Spin-Off Preserves Tax Exemptions

When hotel REIT Hospitality Properties Trust agreed to buy Travel Centers of America from Oak Hill Capital Partners, it unveiled a unique structure for executing the $1.9 billion deal. Hospitality Properties would take over the real estate assets at Travel Centers’ 162 sprawling travel spots along interstate highways and spin-off the target’s operating business associated with hotels, restaurants, stores, fuel service and repairs, etc. into a separate publicly traded company. Without the complex structure, Hospitality Properties may have jeopardized the tax-free status of its earnings. To preserve the exemption, says Lehman Brothers Managing Director Robert Willens, “a REIT has to derive virtually all of its income and have virtually all of its assets in real estate.” He says that REITs do have the option of operating non-real estate businesses through a taxable subsidiary, but if that unit “ever represents more than 20% of the value of the REIT’s total assets, the REIT loses its status.” Because the split also offers strategic advantages, it could become a model for REITs that face similar tax problems in buying diversified real estate-based companies. The structure allows Hospitality Properties’ shareholders to own shares in two pure-play companies while creating a captive stream of rentals from the Travel Centers operations to the property owner. (c) 2006 Mergers and Acquisitions Journal and SourceMedia, Inc. All Rights Reserved. http://www.majournal.com http://www.sourcemedia.com