Using Partnerships and REITs to Go

PublicTax Executive InstitueOctober 10, 2014

PwC

Meeting with you today

Agenda

Mike Moreland, MLP Tax Partner

• Extensive experience with MLPs, structuring and analyzing the impact of transactions on sponsors and investors

• 23 years of tax, MLP and energy experience

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• Overview• Structuring Considerations• Capital Markets State of Play• Issues and Opportunities

Adam Handler, Principal, National Tax Services

• REIT leader in NTS

• 30 years of experience

• Former Treasury official

• Market Considerations• Structuring Considerations• Qualifying Income• Challenges and Uncertainty

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Using Partnerships to Go Public

MLP Overview

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Overview: Master Limited Partners (“MLPs”)

PTPs

• Traded on a national securities exchange, or

• A secondary market (or a substantial equivalent)

• Involve a large number of partners (100+) and significant transfers of interests (>2%)

PTPs are different :

•Section 7704;

•Qualifying Income; and

•Fungibility

•MLP is a common name for publicly traded partnerships (“PTPs”)

• Generally, MLPs are subject to the same rules that apply to all other partnerships

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Basic Partnership Tax

Income• Partners are treated as directly earning the MLP’s income

and pay tax at their own tax rate

Distributions• Distributions are not the same as a partner’s share of

MLP’s income

• Under the tax code, the distributions are a return of capital and are not taxed when received

Schedule K-1• No two Schedule K-1s are the same; they must be

calculated individually based upon the number of units purchased, the price paid, the units sold, and the timing of each trade

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Overview: Section 7704 and Qualifying Income

•PTPs taxed as corporations

• Partnership must generate 90% of its gross income from qualified sources (i.e., the Qualifying Income Exception)

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Overview: Section 7704 and Qualifying Income

•Qualifying Income includes:

- Interest;

- Dividends;

- Rents from, or gains from the sale of, Real Property;

- Income from the exploration, development, mining, production, refining or transportation of a natural resource, including gain on property used in such business; and

- Regulated Investment Company income.

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“Hole in the Ground”

Gathering

Transporting

Refining

Marketing

Production

Exploration

Oil Field Services

Frac Fluids

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Qualifying Income

• Statute – mineral or natural resource includes fertilizer, geothermal energy, and timber as well as any product of a character with respect to which a deduction for depletion is allowable.

- Does not include soil, sod, dirt, turf, water, mosses or minerals from sea water, the air, or similar inexhaustible sources.

• Legislative History (1987 Conference Committee Report) - mineral or natural resource includes “oil, gas or products thereof” which means “gasoline, kerosene, number 2 fuel oil, refined lubricating oils, diesel fuel, methane, butane, propane and similar products which are recovered from petroleum refineries or field facilities.”

• Legislative History (1987 Conference Committee Report) – “Oil, gas, or products thereof are not intended to encompass oil or gas products that are produced by additional processing beyond that of petroleum refineries or field facilities, such as plastics or similar petroleum derivatives.”

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Qualifying Income

• Legislative History (1988 Senate Report) – “qualifying income does not include, for example, income from fishing, farming (including the cultivation of fruit or nuts), or from hydroelectric, solar, wind, or nuclear power production.”

• Most of the authority regarding Qualifying Income is in the form of Private Letter Rulings.

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Overview: Fungibility

• The concept that something is interchangeable with other property of the same type (i.e., mutual substitution)

• Examples: gold, WTI crude, cash

• Necessary to allow the trading of securities on a national exchange

• Because MLPs are flow-through entities, the tax consequences to the investors must be considered in evaluating fungibility

• MLP fungibility requires a combination of Section 743(b) adjustments and Section 704(c) remedials

Fungibility is not an income tax concept.

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Using Partnerships to Go Public

MLP Structuring Considerations

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MLP business drivers

Business Drivers

Sponsor• Higher valuation• Retain control• Upside• Liquidity• Capital Access

Public• Attractive yields• Low risk• Tax deferred• Total return• US energy access

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Ignores tax deferral on MLP distributions (typically, around 80%)

Corporation

Income & Cash = $10

35% Entity Level Tax = $3.50

Owners(Shareholders)

Dividends = $6.50

15% Individual Tax = $0.98

Net Cash Received = $5.52

Master Limited Partnership (MLP)

Income & Cash = $10

Entity LevelTax = $0

Owners(GP & LPs)

Distributions = $10

35% Individual Tax = $3.50

Net Cash Received = $6.50

MLP vs. Corporation Net Cash

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1 ‘Variable’ MLPs typically have only common units

