Sen. Harry Reid is estimated to have saved American casino companies roughly $1 billion in taxes when he eliminated taxes based on real estate investment trusts, or REITs, in the recent government budget omnibus bill. Companies like Caesars Entertainment and MGM Resorts have used REITs to shift company assets from the parent company to subsidiaries in recent years. The omnibus originally would have taxed those transactions, but Sen. Reid used his influence to "gut" those assessments. A 54-word passage was included which exempted existing REIT plans to avoid heavy taxation. The result was a billion dollars in savings for Las Vegas casino companies, with a requisite loss of $1 billion to the US Treasury Department.
The service was rendered to the casino companies, which have been major contributors to Harry Reid's campaigns over the years, on December 18. That was the day the U.S. House of Representatives and the U.S. Senate each passed the "omnibus tax & spending bill", a $1.1 trillion budget deal that funds the federal government for the next year. The passage of the omnibus bill, like every year at this time, avoided a shutdown of the federal government.
Kevin Brady Quote
Rep. Kevin Brady was the man who wrote the 54-word passage. Kevin Brady was quoted in Washington newspapers saying, "We just weren't interested, I think on both sides of the aisle, in disrupting transactions, mid-transaction."
How REIT Laws Work
Current REIT laws allow owners of casinos, hotels, and other real estate businesses to spin off physical assets in "real estate investment trusts" in a tax-free transaction. The REIT is used in conjunction with an operating company, which pays rent to the REIT. Companies then use an initial public offering (IPO) to sell shares in this new subsidiary of the organization.
Such transactions allow companies to shift assets away from the parent company, along with billions of dollars in debt. This clears the balance sheet of the company, allowing it to attract more investors in the core business.
Penn National Gaming's REIT
In recent years, U.S. gaming companies have used the law in several instances. In 2013, Penn National Gaming founded GLPI or "Gaming and Leisure Properties Inc". The new unit allowed Penn National to maintain control over 18 casinos, while the operating unit bought or received assets. The GLPI deal shows how the REIT can take on a life of its own. In the case of the Penn National subsidiary, it added and additional 15 gaming facilities.
MGM Resorts' REIT
The REIT sometimes can act against the wishes of the company's board and against public opinion, so the method carries with it risks for the parent company. Earlier in 2015, MGM Resorts faced a takeover attempt from a 1% investor -- the hedge fund Land and Buildings Investment Management -- which wanted the casino company to put 10 assets into a REIT.
Jonathan Litt, the head of that REIT, wanted to name four members to the MGM Resorts board of directors. Ultimately, Land & Buildings was unable to get the three biggest investors in MGM Resorts to go along with the plan. When John Paulson, Tracinda Corp (Kirk Kerkorian's investment company), and Infinity World balked at Litt's REIT plan, he backed off in May 2015. The takeover attempt highlighted the potential trouble which could be caused with such financial options available to investors. To forestall another such attempt, MGM Resorts announced its own 10-property spin-off in October 2015, which looked remarkably like the one Jonathan Litt had proposed.
How Caesars Could Be Helped by the Law
The company most likely to be affected by Harry Reid's intervention is Caesars Entertainment. After years of speculation that Caesars was headed towards bankruptcy (with $23 billion in debt), CEO Gary Loveman announced an $18 billion reorganization plan in January 2015 which would have seen the creation of a REIT called Caesars Growth Properties.
The plan is being challenged in court by junior shareholders, but the new law should help Caesars in avoiding bankruptcy, if the lawsuit is unsuccessful and the plan moves forward. If Caesars Entertainment Operations Company (CEOC) is successfully split into an operations division and a real estate investment trust, the company would have not to pay additional taxes to make it happen.
Comments