The IRS Deals the REIT Revolution an Ambiguous Blow

June 7th, 2013 by · 2 Comments

As disclosed by Equinix (NASDAQ:EQIX, news, filings) this morning, the IRS says it has convened an internal working group to study what constitutes “real estate” when it comes to classifying assets in the context of REITs. Equinix has been working toward a conversion of its business into a REIT, and based on the analyst and pre-market response, the wind has just shifted in an unfavorable direction.

Basically, the more you can call ‘real estate’ for the purposes of filing as a REIT, the more money you can make off structuring yourself as one. The IRS says it is unlikely to issue private letter rulings on the matter even when it’s done, which means basically that they’re not going to be offering their blessing any time soon for the liberties folks have been taking with the ambiguity in the law.

Equinix continues to believe that precedent says they should still qualify as expected, and also that the likely delay in getting a PLR is not expected to stop their plans to become a REIT for 2015. But it does mean that they and the rest of the REIT sector will endure further uncertainty in their rights to the tax advantages that are being milked so assiduously.

It’s all quite foggy, as regulatory crap always is at this stage. But it should be interesting to see the responses not just from Equinix, but from elsewhere among the datacenter REITs out there, public or private. Some are more real-estate heavy than others of course, so where the line gets drawn – if it ever actually gets drawn – could mean a lot.  But the current threat is mainly one of continued ambiguity.

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Categories: Datacenter · Financials

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2 Comments So Far

  • Taxman says:

    Beware the Taxman who finally wakes from a slumber…

    If peering exchanges, storage companies, data center fiber loops and other service providers magically produce “real estate income”, why don’t we just get rid of corporate taxes altogether? Why should savvis pay taxes while equinix doesnt? Why should digital realty get to REIT “local loop” income, but TW Telecom cannot?

    If all these companies get to skip income taxes, why would anyone be anything other than a REIT? By this logic, every telecom, “facilities based” hamburger stand and movie theater should become a REIT. Or, the IRS will get real.

    This is going to get interesting…

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