WASHINGTON, DC-The REIT industry took a big, collective gulp last week when news emerged that the Internal Revenue Service had formed a Working Group to examine the legal definition of real estate for the purposes of forming a, or converting to, a REIT. Iron Mountain, Equiniz, a data center provider, and Lamar Advertising have all been reportedly informed that the IRS plans to study this issue closely and that it may delay some conversions.

It is not surprising that the IRS has decided to study this issue. The tax advantages of REIT conversion are generous, REIT investors tend to be loyal and the competitive advantages of being able to tap capital markets in recent years have become quite clear. A number of companies, in short, have been tempted to try to shoehorn their particular business model into the REIT structure as a result.

Many have been successful and are current well into the conversion process, such as Iron Mountain, a document storage companies, and Penn National Gaming.

Other examples include American Tower Corp., which owns about 20,000 cell-phone antennas used by wireless carriers and converted to a REIT last year, and GEO Group, which owns correctional facilities around the world. Earlier this year GEO Group joined FTSE NAREIT US Real Estate Index Series.

Could it be, then, that the IRS will put an end to these less-than-traditional property trusts? To find out, we asked Moss Adams Senior Manager Kevin Seabolt for his opinion.

GlobeSt.com: Working Group. That sounds serious. Does that usually signify a change is coming or is it business as usual for the agency?

Seabolt: It is probably business as usual, but it does indicate that the agency is looking at the issue and probably further information may come out on at a later time.

GlobeSt.com: Isn't real estate already defined in the code?

Seabolt: The true definition of real estate is defined in the code [however] liberal use of the definition has been used to structure REITs among multiple industries. There are examples in the high tech field, data storage, rental storage, and healthcare industries.

GlobeSt.com: Could this impact REITs that have already converted and have offbeat real estate assets that may not meet the presumably new and stricter definition that the IRS might develop for real estate?

Seabolt: The IRS can examine any company that is structured as a REIT. They can come under IRS scrutiny even if they are old, established REITs that may not have traditional assets under the 'true' definition, or more traditional definition, of real estate. This may make it more difficult for structuring REITs that have asset holdings outside the traditional REIT.