II

105TH CONGRESS

2D SESSION S. 1871

To provide that the exception for certain real estate investment trusts from

the treatment of stapled entities shall apply only to existing property,

and for other purposes.

IN THE SENATE OF THE UNITED STATES

MARCH 26, 1998

Mr. ROTH (for himself and Mr. MOYNIHAN) introduced the following bill;

which was read twice and referred to the Committee on Finance

A BILL

To provide that the exception for certain real estate investment trusts from the treatment of stapled entities shall

apply only to existing property, and for other purposes.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. TERMINATION OF EXCEPTION FOR CERTAIN

4 REAL ESTATE INVESTMENT TRUSTS FROM

5 THE TREATMENT OF STAPLED ENTITIES.

6 (a) IN GENERAL.—Notwithstanding paragraph (3) of

7 section 136(c) of the Tax Reform Act of 1984 (relating

8 to stapled stock; stapled entities), the REIT gross income

9 provisions shall be applied by treating the activities and
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1 gross income of members of the stapled REIT group prop2 erly allocable to any nonqualified real property interest

3 held by the exempt REIT or any stapled entity which is

4 a member of such group (or treated under subsection (c)

5 as held by such REIT or stapled entity) as the activities

6 and gross income of the exempt REIT in the same manner

7 as if the exempt REIT and such group were 1 entity.

8 (b) NONQUALIFIED REAL PROPERTY INTEREST.—

9 For purposes of this section—

10 (1) IN GENERAL.—The term ‘‘nonqualified real

11 property interest’’ means, with respect to any ex12 empt REIT, any interest in real property acquired

13 after March 26, 1998, by the exempt REIT or any

14 stapled entity.

15 (2) EXCEPTION FOR BINDING CONTRACTS,

16 ETC.—Such term shall not include any interest in

17 real property acquired after March 26, 1998, by the

18 exempt REIT or any stapled entity if—

19 (A) the acquisition is pursuant to a written

20 agreement which was binding on such date and

21 at all times thereafter on such REIT or stapled

22 entity, or

23 (B) the acquisition is described on or be24 fore such date in a public announcement or in
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1 a filing with the Securities and Exchange Com2 mission.

3 (3) IMPROVEMENTS AND LEASES.—

4 (A) IN GENERAL.—Except as otherwise

5 provided in this paragraph, the term ‘‘non6 qualified real property interest’’ shall not in7 clude—

8 (i) any improvement to land owned or

9 leased by the exempt REIT or any member

10 of the stapled REIT group, and

11 (ii) any repair to, or improvement of,

12 any improvement owned or leased by the

13 exempt REIT or any member of the sta14 pled REIT group,

15 if such ownership or leasehold interest is a

16 qualified real property interest.

17 (B) LEASES.—Such term shall not include

18 any lease of a qualified real property interest.

19 (C) TERMINATION WHERE CHANGE IN

20 USE.—

21 (i) IN GENERAL.—Subparagraph (A)

22 shall not apply to any improvement placed

23 in service after December 31, 1999, which

24 is part of a change in the use of the prop25 erty to which such improvement relates un-
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1 less the cost of such improvement does not

2 exceed 200 percent of—

3 (I) the cost of such property, or

4 (II) if such property is sub5 stituted basis property (as defined in

6 section 7701(a)(42) of the Internal

7 Revenue Code of 1986), the fair mar8 ket value of the property at the time

9 of acquisition.

10 (ii) BINDING CONTRACTS.—For pur11 poses of clause (i), an improvement shall

12 be treated as placed in service before Janu13 ary 1, 2000, if such improvement is placed

14 in service before January 1, 2004, pursu15 ant to a binding contract in effect on De16 cember 31, 1999, and at all times there17 after.

18 (4) TREATMENT OF ENTITIES WHICH ARE NOT

19 STAPLED, ETC. ON MARCH 26, 1998.—Notwithstand20 ing any other provision of this section, all interests

21 in real property held by an exempt REIT or any sta22 pled entity with respect to such REIT (or treated

23 under subsection (c) as held by such REIT or sta24 pled entity) shall be treated as nonqualified real

25 property interests unless—
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1 (A) such stapled entity was a stapled en2 tity with respect to such REIT as of March 26,

3 1998, and at all times thereafter, and

4 (B) as of March 26, 1998, and at all times

5 thereafter, such REIT was a real estate invest6 ment trust.