Operating Subs(assets)

MLP(master limited

partnership)

Sponsor

General Partner

Public

Common and Subordinated

Units 1

GP Interestand IDRs

Common Units

100%

100%

General Partner

• Manages the partnership

• Typically owns a 2% or noneconomic stake

• Incentive distribution rights (IDRs) tied to distribution targets

• Typically owns subordinated units unless certain thresholds are met

Limited Partners

• Provide capital by purchasing units

• Have limited voting power – no role in operations/management and limited governance role

• Receive cash distributions

Common Structure

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MLPs distribute all of their “available cash” to their partners every quarter

Master Limited Partnership

(MLP)

Limited Partners(LPs)

Capital

General Partner(GP)

Management & Capital

Tier 1 Cash Flow

85% to LPs

Tier 2 Cash Flow

Tier 3 Cash Flow

Tier 4 Cash Flow

50% to LPs

98% to LPs

75% to LPs

• Incentive distribution rights (“IDRs”) incentivize sponsor to grow distributions

• General partner and E&P structures may differ from above

Distributions

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Using Partnerships to Go Public

Capital Markets State of Play

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2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2013 YTD

2014 YTD

$0

$5,000,000,000

$10,000,000,000

$15,000,000,000

$20,000,000,000

$25,000,000,000

$30,000,000,000

$3,585,231,676.0$3,793,330,422.

0$2,980,620,173.

0

$5,089,020,080.0$3,517,075,000.

0

$6,556,298,557.0

$11,848,872,558.0

$13,819,198,239.0

$17,287,793,427.0

$19,487,292,812.0$14,726,242,577

.0$11,191,029,346.0$529,750,000.0

$1,313,290,024.0$3,739,972,850.

0

$3,170,975,000.0$791,125,000.0

$2,046,857,000.0

$2,429,802,000.0

$3,300,082,000.0

$5,411,800,000.0

$2,904,300,000.0

$2,762,150,000.0

Follow-On IPO

Pro

cee

ds

($bn)

MLP Capital Markets OverviewAn exceptional decade and half of MLP equity issuance appears to be slowing down

Source: ECM Dealogic. As of 9/11/14. (1) National Association of Publicly Traded Partnerships.

Sub-Sector Breakdown for IPOs since 2004Pricing Breakdown for IPOs since 2004

Key Takeaways

The MLP market has grown from 18 companies with an aggregate market cap of $14bn in 2000 to 118(1) companies with an aggregate market cap of $606bn today

This significant growth was mainly driven by Investor appetite for

high-yielding investments in a low-interest rate environment

Capital-hungry issuers with large investment budgets to build-out the North American energy infrastructure

Recent expectations of rising interest rates have put a dent on issuance of all high-yielding asset classes, including REITs, Utilities and MLPs

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Above, 22, 19%

Below, 20, 18%In

Range, 71, 63%

Coal0%

Pipeline0%

E&P1% Other

5%Oilfield

6%Propane

7%

Shipping9%

Refining 8%

GP12%

Midstream52%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2013 YTD 2014 YTD

IPOs 5 9 18 14 3 0 8 13 13 20 12 10

Follow-On 28 30 17 27 20 54 62 59 69 74 50 42

Total 33 39 35 41 23 54 70 72 82 94 62 52

$17.6

$25.4

$21.0

$16.5$14.

1

$6.6$4.4

$8.6$7.0

$5.3

$14.3

$4.2

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Recent MLP IPO Issuance

Key Takeaways

IPO issuance came to a halt shortly after the Fed announcement in 2013 Activity picked up after

the Fed re-affirmed its commitment to cautiously raise interest rates while keeping in check the job and housing markets

Opportunistic issuers benefited from an IPO market window from late July through December 2013, anticipating rising interest rates; however, at the expense of weak pricing

2014 YTD MLP equity issuance has slowed down, driven by a slowdown in broader market issuance; but broader activity later picked up mainly driven by investors seeking higher yield

In 2014YTD, 10 IPOs raised $2.8bn compared with 12 IPOs that raised $2.9n in the same period last year

Recent MLP issuance has picked up due to investors searching for high-yielding asset classes

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Source: ECM Dealogic. As of 9/11/14.Note: N/A represents information that is unavailable.

