REIT In-Kind Distributions During the Pandemic

REITs are required to distribute 90% of their taxable income on an annual basis in order to maintain their status as REITs.  In turbulent financial periods, this may be difficult.

For REITs that want to retain capital during uncertain or difficult financial periods, a dividend consisting of a combination of stock and cash may be an alternative to an all cash dividend. In order for the stock distribution to qualify, the shareholders must have an option to receive stock or cash with at least a floor amount being paid in cash, i.e., if all elected to receive stock, each shareholder would receive a  pro rata combination of stock and cash.  Before the Great Recession of 2008, the IRS privately ruled that REITs could issue a stock distribution for up to 80% of the dividend payout, meet their distribution requirements, and obtain a dividend paid deduction.

As a result of the economic turmoil caused by the Great Recession, the IRS issued several revenue procedures allowing the mix of stock and cash to up to 90% in stock with a sunset after four years. The IRS issued a revenue procedure in 2017 which reset the in-kind distribution rule to 80% stock and 20% cash, confirming this policy for publicly offered REITs and RICs.

In order to provide publicly offered REITs with the flexibility to retain capital during the current pandemic, NAREIT has requested the Treasury Department issue fresh guidance to allow a 90% stock dividend for 2020 and 2021.

On May 4, 2020, the IRS issued Rev. Proc. 2020-19, 2020-22 IRB 1, which reduces the safe harbor minimum amount of cash that shareholders may receive to 10 percent of the total distribution.

The modification only applies to “distributions declared by a publicly offered REIT or publicly offered RIC on or after April 1, 2020, and on or before December 31, 2020.”