Hotel REITs and taxable REIT subsidiaries
KPMG report discussing lease amendments in response to coronavirus.
The building, construction and real estate industry is comprised of a diverse set of different asset types such as office, retail, senior living, multifamily and hospitality. Vacancy rates, property value and credit availability have a large impact on the growth of each market and changes in these factors, as well as larger market demand, will drive growth for some asset types and slow growth for others.
- What's at risk
- Industry considerations
- KPMG can help
What's at risk
Ownership of these assets can be made through a real estate investment trust (REIT), which operates or finances the income producing real estate. Modeled after mutual funds, REITs historically have provided investors of all types regular income streams, diversification, and long-term capital appreciation. However, REITs operate with restrictions, and they risk losing their REIT status and the favorable tax treatment that goes with this status if they violate these restrictions.
Transfer pricing can be important for REITs and organizations realize that effective transfer pricing planning can enhance the benefits of establishing taxable REIT subsidiaries while mitigating the risk of penalties for unqualified REIT income.
Industry considerations
Utilizing the experience of the combined transfer pricing and valuation team at KPMG offers a robust approach to establishing arm’s-length pricing on various intercompany transactions that may occur between a REIT and taxable REIT subsidiary (TRS). For example, when a REIT needs to establish a lease payment that is consistent with the arm’s-length standard to determine the taxable income for a TRS, KPMG uses an integrated approach.
The Transfer Pricing team helps the TRS establish an observed market range or return to the TRS by relying on approaches prescribed by the federal transfer pricing regulations. The Real Estate valuation team evaluates and establishes a range of market returns to be earned by the REIT by deriving the market rent estimated from publicly commercial real estate transaction data. These two approaches are then aligned to support a robust arm’s length range of lease payments made by the TRS to the REIT.
KPMG can help
The KPMG Economic and Valuation Services (EVS) practice has dedicated resources for REITs that brings together transfer pricing and valuation services within one integrated team to better serve your business needs. We have an in-depth knowledge of transfer pricing regulations and fair value measurement concepts and we look beyond the immediate compliance task to deliver value added advice to our clients.
Our REIT client base includes premier private and public entities, many of whom we have served since they first registered their securities in the public markets. In addition to intercompany leasing transactions, the KPMG EVS practice routinely assists REITs and real estate funds with the following transfer pricing advisory services:
- Shareholder loan leverage and interest rate analysis
- Intercompany services
- Management fee allocations
- Employee cost sharing
- Lease structuring
Additional resources
