Another Real Estate Investment Trust Sheds Its Preferred Tax Status by Lesley Hensell
Late last week, Tarragon Tarragon Realty Investors, Inc. (NASDAQ:TARR) announced that it has terminated its REIT status for the 2000 tax year. The result? Tarragon can take advantage of its more than $40 million of net operating loss carryforwards, continue its stock repurchase program and actively seek profits through condominium conversions and land development. The firm is a full-service real estate company that manages and maintains almost 17,000 apartment units, including approximately 3,500 luxury units, located primarily in Florida, Texas, Connecticut and California. In addition, Tarragon manages more than 2.5 million square feet of office and retail space. The company has not yet released its year-end earnings figures, but in the first three quarters of last year revenue was up 29 percent. And income was up from $1 million to $4.5 million. Higher revenue was as a result of property acquisitions, and net income reflected a higher gain on the sale of real estate assets. There are several reasons the real estate industry is re-thinking what it previously thought was a preferred structure for its businesses. In 1998, when REIT share prices started dropping and made it difficult for REITs to leverage their assets, the cracks in REITs' armor started to show. There are two main reasons corporations choose REIT status over C-Corporation status. First, REIT structure shields companies against corporate income taxes. This is offset, however, by the higher dividends REITs must pay out to shareholders. REITs also save bucks by not spending as much cash on accounting fees, racked up through efforts to evade the taxman. Most of the time, according to industry experts, real estate firms with REIT structures typically enjoy only a 2 percent to 5 percent increase in equity market capitalization because of their chosen status. More and more companies, however, are giving up that 2 to 5 percent in favor of the freedom to earn money from operations, make business alliances at will and retain earnings for expansion. Stay tuned for more conversions. In other news, a member of the U.S. House has introduced legislation to repeal a tax provision that the National Association of Realtors has labeled as detrimental to seller financing of sales by small businesses. “The seller financing provision, enacted last December, requires upfront payment of tax on all gain realized from the sale of a business, even if the gain is received through installments,” said Dennis Cronk, president of NAR. “In many installment arrangements, this provision would require the seller to pay tax on income he hasn't received, and with cash he doesn't have. This could have a disastrous impact on sales of small businesses.” The legislation is to be considered by the House next week. The ridiculous provision now in place should be repealed by summer. “In certain cases, it is desirable for sellers of small businesses to finance sales, because purchasers of such properties often have difficulty obtaining financing,” Cronk added. “As a result, the seller provides the financing and structures the payments as a series of installments to accommodate the purchaser's cash flow. Or, seller financing might be desirable for a seller who is retiring and would like to receive payments as steady income. “Before the seller financing provision was enacted last year, business owners only had to pay taxes on the payments as they were received -- they were not required to recognize all gain from the sale upfront for tax purposes. Now, these owners have been hit with an unfair tax obligation.” The original provision was intended to close loopholes for certain large transactions by big corporations, but its real effect makes it difficult to sell small businesses. Sales could either be halted, or, in some cases, sale prices could drop dramatically. | 
