Why real estate investment trusts should invest in strong tax leadership
In the complex and highly regulated world of real estate investment, real estate investment trusts (REITs) face a unique set of tax challenges and opportunities. As vehicles designed to provide investors with regular income and long-term capital appreciation, REITs must navigate a labyrinth of tax codes, compliance requirements, and strategic planning decisions. In this context, strong tax leadership is not just a back-office necessity, it is a strategic imperative.
The strategic role of tax in REITs
REITs are structured to avoid corporate income tax by distributing at least 90% of their taxable income to shareholders. While this structure offers significant tax advantages, it also imposes strict compliance obligations. A single misstep in tax reporting or distribution requirements can jeopardize a REIT’s tax-exempt status, leading to severe financial and reputational consequences.
Strong tax leadership ensures that REITs remain compliant with Internal Revenue Service (IRS) regulations and other jurisdictional tax laws. But beyond compliance, tax leaders play a critical role in strategic decision-making, guiding mergers and acquisitions, structuring deals, managing risk, and optimizing after-tax returns for investors.
Navigating regulatory complexity
The tax landscape for REITs is constantly evolving. Changes in tax legislation, such as the Tax Cuts and Jobs Act (TCJA) in the U.S. or shifting international tax treaties, can have profound implications for REIT operations. Tax leaders must stay ahead of these changes, interpret their impact, and implement timely strategies to adapt.
For example, the TCJA introduced a 20% deduction for qualified REIT dividends, enhancing the attractiveness of REIT investments. However, it also brought new limitations on interest deductibility and changes to depreciation rules. A strong tax leader can interpret these nuances and adjust the REIT’s strategy accordingly, ensuring compliance while maximizing shareholder value.
Enhancing investor confidence
Investors in REITs are increasingly sophisticated and demand transparency, especially regarding tax matters. Strong tax leadership contributes to robust financial reporting, clear disclosures, and proactive communication with stakeholders. This transparency builds investor confidence and can be a differentiator in a competitive capital market.
Moreover, tax leaders help REITs manage their effective tax rate, which directly impacts distributable income. By identifying tax-saving opportunities such as leveraging tax credits, optimizing entity structures, or managing state and local tax exposure, tax leaders can enhance returns to investors.
Supporting growth through M&A and structuring
REITs often grow through acquisitions, joint ventures, and complex real estate transactions. Each of these activities carries significant tax implications. Poorly structured deals can result in unexpected tax liabilities, reduced returns, or even regulatory penalties.
Tax leaders bring critical expertise to the table during deal structuring. They assess the tax implications of various transaction models, advise on entity formation, and ensure that deals are structured in a tax-efficient manner. Their involvement can mean the difference between a successful acquisition and a costly misstep.
Risk management and governance
Tax risk is a material concern for REITs. Inadequate tax governance can lead to audits, penalties, and reputational damage. Strong tax leadership ensures that the REIT has robust internal controls, documentation practices, and risk management frameworks in place.
This includes implementing tax technology solutions, maintaining up-to-date transfer pricing documentation, and conducting regular tax risk assessments. A proactive tax leader will also engage with external auditors and tax authorities, fostering a culture of compliance and transparency.
Global expansion and cross-border considerations
As REITs expand globally, they encounter a host of cross-border tax issues ranging from withholding taxes and permanent establishment risks to transfer pricing and treaty benefits. Navigating these complexities requires specialized knowledge and strategic foresight.
Strong tax leadership enables REITs to expand internationally with confidence. Tax leaders can design global tax strategies that align with business objectives while minimizing tax leakage. They also ensure compliance with local tax laws and reporting requirements, reducing the risk of costly disputes or double taxation.
Talent development and organizational resilience
Investing in tax leadership is also an investment in organizational resilience. A strong tax leader builds and mentors a capable team, ensuring that the REIT has the internal expertise to respond to emerging challenges. They foster a culture of continuous learning and collaboration across finance, legal, and operations teams.
Moreover, tax leaders often serve as key advisors to the C-suite and board of directors. Their insights inform strategic decisions, from capital allocation to geographic expansion. By elevating the role of tax within the organization, REITs can make more informed, agile, and resilient business decisions.
ESG and tax transparency
Environmental, social, and governance (ESG) considerations are increasingly influencing investor behavior. Tax transparency is a growing component of ESG assessments, with stakeholders expecting companies to disclose their tax strategies, contributions, and governance practices.
Strong tax leadership positions REITs to meet these expectations. By articulating a clear and responsible tax strategy, engaging in ethical tax practices, and reporting transparently, REITs can enhance their ESG profile and appeal to socially conscious investors.
Why tax leadership in a REIT is a strategic imperative
In today’s dynamic and complex environment, tax is no longer a siloed function. It is a strategic pillar of business success. For REITs, where tax compliance and efficiency are central to the business model, strong tax leadership is essential.
By investing in experienced, forward-thinking tax professionals, REITs can navigate regulatory complexity, enhance investor confidence, support growth, manage risk, and align with ESG expectations. In doing so, they not only protect their tax-advantaged status but also unlock greater value for shareholders.
In short, strong tax leadership is not a cost center. It is a value driver. And for REITs aiming to thrive in a competitive and evolving market, it is an investment worth making.
How Brewer Morris can help you find your next tax leader
At Brewer Morris, we have a network of world-class tax leaders who are open to new opportunities. If you would like to hire strategic tax leader for your business, please submit a brief and a member of our team will be in touch.
Alternatively, if you are tax professional looking for a new role, check out our latest jobs.
