The U.S. government is looking at a way to raise billions in tax revenue, but it could come at the expense of some tower companies. A tax reform bill drafted by the House Ways and Means Committee would change the rules companies must follow when they convert to real estate investment trusts (REITs).
REITs can avoid taxes by distributing 90% of their earnings, and as more companies convert to REIT status, money that once went to the IRS is instead going straight to shareholders. The current tax structure encourages investment in real estate, and it can also be helpful for companies that are in businesses that rely on real estate, like building and leasing cell sites.
Both American Tower and Crown Castle International have benefitted from REIT conversions. SBA Communications has been seen as the next likely candidate, but the company has not made any announcements about reorganizing as a REIT.
The bill spearheaded by House Ways and Means Chairman Dave Camp (R-Michigan) would do away with the current provision stating that REIT shareholders do not have to pay tax on capital gains until the REIT sells or distributes its assets. Instead, shareholders would pay taxes on capital gains at the time of the conversion, effectively taking REIT conversion off the table for many companies.
In addition, the bill would require REITs to distribute earnings as cash rather than stock. Shareholders would pay tax on those earnings at the same rate they pay on other ordinary income.
The outlook for Representative Camp’s tax reform proposal is bleak, according to Washington insiders, but they say that elements of the bill are likely to make it into the tax reform legislation that Congress will eventually consider in earnest. The House Ways and Means committee has created a 979-page draft that avoids the over-simplification of some previous attempts to change America’s tax code.
If changes to the REIT rules do end up becoming law someday, tower companies may not be the only ones impacted in the wireless space. By the time tax reform actually passes, billboard owners may be recognized as a part of the wireless ecosystem, because their properties are potential sites for small cells. Alcatel-Lucent already considers outdoor advertising companies important partners in its small cell initiatives.
Like tower companies, billboard owners are interested in the benefits of REIT status. CBS Outdoor recently completed a REIT conversion. Lamar Advertising, which calls itself the nation’s largest billboard company, has not yet converted to REIT status.