REITs- Bane or Blessing?

Wall Street and savvy investors are always looking for the next big thing. This “thing”, however, has been around since the days of Dwight Eisenhower. As a kid, Eisenhower reminded me of the uncle I wish I had. Hard to imagine such a politician. Ike was a real war hero who would take on full responsibility for the D day invasion in Europe that led to the end of World War II. It was during Ike's administration that the real estate investment trust (REIT) was invented. When it first came into existence, these trusts were designed to be passive investment vehicles owning real estate and deriving most all of their income from those real estate holdings. REITs were granted tax exemption because as trusts they did not do any business other than owning the real estate. Fast forward to today. Wall Street has discovered the game. Now companies operating businesses which include prisons as well as casinos are making what is called an “aggressive move” to have IRS declare them REITs. The prison company called Corrections Corp. successfully argued that the money they collect from government for holding prisoners is essentially rent. So too are companies that operate cell phone towers who have claimed that the towers themselves are real estate. One Wall Street firm was quoted in the NY Times as saying that “it is not a far stretch to envision REITs concentrating in railroads, highways, mines, landfills, vineyards, farmland or any other immovable structure that generates revenue”. There are more than 1000 real estate investment trusts, 10% of them are traded publicly. Other than the obvious loss of tax revenue for a society whose tax resources are rapidly evaporating both the companies and their shareholders are winners as REIT conversion seems to result in higher stock price and legal avoidance of the corporate tax.