IRS Relaxes REIT Distribution Requirement

2 min

Pursuant to the issuance on May 4 of Rev. Proc. 2020-19, the IRS has relaxed the annual income distribution requirement for publicly offered real estate investment trusts (REITs) by temporarily reducing the amount of cash that needs to be distributed as part of an elective cash/stock distribution. This IRS guidance, which mirrors the IRS response to the 2008 financial crisis, provides welcome relief for many REITs that have been faced with the challenge of reduced cash flow as a result of the COVID-19 pandemic.

REITs must generally distribute at least 90% of their taxable income each year. This requirement can – and usually is – satisfied with cash distributions. Satisfying this requirement with stock distributions is possible but more difficult, as certain technical requirements must be met. For REITs with reduced cash flow, however, stock distributions may be necessary to satisfy the 90% distribution requirement.

In the wake of the 2008 financial crisis, the IRS issued Rev. Proc. 2008-68, later superseded by Rev. Proc. 2009-15, which temporarily provided a safe harbor permitting publicly traded REITs to satisfy the 90% distribution requirement with a combined cash/stock distribution as long as (1) each stockholder could elect to receive either cash or stock, (2) the aggregate cash component of the distribution to all stockholders represented at least 20% of the total distribution, and (3) certain additional technical requirements were satisfied. In 2017, the IRS issued Rev. Proc. 2017-45, which effectively made the earlier IRS relief permanent for publicly offered REITs, except that the safe harbor under Rev. Proc. 2017-45 increased the cash component requirement from 10% to 20%. In response to the COVID-19 pandemic, Rev. Proc. 2020-19 temporarily (i.e., for dividends declared between April 1, 2020 and December 31, 2020) decreases the cash component requirement to the original 10%.

It should be noted that the Rev. Proc. 2020-19 safe harbor, like the Rev. Proc. 2017-45 safe harbor that preceded it, applies only to a "publicly offered" REIT (i.e., a REIT that is required to file certain reports with the Securities and Exchange Commission under the Securities Exchange Act of 1934) but not to private REITs. The IRS, however, has issued a number of private letter rulings over the years that have extended the relief provided by the safe harbor to private REITs.

Although Rev. Proc. 2020-19 will obviously not, in and of itself, solve the liquidity problems that many REITs are currently facing, it should at least take some pressure off of financially strapped REITs that are struggling to stay afloat while maintaining their REIT status.