Deal Dividend Price Relative Pricing Date Issuer Sector Value ($mm) Yield at IPO to Range 1 Day 1 Week 1 Month

8/ 7/ 2014 Hoegh LNG Partners LP Shipping $192.0 6.8% In Range 11.8 % 17.4 % 20.7 %

7/ 31/ 2014 Transocean Partners LLC Shipping $385.0 6.6% Above 12.5 % 12.0 % 27.9 %

7/ 31/ 2014 VTTI Energy Partners LP Midstream $367.5 5.0% In Range 5.5 % 8.0 % 26.5 %

7/ 29/ 2014 Westlake Chemical Partners LP Other $270.0 4.6% Above 28.2 % 22.7 % 24.8 %

6/ 17/ 2014 Foresight Energy LP Oilfield $350.0 6.8% In Range (5.8 %) (5.4 %) (3.0 %)

6/ 17/ 2014 Viper Energy Partners LP Propane $130.0 0.0% Above 23.7 % 26.5 % 26.9 %

5/ 8/ 2014 PBF Logistics LP Oilfield $316.3 5.2% Above 20.2 % 17.3 % 21.3 %

5/ 6/ 2014 GasLog Partners LP Shipping $176.4 7.1% In Range 23.8 % 25.6 % 32.4 %

4/ 10/ 2014 Enable Midstream Partners LP Midstream $500.0 5.8% In Range 12.0 % 12.0 % 14.8 %

1/ 14/ 2014 Cypress Energy Partners LP Oilfield $75.0 7.8% In Range 6.0 % 13.7 % 24.0 %

12/ 10/ 2013 Valero Energy Partners LP Refining $345.0 3.7% Above 22.9 % 28.6 % 37.8 %

11/ 12/ 2013 Dynagas LNG Partners LP Shipping $225.0 8.1% Below (0.8 %) (0.9 %) 7.0 %

11/ 6/ 2013 Midcoast Energy Partners LP Midstream $333.0 6.9% Below (2.0 %) (5.8 %) (2.0 %)

11/ 5/ 2013 Arc Logistics Partners LP Midstream $114.0 8.2% In Range (0.4 %) (0.0 %) (0.5 %)

10/ 24/ 2013 Sprague Resources LP Midstream $153.0 9.2% Below (1.8 %) (3.8 %) (8.7 %)

10/ 9/ 2013 Western Refining Logistics LP Midstream $302.5 5.2% Above 7.4 % 5.8 % 10.9 %

10/ 3/ 2013 OCI Partners LP Other $315.0 0.0% Below 3.7 % 7.4 % 17.5 %

9/ 12/ 2013 OCI Resources LP Oilfield $95.0 10.5% In Range (5.5 %) (6.0 %) 3.6 %

8/ 8/ 2013 QEP Midstream Partners LP Midstream $420.0 4.8% In Range 6.3 % 6.6 % 10.5 %

8/ 8/ 2013 World Point Terminals LP Midstream $175.0 6.0% In Range (1.1 %) 0.2 % 3.6 %

7/ 25/ 2013 Marlin Midstream Partners LP Midstream $137.5 7.0% In Range (2.6 %) (0.6 %) (0.9 %)

7/ 22/ 2013 Phillips 66 Partners LP Midstream $377.8 3.7% Above 29.3 % 42.8 % 39.3 %

5/ 13/ 2013 Tallgrass Energy Partners LP Midstream $280.6 5.3% In Range (1.0 %) 1.5 % (0.7 %)

5/ 8/ 2013 Emerge Energy Services LP Oilfield $127.5 0.0% Below (2.3 %) (2.8 %) 20.5 %

4/ 9/ 2013 KNOT Offshore Partners LP Shipping $156.5 7.1% In Range 2.5 % 5.3 % 7.8 %

Mean Since 2012 $252.8 5.7% Above - 7 7.7 % 9.1 % 14.5 %Median Since 2012 $270.0 6.0% In Range - 13 5.5 % 6.6 % 14.8 %

Mean Since 9/12/2013 $258.0 6.0% Below - 5 9.0 % 9.7 % 15.7 %Median Since 9/12/2013 $286.3 6.7% Total - 25 IPOs 6.7 % 10.0 % 19.1 %

vs. S&P 500

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+80%

PHLX Utility Index+77%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20140%

50%

100%

150%

200%

250%

Jan-0

4

Jun-0

4

Dec-04

Jun-0

5

Dec-05

May

-06

Nov-06

May

-07

Nov-07

Apr-08

Oct-08

Apr-09

Oct-09

Mar

-10

Sep-10

Mar

-11

Sep-11

Feb-12

Aug-12

Feb-13

Aug-13

Jan-1

4Ju

l-14-2%

0%2%4%6%8%

10%12%14%16%

The MLP market outperformed both the S&P500 and DJIA for 12 consecutive years through 2012

