The Real Deal New York

New tax law could spur REITs to become regular corporations

Businesses may want to take advantage of lower corporate tax rate
April 25, 2018 11:20AM

1666 K Street in DC, 1233 20th Street in DC and Vornado’s 61 Ninth Avenue in Chelsea

Real estate investment trusts may want to take advantage of the new lower corporate tax rate by becoming regular corporations.

Jason Wolf and Ryan Dobratz, managers of the Third Avenue Real Estate Value Fund, wrote in a letter to investors published this week that some REITs should consider becoming standard corporations to maximize their value for shareholders, according to Bloomberg.

REITs currently pay no federal taxes, and converting to regular corporations would require them to pay the new 21 percent corporate tax rate. However, they would also be able to keep their earnings for capital expenditures and use extra cash to buy back stock.

Most REITs will likely remain REITs, but ones that have large development and redevelopment needs could benefit from switching, with Wolf and Dobratz citing Seritage Growth Properties, Vornado Realty Trust and JBG Smith  as examples.

Dobratz told Bloomberg that a Seritage conversion “seems like a no-brainer to us. We think the company would be in a better spot in five years if they made a decision to retain the capital, reinvest in the business and accelerate the pace of putting their legacy Sears and Kmart boxes to a higher and better use.”

Conversions have tended to go the other way, and REITs may be wary of becoming corporations in the event that the tax rate changes again. Their stock price would likely decline as well, but Third Avenue argued that such short-term declines would be countered by long-term gains. [Bloomberg]Eddie Small