Byron C
Creating elegant financing and acquisition strategies for real estate investment groups to outmaneuver their competitors
Can an oil refinery be owned in a real estate investment trust (REIT)?
I am trying to increase the return to investors on a 5,000 bbl/day topping plant.
Answers (2)
Stephen S
Head of Dubai Operations and PMO at SHUAA Capital
Best Answers in: Energy and Development (2), Government Policy (1), Commodity Markets (1)
Sure. But it will blow up the REIT and turn it into a regular C-Corp.
REITS must hold passive real estate assets. Any services performed must be captured by a taxable REIT subsidiary that pays corporate taxes.
So your REIT can own the land under a refinery and charge market-based rent. But the refining services generate bad income for the REIT.
This is just the general rule. The real analysis is much more involved. Pay for proper advice from a licensed professional. I could be wrong. I didn't even stay at a Holiday Inn Express last night.
Mr. Stanton's answer is generally correct, so I am somewhat suspect about his staying at a Holiday Inn Express.
While the REIT would be ineligible for REIT tax benefits if it owned and operated an oil refinery, it may be possible (and lilely is possible) for a REIT to own the land and to lease it as a landlord to the operator. The operator may be a taxable REIT subsidiary or it may be a wholly separate entity owned by some or all of the same REIT investors. Bear in mind that in order to qualify as a REIT the entity must have at least 100 beneficial owners. Frequently that comprises a small number of investors who are actively involved and a large number who are purely passive, often "preferred shareholders." It would not be uncommon for the actively involved REIT shareholders to be the only owners and operators of the refinery operating company, tenant to the REIT.
Mr. Stanton's best advice, though is to get appropriate counsel because there are fiduciary duty concerns, tax concerns, real property concerns, corporate law concerns, and others ready to provide a trap for the unwary.