In 2012 and 2013, MLPs underperformed the broader equity market

From May to August 2013 (the 10-yr Treasury yield increased from 1.6% to 2.5%), MLPs, REITs and Utilities experienced a correction

MLPs have outperformed the broader market in 2014 YTD, mainly driven by promising yield growth in a very low interest rate environment

Recently, the sector has traded up – the announcement of the Kinder Morgan acquisition of its underlying MLPs triggered speculation on industry consolidation and focus on cost of capital changes

Perception of corporate credit risk has been stable despite a broader change in interest rates

MLP Market Performance

After the Fed announcement in May 2013, the 10-yr UST yield has increased by approximately 100bps while MLP dividend spreads have slightly contracted

The MLP market had a banner decade through 2012; MLPs have outperformed the broader market in 2014YTD

Key Takeaways

AMZ/UST107/12/2007

Spread:27 bps

AMZ/UST1011/8/2008

Spread:1,205 bpsAMZ/UST10

9/5/2014Spread: 272bps

AMZ/UST105/20/2013

Spread: 369 bps

Fed announces tapering of bond buying program Spread: 369 bps

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+152%

DJIA

Alerian MLP

+64%

S&P500

Source: Alerian, S&P CapitalIQ & Bloomberg. As of 9/11/2014

5.18%

Alerian MLP

2.55%

UST 10-Year

Dow Jones REIT Index+41%

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Distribution Growth Drives Valuation

Regression Analysis - Yield to Distribution GrowthKey Takeaways

Source: MLP Data. As of 9/11/14. (1) Also referenced by BofA Merrill Lynch Equity Research Analyst, Kevin W. McCarthy, on 10/17/12 published research report.

The market views MLPs as yield instruments and benchmarks them with Treasury or corporate bonds

However, valuation emphasizes on bottom-up valuation analysis Detailed diligence of

distributable cash is important, with emphasis on whether or not the MLP is over-distributing (e.g., GAAP does not dictate maint. capex)

The rule of thumb on valuation arbitrage between C-Corps and MLPs is approximately 4.0x EBITDA, which is essentially equal to the value generated from corporate tax savings under the MLP structure(1)

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0% 2% 4% 6% 8% 10% 12% 14% 16% 18%0%

5%

10%

15%

20%

25%

30%

35%

40%

Current Distribution Yield

DP

S 5

YR

CA

GR

(%

)

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Using Partnerships to Go Public

MLP Issues and Opportunities

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IRS Private Letter Rulings Pause

• Early in 2014, the IRS had announced a temporary pause

• Industry changes had resulted in more requests for PLRs

• A decision is expected in the fall of 2014

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Risks & Opportunities

•Tax Reform

• Broad Reform

• Intangible Drilling Expense

• Percentage Depletion

• Paper

• Interest Rate

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REITs

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Using Partnerships and REITs to Go Public

REIT Market Considerations

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Market considerations

How are investors responding?• Investor response to REIT conversions has been favorable.• Post-announcement stock prices for completed transactions were up

nearly 50% vs. 13% for the MSCI US REIT Index and 20% for the S&P 500 through July 1, 2013.

Is it real estate?• Benchmark indices include a wide variety of property types, including

hotels, data centers and prisons, but not cell towers and timber.• Companies that "control" a significant portion of their properties

through leasing (vs. owning) may entail additional complexity and risk.• Companies that generate a significant portion of their revenues using

TRS structures may place limits on their ability to grow.

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Non-traditional REIT activity

Existing New Potential Future Candidates

• Timber/agriculture

• Cell towers

• Hotels

• Casinos/gaming

• Hospitals/nursing homes

• Golf courses

• Data centers

• Billboards

• Record warehousing

• Cold storage

• Prisons

• Railroads

• Docks/marinas

• Landfills

• Toll roads/bridges

• Telecom infrastructure

• Energy infrastructureI. PipelinesII. Transmission Lines

PwC Observation: Entire sectors move relatively en masse for example the timber sector in recent years and now the cell tower and billboard sectors are apparently in the process of significantly converting. More recently, healthcare, Hospitality/entertainment and telecom infrastructure.

