by Michele S. Harrington
There are several possible antitrust notification issues that a REIT must consider before acquiring voting securities (or adding to voting securities) in a Taxable REIT Subsidiary (TRS). Under the REIT Modernization Act (RMA), which will go into effect on January 1, 2001, a REIT may to own up to 100 percent of the voting securities, of a TRS without jeopardizing its REIT tax status. Under the new law, a TRS may provide certain services to REIT tenants that a REIT and their subsidiaries cannot currently provide today. A TRS also will be able to manage properties or provide other services to third parties, with some restrictions.
To qualify as a TRS, both the REIT and the subsidiary corporation must jointly elect TRS status for the subsidiary corporation. Any corporation in which a TRS owns directly or indirectly more than 35 percent of the vote or value will also be treated as a TRS.
Hart-Scott-Rodino Act Implications
The Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act) applies to certain acquisitions of assets or voting securities and requires that both the acquiror and the acquired entity file a premerger notification and observe a waiting period before a transaction is consumated. To be finalized, the transaction must satisfy each of three tests—the commerce test, the size-of-person test (under the law, each of the companies involved is considered a "person"),
and the size-of-transaction test. In addition, a $45,000 HSR filing fee must
accompany the acquiror's HSR notification. (There is currently legislation in
Congress that would increase HSR thresholds and, in some circumstances, filing
fees. Thus, the thresholds and filing fees might increase sometime in the near
future.)
The Three Tests
The Commerce Test. HSR applies only if the acquiring or acquired company
is engaged in "commerce." A REIT and a TRS will almost certainly be
considered to be engaged in commerce.
The Size-of-Transaction Test. This test would be satisfied if, as a
result of the acquisition, a REIT would hold either 15 percent or more of the
voting securities or assets of the acquired TRS, or voting securities and assets
of the TRS exceeding $15 million. For the purposes of these tests, the ultimate
parent entity (UPE) and all subsidiary entities of both the REIT and the TRS
must be included in the calculations.
The Size-of-Person Test. This test requires that either the REIT or
the TRS have annual net sales or total assets of at least $10 million; the other
entity must have annual net sales or total assets of at least $100 million.
If a REIT with $100 million in annual net sales or total assets is acquiring
voting securities or assets from a target company that is not engaged in manufacturing,
the size-of-person threshold test would not be satisfied if the target company
has less than $10 million in total assets and less than $100 million in annual
net sales. As with the size-of-transaction test, the UPE's of both companies
must be considered in the calculations.
If any one of the three threshold tests would not be met at the time of the
closing, no HSR Act notification would be required. However, given the scope
of these tests, many acquisitions of voting securities of a prospective TRS
by a public REIT will meet these requirements when the TRS has at least $10
million in assets.
The REIT Exemption to the HSR Act
There are a number of exemptions to the HSR Act for specific transactions
on certain types of realty. There is also a "REIT exemption," under
which REITs whose UPEs are themselves REITs do not have to report their acquisition
of realty, regardless of whether it is exempt realty. This means that a company
whose UPE is a REIT can acquire realty assets without filing a HSR Act notification,
but only if any non-realty assets included in the transaction have a fair market
value of $15 million or less.
Similarly, a company whose UPE is a REIT can acquire the voting securities
of a target entity that holds realty without filing a HSR Act notification,
so long as any non-realty assets held by the target have a fair market value
of $15 million or less. Along the same lines, a company whose UPE is a REIT
can acquire the voting securities of other REITs without having to file HSR
notification reports.
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For additional background on the RMA and anti-trust notification regulations,
see the following articles:
T. Edwards, "At Your Service: REITs Modernized," Real
Estate Portfolio, 42, (March/April 2000).
T. Edwards and M. Jaffe, "New Regulations Exempt REITs
From Anti-Trust Notification," XVI The REIT Report 17 (Summer 1996). |
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Making a Determination
Before any REIT (or subsidiary of a REIT) actually acquires voting securities
of entities under the terms of the RMA, the REIT must analyze whether its proposed
acquisition would be reportable under the HSR Act. If the proposed acquisition
would be reportable, the UPE of that REIT, along with the UPE of the target,
would have to file HSR notification reports with the federal antitrust agencies
and observe a waiting period, before the REIT could acquire beneficial ownership
of the target company's voting securities.
Given the breadth of the HSR Act rules, many prospective transactions involving
public REITs and significant TRS entities will be reportable under the HSR Act,
so REIT executives should look carefully at these thresholds before moving forward
in the post RMA REIT world.
Michele S. Harrington is an attorney with Hogan & Hartson L.L.P.
