Date: 4/30/99

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