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Using Partnerships and REITs to Go Public

REIT Structuring Considerations

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Weighing the decision

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ConsPros

Corporate tax savings

Multiple expansion

Appeal to yield hungry investors

Better access to unsecured debt markets

Ability to use Operating Partnership units as tax efficient currency for acquisitions in fragmented industry(see following page)

Transaction can be used to facilitate beneficial capital reorganization

Dividends distributed to taxable investors are taxed at ordinary marginal rates

Complexity and impact on operationsTransition expenses may be significantOngoing expenses may be increasedNeed to finance a "purging" dividend

of accumulated C-corp earnings and profitsLimitations on ability to retain capital from

operations on capital gainsNeed to access capital markets for growth

capitalRegulatory and legislative tax policy uncertainty Difficult to turn back

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Diagram 1 – Spin-off unrelated REIT qualified businesses

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Business Issues:

Transaction Issues:

Structure Diagram:

• May require significant reorganization and incurrence of costs (e.g., legal, realty transfer taxes, reorganization, new accounting/tax/compliance systems and personnel, and other costs).

• Potential need to move assets and/or restructure contracts to make some or all of the revenue qualified revenue for REIT .

• May require divestiture of some of business if "bad" assets/operations too large relative to TRS limitations.

• Need to "rationalize" corporate overhead structure.• May need post closing shared services/employee

agreements for some period.

• Will the spin-off qualify as a tax-free spin-off?

• A tax-free spin-off requires, among other things, that both corporations be engaged in an active trade or business after the spin-off.

• REIT will be "captive" to the OpCo until it can diversify.

• REIT's rental of property to OpCo will not satisfy the active trade or business requirement for a tax-free spin, so an additional business is required to be transferred to the REIT.

• Restrictions on qualifying "rents from real property" can put stress on business relationship between REIT and OpCo.

Before After

SHs

Business B Business A

C-Corp

SHs

Business B Business A

C-Corp REIT

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Diagram 2 – Split-off/Equity carve-out

Business Issues:

Transaction Issues:

• Multi-stage transaction more complicated and will take longer with SEC.• May have difficulty selling IPO to typical REIT shareholders if REIT conversion is delayed or not certain.

• Same issues as Diagram 1

Structure Diagram:

Before Intervening Partial IPO of Subsidiary Post Split-Off/Spin-off

<20%

A = Original shareholders minus those who exchanged out 100%B = Shareholders who exchanged out in "split-off" and other original shareholders who received remaining shares pro rated in "spin-off"

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Business B Business A

C-Corp

OriginalSHs

Business B Business A

C-Corp

OriginalSHs

IPO SHs

Business A

C-Corp

A BIPO SHs

Business B

REIT

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Diagram 3 – Spin-off "OpCo/PropCo"

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Business Issues:

Transaction Issues:

Structure Diagram:

• Concentration of credit with single tenant may not price favorably.

• Transfer pricing issues with respect to setting initial rents.• Will OpCo be comfortable with an independent PropCo as

its landlord-lease renewal terms, Dealing with underperforming properties and potentially leasing space to OpCo's competitors.

• Will the spin-off qualify as a tax-free spin-off?• A tax-free spin-off requires, among other things, that both

corporations be engaged in an active trade or business after the spin-off.

• REIT leasing to OpCo will not count as an active trade or business for this purpose.

• In order to qualify as a REIT, PropCo cannot have any C-Corp E&P at the end of its first REIT taxable year.

• Potential techniques to "purge" C-Corp E&P:• Distribution of OpCo may reduce PropCo E&P.• Cash Dividends.• Cash/Stock Dividends.

• Related party rent issues may arise if common shareholders are significant

Lease

Rent

Operations

Before After

SHs

C-Corp

Operations

SHs

C-Corp"OpCo"

Operations

REIT"Prop Co"

Property

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Using Partnerships and REITs to Go Public

REIT Qualifying Income

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Key Issue – What are “Rents” from “Real Property”Issue: Real property

Summary discussionTreas. Reg. § 1.856-3(d) provides that the term "real property" means land or improvements thereon, such as buildings or other inherently permanent structures thereon (including items which are structural components of such buildings or structures). In addition, the term "real property" includes interests in real property. Local law definitions will not be controlling for purposes of determining the meaning of the term "real property."

The term includes, for example, the wiring in a building, plumbing systems, central heating, or central air-conditioning machinery, pipes or ducts, elevators or escalators installed in the building, or other items which are structural components of a building or other permanent structure.

The term does not include assets accessory to the operation of a business, such as machinery, printing press, transportation equipment which is not a structural component of the building, office equipment, refrigerators, individual air-conditioning units, grocery counters, furnishings of a motel, hotel, or office building, etc., even though such items may be termed fixtures under local law.

