I
105TH CONGRESS
2D SESSION
H. R. 3558
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 HOUSE OF REPRESENTATIVES
MARCH 26, 1998
Mr. ARCHER introduced the following bill; which was referred to the
Committee on Ways and Means
A BILL
To provide that the exception for certain real estate invest-
ment trusts from the treatment of stapled entities shall
apply only to existing property, and for other purposes.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. TERMINATION OF EXCEPTION FOR CERTAIN
REAL ESTATE INVESTMENT TRUSTS FROM
THE TREATMENT OF STAPLED ENTITIES.
(a) IN GENERAL.—Notwithstanding paragraph (3) of
section 136(c) of the Tax Reform Act of 1984 (relating
to stapled stock; stapled entities), the REIT gross income
provisions shall be applied by treating the activities and
gross income of members of the stapled REIT group prop-
erly allocable to any nonqualified real property interest
held by the exempt REIT or any stapled entity which is
a member of such group (or treated under subsection (c)
as held by such REIT or stapled entity) as the activities
and gross income of the exempt REIT in the same manner
as if the exempt REIT and such group were 1 entity.
(b) NONQUALIFIED REAL PROPERTY INTEREST.—
For purposes of this section—
(1) IN GENERAL.—The term ‘‘nonqualified real
property interest’’ means, with respect to any ex-
empt REIT, any interest in real property acquired
after March 26, 1998, by the exempt REIT or any
stapled entity.
(2) EXCEPTION
FOR
BINDING
CONTRACTS,
ETC.—Such term shall not include any interest in
real property acquired after March 26, 1998, by the
exempt REIT or any stapled entity if—
(A) the acquisition is pursuant to a written
agreement which was binding on such date and
at all times thereafter on such REIT or stapled
entity, or
(B) the acquisition is described on or be-
fore such date in a public announcement or in
a filing with the Securities and Exchange Com-
mission.
(3) IMPROVEMENTS AND LEASES.—
(A) IN
GENERAL.—Except as otherwise
provided in this paragraph, the term ‘‘non-
qualified real property interest’’ shall not in-
clude—
(i) any improvement to land owned or
leased by the exempt REIT or any member
of the stapled REIT group, and
(ii) any repair to, or improvement of,
any improvement owned or leased by the
exempt REIT or any member of the sta-
pled REIT group,
if such ownership or leasehold interest is a
qualified real property interest.
(B) LEASES.—Such term shall not include
any lease of a qualified real property interest.
(C) TERMINATION
WHERE
CHANGE
IN
USE.—
(i) IN GENERAL.—Subparagraph (A)
shall not apply to any improvement placed
in service after December 31, 1999, which
is part of a change in the use of the prop-
erty to which such improvement relates un-
less the cost of such improvement does not
exceed 200 percent of—
(I) the cost of such property, or
(II) if such property is sub-
stituted basis property (as defined in
section 7701(a)(42) of the Internal
Revenue Code of 1986), the fair mar-
ket value of the property at the time
of acquisition.
(ii) BINDING CONTRACTS.—For pur-
poses of clause (i), an improvement shall
be treated as placed in service before Janu-
ary 1, 2000, if such improvement is placed
in service before January 1, 2004, pursu-
ant to a binding contract in effect on De-
cember 31, 1999, and at all times there-
after.
(4) TREATMENT OF ENTITIES WHICH ARE NOT
STAPLED, ETC. ON MARCH 26, 1998.—Notwithstand-
ing any other provision of this section, all interests
in real property held by an exempt REIT or any sta-
pled entity with respect to such REIT (or treated
under subsection (c) as held by such REIT or sta-
pled entity) shall be treated as nonqualified real
property interests unless—
(A) such stapled entity was a stapled en-
tity with respect to such REIT as of March 26,
1998, and at all times thereafter, and
(B) as of March 26, 1998, and at all times
thereafter, such REIT was a real estate invest-
ment trust.
(5) QUALIFIED REAL PROPERTY INTEREST.—
The term ‘‘qualified real property interest’’ means
any interest in real property other than a non-
qualified real property interest.
(c) TREATMENT OF PROPERTY HELD BY 10-PER-
CENT SUBSIDIARIES.—For purposes of this section—
(1) IN GENERAL.—Any exempt REIT and any
stapled entity shall be treated as holding their pro-
portionate shares of each interest in real property
held by any 10-percent subsidiary entity of the ex-
empt REIT or stapled entity, as the case may be.
(2) PROPERTY HELD BY 10-PERCENT SUBSIDI-
ARIES TREATED AS NONQUALIFIED.—
(A) IN GENERAL.—Except as provided in
subparagraph (B), any interest in real property
held by a 10-percent subsidiary entity of an ex-
empt REIT or stapled entity shall be treated as
a nonqualified real property interest.
(B) EXCEPTION FOR INTERESTS IN REAL
PROPERTY HELD ON MARCH 26, 1998, ETC.—In
the case of an entity which was a 10-percent
subsidiary entity of an exempt REIT or stapled
entity on March 26, 1998, and at all times
thereafter, an interest in real property held by
such subsidiary entity shall be treated as a
qualified real property interest if such interest
would be so treated if held directly by the ex-
empt REIT or the stapled entity.
