Marc Kushner Published in The New York Real Estate Journal

Marc Kushner’s article, “’Tracking Stock’ May Not Track Well for REITs,” appeared in the September 12 issue of the New York Real Estate Journal. He defines tracking stock as the corporate equity that “tracks” economic performance of a portion of the issuer’s assets, and discusses the IRS challenge over whether it should be treated as the stock of the issuer or re-cast as a direct interest in the “tracked” asset(s), as well as potential risks relating to specific REIT rules.

A REIT’s issuance of “tracking stock” could raise a number of tax concerns, Marc explains. It’s of utmost important for a REIT’s distributions to qualify as qualifying distributions, which are repaid out of the REIT’s earnings and profits and distributed equally to every shareholder of the same class. A REIT considering issuing “tracking stock” should specify how its income, gain, expenses, losses and show flow is to be allocated to the “tracked” and “non-tracked” assets, but some items may not fit the description or be foreseeable at the time the “tracking stock” is established. The risk, warns Marc, is that one or more of these allocations creates a situation where one class of shareholders is subsidizing another class of shareholders. The other significant potential risk would be if the REIT’s tracking stock were viewed for tax purposes as a “direct” equity interest in a corporate subsidiary that is holding the tracked asset, in which case the REIT could be in violation of the 10% asset test, which requires (with exceptions) that a REIT may not hold securities that represent more than 10% of the outstanding securities of any one issuer. Ultimately, though it makes economic sense for REITs to consider issuing “tracking stock,” the concept may not fit well with REIT rules.