7 (5) QUALIFIED REAL PROPERTY INTEREST.—

8 The term ‘‘qualified real property interest’’ means

9 any interest in real property other than a non10 qualified real property interest.

11 (c) TREATMENT OF PROPERTY HELD BY 10-PER12 CENT SUBSIDIARIES.—For purposes of this section—

13 (1) IN GENERAL.—Any exempt REIT and any

14 stapled entity shall be treated as holding their pro15 portionate shares of each interest in real property

16 held by any 10-percent subsidiary entity of the ex17 empt REIT or stapled entity, as the case may be.

18 (2) PROPERTY HELD BY 10-PERCENT SUBSIDI19 ARIES TREATED AS NONQUALIFIED.—

20 (A) IN GENERAL.—Except as provided in

21 subparagraph (B), any interest in real property

22 held by a 10-percent subsidiary entity of an ex23 empt REIT or stapled entity shall be treated as

24 a nonqualified real property interest.
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1 (B) EXCEPTION FOR INTERESTS IN REAL

2 PROPERTY HELD ON MARCH 26, 1998, ETC.—In

3 the case of an entity which was a 10-percent

4 subsidiary entity of an exempt REIT or stapled

5 entity on March 26, 1998, and at all times

6 thereafter, an interest in real property held by

7 such subsidiary entity shall be treated as a

8 qualified real property interest if such interest

9 would be so treated if held directly by the ex10 empt REIT or the stapled entity.

11 (3) REDUCTION IN QUALIFIED REAL PROPERTY

12 INTERESTS IF INCREASE IN OWNERSHIP OF SUBSIDI13 ARY.—If, after March 26, 1998, an exempt REIT or

14 stapled entity increases its ownership interest in a

15 subsidiary entity to which paragraph (2)(B) applies

16 above its ownership interest in such subsidiary entity

17 as of such date, the additional portion of each inter18 est in real property which is treated as held by the

19 exempt REIT or stapled entity by reason of such in20 creased ownership shall be treated as a nonqualified

21 real property interest.

22 (4) SPECIAL RULES FOR DETERMINING OWNER23 SHIP.—For purposes of this subsection—
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1 (A) percentage ownership of an entity shall

2 be determined in accordance with subsection

3 (e)(4),

4 (B) interests in the entity which are ac5 quired by the exempt REIT or stapled entity in

6 any acquisition described in an agreement, an7 nouncement, or filing described in subsection

8 (b)(2) shall be treated as acquired on March

9 26, 1998, and

10 (C) except as provided in guidance pre11 scribed by the Secretary, any change in propor12 tionate ownership which is attributable solely to

13 fluctuations in the relative fair market values of

14 different classes of stock shall not be taken into

15 account.

16 (d) TREATMENT OF PROPERTY SECURED BY MORT17 GAGE HELD BY EXEMPT REIT OR MEMBER OF STAPLED

18 REIT GROUP.—

19 (1) IN GENERAL.—In the case of any non20 qualified obligation held by an exempt REIT or any

21 member of the stapled REIT group, the REIT gross

22 income provisions shall be applied by treating the ex23 empt REIT as having impermissible tenant service

24 income equal to—
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1 (A) the interest income from such obliga2 tion which is properly allocable to the property

3 described in paragraph (2), and

4 (B) the income of any member of the sta5 pled REIT group from services described in

6 paragraph (2) with respect to such property.

7 If the income referred to in subparagraph (A) or (B)

8 is of a 10-percent subsidiary entity, only the portion

9 of such income which is properly allocable to the ex10 empt REIT’s or the stapled entity’s interest in the

11 subsidiary entity shall be taken into account.

12 (2) NONQUALIFIED OBLIGATION.—Except as

13 otherwise provided in this subsection, the term ‘‘non14 qualified obligation’’ means any obligation secured

15 by a mortgage on an interest in real property if the

16 income of any member of the stapled REIT group

17 for services furnished with respect to such property

18 would be impermissible tenant service income were

19 such property held by the exempt REIT and such

20 services furnished by the exempt REIT.

21 (3) EXCEPTION FOR CERTAIN MARKET RATE

22 OBLIGATIONS.—Such term shall not include any ob23 ligation—

24 (A) payments under which would be treat25 ed as interest if received by a REIT, and
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1 (B) the rate of interest on which does not

2 exceed an arm’s length rate.

