What is a Taxable REIT Subsidiary
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Taxable REIT Subsidiaries were created with signing of the December 1999 REIT Modernization ACT (RMA). Basically, it allows REITs to form and own (up to 100%) companies to provide real estate-related services to their main properties, without jeopardizing the tax standing of the REIT itself. The RMA took effect January 1, 2001.
A TRS can provide various services to a REIT's tenants (for example, concierge services to tenants in a REIT's apartment building). Some Taxable REIT Subsidiaries are doing condo conversions. Obviously, the REIT itself has the inside track providing such services, but before passage of RMA, many believed it would endanger their tax status.
There are Limits. A Taxable REIT Subsidiary Cannot Exceed 20% of the REIT's Gross Assets.
Basically, a TRS can conduct business related to a REIT's core business, but which is not allowed by the original 1960 REIT legislation.
In 2001, there were 400 filings for Taxable REIT Subsidiary status with the IRS.
The biggest beneficiaries of RMA were the lodging REITs. They were still required by law to lease the hotels they owned to independent companies, which handled actual operations. Now hotel REITs can avoid the extra expense and hassle, by leasing their hotels and resorts to operating companies which they own and control. Though they must still have an independent management company.
So a taxable REIT subsidiary is not unusual.
Next: What is a cap rate -- capital investment rate of return.
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