Buyer of Rouse hints at selling its office properties

Action not imminent, General Growth says

much is in Baltimore area

October 27, 2004|By Jamie Smith Hopkins | Jamie Smith Hopkins,SUN STAFF

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.

The problem could delay the merger closing, expected shortly after the shareholder vote Nov. 9 in New York, but the IRS has treated similar errors as relatively minor issues, tax attorneys said.

"I don't believe this will stop the transaction," said Howard B. Jacobson, a partner at Akin Gump Strauss Hauer & Feld LLP in Washington. "I think it's likely that they'll get the approvals."

Rouse is more complex than a typical REIT because in addition to leasing malls and offices, it sells land from the planned communities it develops, such as Summerlin in Nevada, said Robert Towsner, a partner in the real estate and tax groups of Goulston & Storrs, based in Boston.

Unlike the diversified Rouse, General Growth focuses on owning and operating malls. Some analysts have predicted that General Growth will sell Rouse's offices and land-development businesses to decrease its debt after closing on the $12.6 billion deal.

Freibaum, General Growth's chief financial officer, said the company hasn't made up its mind about the land business and isn't in a rush in any case. General Growth is only now marketing industrial buildings it acquired in a merger two years ago, he said. It expects to sell them for nearly $20 million more than their $45 million value in 2002.

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