3 (4) EXCEPTION FOR EXISTING OBLIGATIONS.—

4 Such term shall not include any obligation—

5 (A) which is secured on March 26, 1998,

6 by an interest in real property, and

7 (B) which is held on such date by the ex8 empt REIT or any entity which is a member of

9 the stapled REIT group on such date and at all

10 times thereafter,

11 but only so long as such obligation is secured by

12 such interest. The preceding sentence shall not cease

13 to apply by reason of the refinancing of the obliga14 tion if (immediately after the refinancing) the prin15 cipal amount of the obligation resulting from the re16 financing does not exceed the principal amount of

17 the refinanced obligation (immediately before the re18 financing).

19 (5) TREATMENT OF ENTITIES WHICH ARE NOT

20 STAPLED, ETC. ON MARCH 26, 1998.—A rule similar

21 to the rule of subsection (b)(4) shall apply for pur22 poses of this subsection.

23 (6) INCREASE IN AMOUNT OF NONQUALIFIED

24 OBLIGATIONS IF INCREASE IN OWNERSHIP OF SUB-
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1 SIDIARY.—A rule similar to the rule of subsection

2 (c)(3) shall apply for purposes of this subsection.

3 (7) COORDINATION WITH SUBSECTION (a).—

4 This subsection shall not apply to the portion of any

5 interest in real property that the exempt REIT or

6 stapled entity holds or is treated as holding under

7 this section without regard to this subsection.

8 (e) DEFINITIONS.—For purposes of this section—

9 (1) REIT GROSS INCOME PROVISIONS.—The

10 term ‘‘REIT gross income provisions’’ means—

11 (A) paragraphs (2), (3), and (6) of section

12 856(c) of the Internal Revenue Code of 1986,

13 and

14 (B) section 857(b)(5) of such Code.

15 (2) EXEMPT REIT.—The term ‘‘exempt REIT’’

16 means a real estate investment trust to which sec17 tion 269B of the Internal Revenue Code of 1986

18 does not apply by reason of paragraph (3) of section

19 136(c) of the Tax Reform Act of 1984.

20 (3) STAPLED REIT GROUP.—The term ‘‘stapled

21 REIT group’’ means, with respect to an exempt

22 REIT, the group consisting of—

23 (A) all entities which are stapled entities

24 with respect to the exempt REIT, and
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1 (B) all entities which are 10-percent sub2 sidiary entities of the exempt REIT or any such

3 stapled entity.

4 (4) 10-PERCENT SUBSIDIARY ENTITY.—

5 (A) IN GENERAL.—The term ‘‘10-percent

6 subsidiary entity’’ means, with respect to any

7 exempt REIT or stapled entity, any entity in

8 which the exempt REIT or stapled entity (as

9 the case may be) directly or indirectly holds at

10 least a 10-percent interest.

11 (B) EXCEPTION FOR CERTAIN C CORPORA12 TION SUBSIDIARIES OF REITS.—A corporation

13 which would, but for this subparagraph, be

14 treated as a 10-percent subsidiary of an exempt

15 REIT shall not be so treated if such corpora16 tion is taxable under section 11 of the Internal

17 Revenue Code of 1986.

18 (C) 10-PERCENT INTEREST.—The term

19 ‘‘10-percent interest’’ means—

20 (i) in the case of an interest in a cor21 poration, ownership of 10 percent (by vote

22 or value) of the stock in such corporation,

23 (ii) in the case of an interest in a

24 partnership, ownership of 10 percent of the
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1 assets or net profits interest in the part2 nership, and

3 (iii) in any other case, ownership of

4 10 percent of the beneficial interests in the

5 entity.

6 (5) OTHER DEFINITIONS.—Terms used in this

7 section which are used in section 269B or section

8 856 of such Code shall have the respective meanings

9 given such terms by such section.

10 (f) GUIDANCE.—The Secretary may prescribe such

11 guidance as may be necessary or appropriate to carry out

12 the purposes of this section, including guidance to prevent

13 the avoidance of such purposes and to prevent the double

14 counting of income.

15 (g) EFFECTIVE DATE.—This section shall apply to

16 taxable years ending after March 26, 1998.

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