Piling on the REIT Bandwagon

Gerelyn is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Real Estate Investment Trusts, or REITs, were designed decades ago as tax-friendly structure for developers who provide investment vehicles for those looking for a piece of the commercial real estate pie. Times have changed, and it seems that today, if a company can convince the Internal Revenue Service that owning some tangible asset qualifies the business for REIT structure, it’s allowed membership into the exclusive club. I'm exaggerating, but according to a recent article in The Wall Street Journal that spotlights technology companies that are qualifying as REITs, not by all that much.

On Oct. 11, paper-shredding company Iron Mountain (NYSE: IRM) made a statement when it revealed its special dividend that would be paid as a result of the company's conversion to REIT status. The company staged a 5% rally that day, illustrating the investment community's approval of the company's evolution and its $700 million special dividend, which amounts to $4.07 per share based on the company's shares outstanding. 

Iron Mountain is laying the groundwork for a hopeful conversion to REIT status on or after Jan. 1, 2014, at which time the company stands to save some $150 million each year in tax benefits, according to the WSJ. That sum goes toward a greater total of between $1 billion and $1.5 billion in earnings and profits that must be paid to investors for Iron Mountain to qualify as a REIT, according to the company. 

To be sure, REITs are an attractive way for companies to be structured. The tax savings alone are immense and investor interest is robust. In fact, the size of the REIT market has been catapulted from $9 billion just over two decades ago to more than $450 billion last year, according to the National Association of Real Estate Investment trusts' data cited in the WSJ. And based on the pipeline of interested companies, the REIT category only stands to widen.

Cell phone tower operator American Tower (NYSE: AMT) is also on the REIT bandwagon, and according to the WSJ, stands to save some $400 million each year in taxes beginning in 2017 -- if successful. The company's CEO, Jim Taiclet, caused a stir when on CNBC he characterized the business as a growth company that wants to capitalize on the REIT structure. Gulp. The company has since softened those remarks, says the WSJ, and American Tower insists --given the tower infrastructure that it owns -- that it is and always has been in the real estate business. The company reports its third quarter results on Halloween day.

Under IRS rules, cell phone towers as well as data centers the latter of which supports Iron Mountain's case, qualify as real estate assets. Not to be outdone, outdoor billboard company Lamar Advertising (NASDAQ: LAMR) is arguing its case as a REIT contender insisting its signs, which it rents out to other businesses as ad space, qualify as rental property. In its second quarter earnings, the company revealed that it is exploring the REIT option. If it qualifies and wins the support of its board, Lamar could begin functioning under the REIT structure in the 2014 tax year. The stock is hovering near its 52-week high.

With the U.S. tax structure at the heart of much of the country's presidential election, taxes are at the forefront of domestic issues. Nonetheless, the ability of technology companies to emerge under the REIT umbrella amid some accounting vagaries seems to threaten to undermine the position of the commercial real estate market. Finding loopholes and jumping through those hoops seems to be precisely what got this country's financial markets off track several years ago and following down that road once again -- or even if only tiptoeing across it -- seems a bit dangerous to me.


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