Aresh Homayoun is of counsel in the Washington office of Morris, Manning & Martin LLP.
In this article, Homayoun discusses the tax risks implicated when a real estate investment trust enters into a dispositional joint venture. He focuses on the prohibited transactions rules under section 857(b)(6) and suggests how to manage and mitigate the tax risks prospectively.
Real estate investment trusts have historically entered into joint ventures for a variety of reasons. A joint venture, for instance, allows REITs to diversify their revenue stream by earning potentially lucrative fees, as well as a promote interest, from managing the joint venture’s properties. Joint ventures also effectively enable REITs to reduce exposure to specific markets or disproportionally large assets by shifting a portion of the risk to one or more institutional investors. Perhaps most importantly, REITs often enter into joint ventures to raise capital for a variety of reasons, including, but not limited to, repurchasing stock, paying special dividends, or supporting ongoing operations (for example, by paying down or retiring debt, funding the development pipeline, or financing future acquisitions). This attraction has been especially relevant in recent years, as prevailing market conditions have made raising capital more difficult for REITs. Although commercial real estate prices have generally increased, many REITs have traded at a discount to net asset value, which makes accessing capital in public markets more expensive. Moreover, although the debt markets continue to be accommodating, taking on more debt can adversely affect credit ratings and therefore is not an ideal solution. A joint venture enables a REIT to raise capital without incurring debt or issuing additional shares of stock.
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“Tax Considerations in REIT Joint Venture Transactions,” Tax Notes, Aug. 27, 2018, pp. 1247-1254