Commercial Investment Real Estate May/June 2016 | Page 21

with NOLs may spin of the real estate assets and ofset their losses with the gain. Tose considering strategic transactions that involve a change of control may fnd this a productive use of their losses. However, this limits the future use of NOLs. Captive REIT Structure. Similar to the REIT spin-of, organizations may use a cap- tive REIT structure. Te diference is that the operating company continues to own the REIT subsidiary. Tis structure pro- vides certain state and local tax benefts. Also, at the end of the 10-year period that is now specifed by the tax code, the cap- tive REIT shares may be distributed by the operating company without it recognizing taxable income. Up-C Structure. A subsidiary company is formed as a limited partnership. New inves- tors fund the subsidiary company through the purchase of stock in a newly listed pub- lic company, which purchases LP or LLC interests in the subsidiary from the operat- ing company. A tax receivable agreement is entered into between the operating company and the subsidiary company to shif a por- tion of the tax beneft from the transaction to the organization, mitigating the tax costs of the spin-of. Non-REIT Subsidiary. Companies can create a non-REIT subsidiary to hold the property. Subsidiary company preferred stock, e.g., capital class, could be structured to have a liquidation and dividend prefer- ence to the operating company, so that other subsidiary company preferred stock (income class) can be distributed to operating com- pany stockholders without signifcant tax- able income at that level. Each of these alternatives have many variations available to an operating com- pany that is considering spinning of its real estate assets. In addition, an organization may seek more-traditional structures such as mortgage fnancing and sale-leasebacks. Commercial property executives have always been able to unlock property value. Te next phase will require an equal commitment to creative thought and Internal Revenue Ser- vice regulatory responses. Te IRS has not yet addressed certain alternatives that may be useful. Richard Morris is a corporate partner at the law frm of Herrick, Feinstein LLP in New York with more than 25 years of transactional experience, including public and private REIT funds. Contact him at [email protected]. Sung Hwang is a tax counsel at the frm and has worked extensively in structuring real estate investments. Contact him at shwang@ herrick.com. Tis article is for informational purposes only and not for the purpose of providing legal advice and is not to be acted on as such. FIND US AT BOOTH #C2020! • Close deals at our tables Join CCIM Institute and STDB at • Learn about the latest STDB updates • Win big prizes Reserve your meeting table now! Space is limited. CCIM.com/RECon May 22-25, 2016 Las Vegas Convention Center CCIM.com May | June | 2016 