(3) REDUCTION IN QUALIFIED REAL PROPERTY
INTERESTS IF INCREASE IN OWNERSHIP OF SUBSIDI-
ARY.—If, after March 26, 1998, an exempt REIT or
stapled entity increases its ownership interest in a
subsidiary entity to which paragraph (2)(B) applies
above its ownership interest in such subsidiary entity
as of such date, the additional portion of each inter-
est in real property which is treated as held by the
exempt REIT or stapled entity by reason of such in-
creased ownership shall be treated as a nonqualified
real property interest.
(4) SPECIAL RULES FOR DETERMINING OWNER-
SHIP.—For purposes of this subsection—
(A) percentage ownership of an entity shall
be determined in accordance with subsection
(e)(4),
(B) interests in the entity which are ac-
quired by the exempt REIT or stapled entity in
any acquisition described in an agreement, an-
nouncement, or filing described in subsection
(b)(2) shall be treated as acquired on March
26, 1998, and
(C) except as provided in guidance pre-
scribed by the Secretary, any change in propor-
tionate ownership which is attributable solely to
fluctuations in the relative fair market values of
different classes of stock shall not be taken into
account.
(d) TREATMENT OF PROPERTY SECURED BY MORT-
GAGE HELD BY EXEMPT REIT OR MEMBER OF STAPLED
REIT GROUP.—
(1) IN
GENERAL.—In the case of any non-
qualified obligation held by an exempt REIT or any
member of the stapled REIT group, the REIT gross
income provisions shall be applied by treating the ex-
empt REIT as having impermissible tenant service
income equal to—
(B) the rate of interest on which does not
exceed an arm’s length rate.
(4) EXCEPTION FOR EXISTING OBLIGATIONS.—
Such term shall not include any obligation—
(A) which is secured on March 26, 1998,
by an interest in real property, and
(B) which is held on such date by the ex-
empt REIT or any entity which is a member of
the stapled REIT group on such date and at all
times thereafter,
but only so long as such obligation is secured by
such interest. The preceding sentence shall not cease
to apply by reason of the refinancing of the obliga-
tion if (immediately after the refinancing) the prin-
cipal amount of the obligation resulting from the re-
financing does not exceed the principal amount of
the refinanced obligation (immediately before the re-
financing).
(5) TREATMENT OF ENTITIES WHICH ARE NOT
STAPLED, ETC. ON MARCH 26, 1998.—A rule similar
to the rule of subsection (b)(4) shall apply for pur-
poses of this subsection.
(6) INCREASE IN AMOUNT OF NONQUALIFIED
OBLIGATIONS IF INCREASE IN OWNERSHIP OF SUB-
SIDIARY.—A rule similar to the rule of subsection
(c)(3) shall apply for purposes of this subsection.
(7) COORDINATION
WITH
SUBSECTION
(a).—
This subsection shall not apply to the portion of any
interest in real property that the exempt REIT or
stapled entity holds or is treated as holding under
this section without regard to this subsection.
(e) DEFINITIONS.—For purposes of this section—
(1) REIT GROSS
INCOME
PROVISIONS.—The
term ‘‘REIT gross income provisions’’ means—
(A) paragraphs (2), (3), and (6) of section
856(c) of the Internal Revenue Code of 1986,
and
(B) section 857(b)(5) of such Code.
(2) EXEMPT REIT.—The term ‘‘exempt REIT’’
means a real estate investment trust to which sec-
tion 269B of the Internal Revenue Code of 1986
does not apply by reason of paragraph (3) of section
136(c) of the Tax Reform Act of 1984.
(3) STAPLED REIT GROUP.—The term ‘‘stapled
REIT group’’ means, with respect to an exempt
REIT, the group consisting of—
(A) all entities which are stapled entities
with respect to the exempt REIT, and
(B) all entities which are 10-percent sub-
sidiary entities of the exempt REIT or any such
stapled entity.
(4) 10-PERCENT SUBSIDIARY ENTITY.—
(A) IN GENERAL.—The term ‘‘10-percent
subsidiary entity’’ means, with respect to any
exempt REIT or stapled entity, any entity in
which the exempt REIT or stapled entity (as
the case may be) directly or indirectly holds at
least a 10-percent interest.
(B) EXCEPTION FOR CERTAIN C CORPORA-
TION SUBSIDIARIES OF REITS.—A corporation
which would, but for this subparagraph, be
treated as a 10-percent subsidiary of an exempt
REIT shall not be so treated if such corpora-
tion is taxable under section 11 of the Internal
Revenue Code of 1986.
(C) 10-PERCENT
INTEREST.—The term
‘‘10-percent interest’’ means—
(i) in the case of an interest in a cor-
poration, ownership of 10 percent (by vote
or value) of the stock in such corporation,
(ii) in the case of an interest in a
partnership, ownership of 10 percent of the
assets or net profits interest in the part-
nership, and
(iii) in any other case, ownership of
10 percent of the beneficial interests in the
entity.
(5) OTHER DEFINITIONS.—Terms used in this
section which are used in section 269B or section
856 of such Code shall have the respective meanings
given such terms by such section.
(f) GUIDANCE.—The Secretary may prescribe such
guidance as may be necessary or appropriate to carry out
the purposes of this section, including guidance to prevent
the avoidance of such purposes and to prevent the double
counting of income.
(g) EFFECTIVE DATE.—This section shall apply to
taxable years ending after March 26, 1998.
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