In March, 2020 a bill was introduced in the U.S. House of Representatives that would change the rules for publicly-traded REITS (Real Estate Investment Trusts) and make it easier for mall landlords to buy their retail tenants.
The legislation (H.R.840 – Retail Revitalization Act of 2021) is being sold as good for retailers, but much of the support currently comes from landlords.
REITS (Real Estate Investment Trusts)
A REIT is a company that can own and operate income-producing real estate. REITS are tax exempt, but must pay at least 90% of their taxable income to shareholders through dividend payments. REITS have notoriously complex rules and limitations regarding how they can operate.
The U.S. Congress passed a law in 1960 providing for REITS, which allowed regular investors to invest in real estate with a security similar to a mutual fund. All the rules governing REITS are supposed to make them less risky than the stock market.
Scott Silver, Silver Law Group’s managing partner, told retaildive.com in a recent article that the proposed changes to REIT rules could push more risk onto the individual REIT investor:
“We always see this in a down market, that the banks and institutional investors look for ways to transition that risk to more unsuspecting investors and protect themselves. So…in times of trouble, when you loosen the restrictions to create greater exposure on mom and pop, you’re letting Wall Street put the risk on Main Street. You still extend the life of a mall, but it won’t change the end result that the businesses go under, in this game of hot potato. You put [the risk] onto 80-year-old Ethel, who just wanted to buy a bond paying 5%.”
Proposed REIT Rule Changes
Some of the changes to existing REIT rules in The Retail Revitalization Act of 2021 are:
- Allowing a REIT to own a 50% stake in a tenant. (Currently, REITS can own 10%.)
- Expanding the amount of space a REIT can lease to its taxable subsidiary.
- Allowing a REIT to receive equity in their tenant’s business in lieu of rent payment.
Allowing REITS to own more of their tenant’s business brings up a number of concerns. Existing limits are designed to make sure that rents accurately reflect the market. If a REIT owns a more significant stake in its tenant, it could charge them less rent, or higher rent to make the mall look like it’s doing better than it is.
Malls can always replace bad tenants with new ones, but if REIT mall landlords own more of their tenants and/or accept equity in a tenant in lieu of rent, investors have voiced concerns that malls might rather keep tenants even if they aren’t paying rent.
Supporters of the bill say that allowing REIT landlords to put more money into their retail tenants will save jobs and counter the significant losses retailers have suffered due to the COVID—19 pandemic. The bill has not yet been introduced in the Senate.
Contact Silver Law Group To Recover REIT Losses
Silver Law Group frequently represents investors in claims to recover losses from investing in REITS. Brokers are required disclose the risks associated with investing in REITS, including tax consequences, fees, and liquidity. Complaints about non-traded REITS are common and often involve their illiquidity and high fees.
If you would like to discuss options to recover your REIT losses, contact Silver Law Group at (800) 975-4799 or email email@example.com for a no-cost consultation.