Date: 1985-05-21
Speaker: VANDER JAGT (republican)
Chamber: H

Mr. Speaker. I am today introducing. with Congressman Boa MATsui and Congressman PETE STARK. H.R. 2571. the REIT Tax Provisions Revison Act of 1985. a bill to amend portions of the Internal Revenue Code dealing with real estate investment trusts or REITs. The legislation has become necessary largely because REITs have found themselves increasingly at a competitive disadvantage in todays real estate marketplace. In recent years. the compelling need for flexibility and creativity in the marketplace has proven to be at odds with the various constraints Imposed on REITs by Federal tax laws. During the same period. REIT investors have been effectively denied many of the benefits of the substantial changes made in the Internal Revenue Code provisions affecting real estate. The REIT plays an Important role in the real estate industry. and these increasing barriers to fulfillment of that role mandate a thorough review of the entire REIT tax regime. The proposed legislation is introduced to serve that purpose and to assure the viability of the REIT as a valuable real estate investment medium. The history of the present REIT industry begins in 1960 with the enactment of Federal tax legislation providing for a real estate investment vehicle to be accorded conduit tax treatment similar to that available to mutual funds. The purpose of the legislation was to provide an opportunity for small investors to obtain the advantages of real estate investment normally available only to those with much greater resources. Under the REIT conduit concept. virtually all the income of the REIT must be derived from the realestateoriented investments and must be passed through to shareholders as dividends. The REIT is allowed a deduction for the dividends paid with the result that the REIT income avoids double taxation. This pass through of untaxed earningsbut not lossesis conditioned on compliance with a variety of organizational and operational constraints imposed on each REIT. These constraints are designed in large part to prevent REITs from engaging in speculative dealing in real estate or from otherwise deriving the benefits of active business operations. particularly those that are essentially unrelated to real estate. The product of this special tax regime is a mechanism for small investors to combine their resources for investment in a diversified pool of real estate assets under professional management. while enjoying the benefits of liquidity represented by transferable securities having the attributes of corporate stock. History has shown that the REIT concept is viable. providing an important alternative In the spectrum of real estate investment Although the industry experienced a welldocumented period of financial constriction during the real estate recession of the early 1970s. there are now some 125 REITs in existence with diverse portfolios of real estate equities and mortgages whose current value is generally well in excess of their aggregate book value of $9.5 million. The industry balance sheet is most notable for its low leverage. evidenced by an aggregate debt to equity ratio of just 1 to 1. During 1984. 101 dividendpaying REITs distributed almost $500 million to shareholders. providing an average yield of some 9 percent. Total public and private offerings by REITs or entities intending to qualify as REITs raised $931 million in new capital. Notwithstanding its obvious vitality. the RIET industry is facing important challenges. many of which derive from the dramatic changes in the form and taxation of real estate activities in general. Congress has previously responded to changing economic conditions and the state of the industry by amending numerous aspects of the REIT Provisions of the Code in early 1975. in 1976. as part of the Tax Reform Act of 1976. and in 1978. as part of the Revneue Act of 1978. There is at present an urgent need for other comprehensive revisions in order to update the REIT tax rules and reconcile them with real estate taxation generally so that REITs and their shareholders will be able to compete more effectively and to continue their important function of enhancing the flow of capital to economically viable. incomeoriented real estate projects.