GOODWIN 15 3. TRANSACTION STRUCTURE AND OTHER TAX CONSIDERATIONS. Among the over 50 REIT M&A transactions announced in the 2012-2017 period, the most common transaction structure involved the forward merger of the REIT with and into either the buyer or its merger sub. The table below indicates the various transaction structures used over this period: The predominance of the forward merger reflects the fact that: • in a tax-free stock-for-stock deal (or a partially tax-free deal with some taxable “boot”) the forward merger is easier to qualify as a tax-free reorganization as compared to other structures; and • in a taxable deal (such as an all-cash go-private transaction) the forward merger provides an easy mechanism to give the buyer a fair market value tax basis “step up” in the target assets. In the public-to-public tax-free or partially tax-free context, the choice between a direct merger of the target into the public acquirer or a triangular merger of the target REIT into a merger sub is generally driven by non-income tax considerations, including transfer tax and lender or JV partner consent considerations. Although the tax structuring considerations for each deal are, of course, unique, there are common themes that run through the universe of REIT M&A transactions announced in the 2012-2017 period. These include: • REIT Qualification. A critical underlying premise of every public REIT transaction is that the target REIT in fact qualifies as a REIT for tax purposes. If the target’s REIT qualification is in question, issues that arise include: (i) exposing buyer to inheriting contingent tax liabilities with respect to the target’s pre-closing years, (ii) in the case of a tax-free deal exposing a buyer REIT to corporate level “sting tax” on a subsequent taxable disposition of target assets, (iii) in a taxable deal with a basis step up the risk of corporate-level tax on the appreciation in target’s assets and/or (iv) additional requirements to qualify for tax-free reorganization treatment when one of the parties is a non-REIT “investment company.” While tax insurance can sometimes provide a satisfactory resolution to these issues, not every deal can absorb the incremental cost of tax insurance. Accordingly, extensive REIT diligence and the delivery of unqualified REIT opinions from target’s counsel are the norm for virtually all REIT M&A deals. • Sting tax. Even if the target has a clean REIT qualification history, it may have tax attributes that limit the range of attractive tax structures and any such attributes must be identified early in the process. For example, if the target has acquired assets with “built-in gain” from a taxable C corporation in a tax-deferred transaction in the prior 5 years5 , a taxable disposition of such assets as part of the transaction would trigger Structure of Transaction Number of Deals REIT Forward Mergers:4 REIT forward triangular merger 12 REIT forward merger 5 REIT forward triangular merger immediately preceded by OP reverse triangular merger 10 REIT forward merger immediately preceded by OP reverse triangular merger 2 REIT forward triangular merger followed immediately by OP reverse triangular merger 7 REIT forward triangular merger followed immediately by OP forward triangular merger 4 REIT forward triangular merger followed immediately by OP forward merger 2 Tender offer followed by REIT forward merger 1 REIT Reverse Mergers:4 REIT reverse triangular merger 5 REIT reverse triangular merger followed immediately by OP reverse triangular merger 1 OP forward merger followed immediately by REIT forward merger 1 Tender offer followed by REIT reverse triangular merger 2 Asset Sales (followed by liquidation) 2 4 In the majority of instances where the relevant merger involved only the REIT, the applicable target was not structured as an UPREIT and thus did not have an operating partnership. 5 This was reduced from 10 years by the Protecting Americans from Tax Hikes Act of 2015, known as the PATH Act.