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NEW YORK CITY-Major Target Corp. investor Pershing Square Capital Management has proposed to the retailer that it spin off its real estate holdings and facilities management into a Target Inflation-Protected REIT, which would then enter 75-year, triple-net lease deals for the stores.

The deal, if accepted by Target and approved by shareholders, would form the largest real estate investment trust in the country, with an estimated market value of $27.5 billion. (Simon Property Group is second at $20.8 billion.)

“By going public with this, we can get feedback from the shareholders,” as will Target, said William A. Ackman, Pershing Square’s fund manager.

Minneapolis-based Target owns approximately 85% of the land underneath its stores, which is a greatly misunderstood and undervalued asset, said Ackman. The move would free the retail company from the tax and management responsibilities of land ownership. The REIT meanwhile, would be unlevered, and serve as Target’s exclusive land developer for two years, and as its preferred developer thereafter.

Since April 2007, Pershing Square has amassed a stake of just under 10% in the discounter.

“This is a great business, a great retailer and a great management team,” Ackman said. “I’d much rather own the land under Target than some of the paper issued by the US government. TIP REIT will have better and cheaper access to capital than any other retailer and any REIT.”

That’s because there is a second company behind the numbers, he added. The chain, which now has 1,685 stores, still has significant growth potential. Pershing Square has estimated that its real estate and buildings are worth about $39 billion. More traditional ways to unlock that value each had disadvantages: a tax-free spinoff of the land and buildings would mean the retailer would lose control of the stores. A taxable spinoff or sale-leaseback would create onerous tax burdens. The proposed structure frees the retailer from capital expenditure costs, while allowing Target the flexibility to close, re-lease or remodel stores.

“If the company had this entity in place, they could accelerate their growth,” rather than being tied to capital markets affecting both retailer and landlord financing, Ackman said.

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