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The press recently picked-up on a trend that may create some issues for the tax advantages of Real Estate Investment Trust (REIT) legislation that was passed in the 1950′s. When enacted, the law required that the assets covered by the law were only real estate such as apartments and office buildings. However, recently bankers and tax lawyers have finagled with the interpretation of the law and taken license with the interpretation of real estate by converting prisons, cell towers, casinos, and most recently, the data and storage company, Iron Mountain into the REIT format. Prior to this most recently trend, Healthcare companies had also availed themselves of the legislation by slicing off their real estate and putting the physical assets such as hospitals, nursing facilities, and special care facilities into REIT structures. For the revenue-starved federal government, one can predict a move to look at the legislation to find more tax revenues which doesn’t bode well for any REIT, especially for the apartment, mall, office, industrial and other sector companies for which the REIT legislation was created. REIT analysts are also going to be stretched to expand their analytical skills to cover exciting new asset classes such as prisons where brand segments such as maximum security for long term stay, white collar spas, juvenile detention camps with high-speed internet in every room, and other opportunities to segment and grow the prison market.

Tony LoPinto is the Global Sector Leader of Korn/Ferry International’s Real Estate Practice and founder of SelectLeaders. The views expressed in this article are the author’s own.

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