Celebrating 30: The Fall of Paired-Share REITs

As Commercial Property Executive celebrates its 30th anniversary, we’re taking a look back at the most significant events in commercial real estate’s history. Stay tuned for our weekly posts highlighting these critical points, and follow along with us on our site and your favorite social media channels using the hashtag #CPETurns30.

1998

One piece of legislation that shook up the REIT industry was the IRS Restructuring and Reform Act of 1998 (IRS Bill), enacted by the Clinton Administration to end the corporate tax advantage that REITs enjoyed under the paired-share structure. In the 1980s, paired-share REITs could own their properties while an “attached” traditional corporation operated them, with the two companies trading as a single entity. Through this structure, the REIT avoided taxation, as the operating company could pass the majority of its revenues to the REIT in the form of rent. By 1984, however, Congress outlawed the formation of new paired-share REITs, but allowed a few existing paired-share REITs to be grandfathered in. Those included Starwood Hotels & Resorts, Patriot American Hospitality, MediTrust and First Union Real Estate. But when Starwood made the high-profile, $14.6 billion acquisition of ITT Corp. in 1998, creating the largest hotel owner in the world, the Treasury Department and Congress began cracking down on the structure. Following the IRS Bill’s enactment in July 1998, Starwood decided to change from a REIT to a traditional corporation, effectively ending the paired-share structure.

For more CRE history, check out last week’s post on Forest City’s transformation of Stapleton, Colo.