The Chicago mall owner buying The Rouse Co. suggested yesterday that it would sell Rouse's office properties, but not immediately.
"It's a substantial portfolio," Bernard Freibaum, chief financial officer of General Growth Properties Inc., said of Rouse's more than 7.9 million square feet of office space, much of it in the Baltimore area. "And we want to make sure that we maximize its value," he said during a conference call with analysts.
The issue is of great importance in Columbia, where Rouse's headquarters and mid-rise office properties dominate the heart of the planned community, which is essentially the state's second-largest city.
The merger between General Growth and Rouse has hurdles to clear. Rouse is working with the Internal Revenue Service to resolve 3-year-old tax errors that could jeopardize its real estate investment trust status and the acquisition deal.
REITs are restricted to certain activities, primarily leasing real estate. They are not taxed on that income, at least 90 percent of which must be passed on to shareholders in the form of dividends.
But REITs can have taxable subsidiaries, and Rouse mistakenly thought it had converted one of its subsidiaries to a taxable entity in 2001 to take advantage of that rule, according to tax attorneys who studied the company's filings with the Securities and Exchange Commission.
Instead the subsidiary continued have the nontaxable REIT status. The mistake came to light in recent weeks as the company sought to consummate its merger with General Growth, the nation's second-largest owner of shopping malls.
Rouse hopes to solve the problem by paying an "extraordinary dividend" to meet the requirement to pass on all non-REIT earnings and profits to shareholders. That dividend could be $2.30 to $3.40 a share, the company said this month. That would mean a payout of about $240 million to $350 million.
The extraordinary dividend could actually leave Rouse shareholders with less money than they expected from the merger. Under the terms of the deal, if the dividend is $2.42 a share or less, it will reduce GeneralGrowth's $67.50-a-share payout dollar for dollar, so there's no difference.
But if the dividend exceeds $2.42 a share, the merger price will be reduced by 110 percent of the excess.
As for the tax situation, the IRS said yesterday that it does not comment on individual cases.
"It's in their hands," Robert E. Rubenkonig Jr., a Rouse spokesman, said of the IRS.