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Key Issue – What are “Rents” from “Real Property”Issue: Rents

Summary discussionSection 856(d)(1) provides that the term "rents from real property" includes (subject to exclusions provided in section 856(d)(2)): (a) rents from interests in real property; (b) charges for services customarily furnished or rendered in connection with the rental of real property; and (c) rent attributable to personal property which is leased under, or in connection with, a lease of real property, but only if the rent attributable to such personal property does not exceed 15% of the total rent for the taxable year attributable to both the real and personal property leased under, or in connection with, such lease.

The term "rents from real property" does not include rents based on net profits or income. However the term does include rents based on gross revenues. The term also does not include rents paid by related parties.

If services are provided to tenants in connection with the rental of real property, consideration must be given both to whether the services are customary and to whether the services may be provided by the REIT, a TRS, or an independent contractor.

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Key Issue – What are “Rents” from “Real Property” PwC ObservationA key consideration in a REIT conversion are the operational, strategic, regulatory, and tax restrictions on creating a structure that generates rents from real property for the REIT. In addition to determining whether the property to be held by the REIT constitutes real property, the parties to the transaction must observe and comply with restrictions contained within the tax provisions governing REITs on related-party rents, rents based on net profits or income, provision of services to tenants, and rental of personal property

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Using Partnerships and REITs to Go Public

REIT Challenges and Uncertainty

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Regulatory and Legislative uncertainty

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C

B

The IRS has issued several PLR requests related to non-traditional REIT assets. Favorable rulings in this area are grounded on principles that have been established and applied by the IRS in the past to distinguish real estate from other property. However, the current market activity regarding REIT conversions has led to additional scrutiny concerning the application of the law in this area. The IRS recently issued Proposed Regulations that "clarify" the definition of real property for REIT purposes. Recent press reports about the use of REITs to hold non-traditional asset classes have raised issues concerning whether such transactions may erode the corporate tax base.  Although these reports have in several cases offered incomplete and sometimes inaccurate accounts of the tax rules, the reports could  conceivably prompt members of the House or Senate to consider whether  additional restrictions need to be placed on the assets that may be held by a REIT or on the circumstances under which an existing business may conduct some of its operations in a REIT.  Congressman Camp has released a far reaching tax reform proposal. The REIT provisions in this proposal would effectively shut down REIT conversions.

Body Summary Discussion

IRS

Congress

PwC Observation: While the Proposed Regulations provide a welcome clarification on a number of points, until they are finalized non-traditional REITs will need to carefully consider whether a ruling from the IRS is required.

The Camp tax reform proposal is not expected to see legislative action in the near term. However, elements of the proposal, such as the anti-REIT conversion provisions, could be cherry-picked to offset the tax costs of some other tax provision.

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Key challenges

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• The need to structure the transactions in a tax-efficient manner. • The potential need to reorganize for governance and/or tax purposes – which

may require shareholder approval.• The potential need to obtain a Private Letter Ruling (PLR) for

REIT qualification purposes and/or to address REIT Conversion issues such as restructurings

• The potential need to make substantial pre-conversion distributions of accumulated Earnings and Profits to shareholders (which may be financed or paid in part through a taxable stock dividend).

• The need to reorganize operations to segregate non-qualified REIT elements into TRSs.

• The potential need to restructure certain contracts to make some or all of the revenue REIT qualified and move non-qualified revenue contracts or portions of them into TRSs.

• The need to develop additional reporting metrics and supplemental reporting packages commonly demanded by the REIT investor community.

Transactional

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Key challenges (continued)

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• Monitoring/Managing the complex requirements for continuing to qualify as a REIT.• Managing dividend levels to balance both tax requirements and financial goals.• Avoiding "dealer" issues and other REIT "penalty" taxes.• Significant changes to controls and processes necessary to operate as a REIT (potentially

with TRSs).• Managing potential taxes on "built-in gains" at time of conversion.• Building the personnel, controls, and systems infrastructure necessary to operate

successfully as a public REIT.• Determining the appropriate placement of company employees (i.e., whether they will be

employed by the REIT or a TRS).• Evaluating financing strategies, including unsecured, secured, and revolving credit lines

including considering changes resulting from the impact of dividend requirements and the resultant increased need to finance growth capital externally.

• Revising treasury functions to align with new business model and legal/tax needs.• Considering changes to stock based compensations packages which typically differ for

dividend paying REITs when compared to those of operating companies in growth industries in a C-corp structure (which generally retain operating cash flow for growth).

• Containing administrative costs.

Subsequent Challenges