In an insane world, it's possible for both sides of an argument to be wrong.

Spotted by Joe M in the NY Times:

A small but growing number of American corporations, operating in businesses as diverse as private prisons, billboards and casinos, are making an aggressive move to reduce — or even eliminate — their federal tax bills. They are declaring that they are not ordinary corporations at all. Instead, they say, they are something else: [Real Estate Investment Trusts] that are typically exempt from paying federal taxes.

This is wildly misleading at best. As Randy from Colorado explains in the comments:

The conversion from a corporation to a real estate investment trust, does not create a windfall profit for anyone, it merely shifts the profit, and the taxation of that profit, from the corporation to the shareholders/taxpayers. The amount of income taxes paid to the government is not reduced either. This is the same way that subchapter s corporations, partnerships, limited liability companies, and sole proprietors are taxed; their owners are the ones who receive all the profits, and pay all the taxes.

This must be one of the most dishonest articles I have ever read. Any freshmen level introductory business or accounting course will teach you this, or any of the thousands of books ever written on the types of business entities, or how to start your own business. It is a disservice to the readers. This article seems to be just another brick in the wall of envy placed by those who want to perpetuate this awful class warfare between the presumed haves and those who think they have not.

It appears that instead of taking this line of defence, these corporations themselves are giving the game away:

One of the bedrock principles — and the reason for the tax exemption — was that the trusts do not do any business other than owning real estate. But bit by bit, especially in recent years, that has changed as the I.R.S., in a number of low-profile decisions, has broadened the definition of real estate, and allowed companies to split off parts of their business that are unrelated to real estate.

For example, prison companies like the Corrections Corporation and the Geo Group successfully argued that the money they collect from governments for holding prisoners is essentially rent. Companies that operate cellphone towers have said that the towers themselves are real estate... The I.R.S. released its latest decision, allowing a data and document storage company to convert, on April 5. The letter did not include the name of the company, but several data storage companies, including Iron Mountain and Equinix, are in the process of converting.

A few days later, a strategist at the Wall Street firm Jefferies wrote in a report: “It is not a far stretch to envision REITs concentrated in railroads, highways, mines, landfills, vineyards, farmland or any other ‘immovable’ structure that generates revenues.”

Exactly.

To a large part their income is just rent (in the literal or economic sense), which in any sane world would be taxed at higher rates than earned income from a business or employment. We live in an insane world where rental income is taxed at lower rates than earned income (that certainly applies in the UK). In a sane world, these corporations would be desperately arguing that their income is not rental income at all.

I hope none of you invested in Real Estate Investment Trusts!!

One of Nulabour first reckless throws of the dice to try and prop up property prices was to invent "Real Estate Investment Trusts" by which small savers would be conned into putting their hard-earned into commercial property.

They went live in early 2007, and were quite highly geared - so every 10% fall in commercial property means a 25% fall in the value of your REITS shares. The insiders bailed out at the top of the market, leaving Nulabour & Tory core voters, the small savers, nursing huge losses. Not that I'm a conspiracy theorist or anything, but remind me, who votes for these people? Here's the chart for the FTSE Real Estate Sector Index for the last two years:


There's an old saying, "Don't invest in a railroad company until it's gone bankrupt three times", which applies to all companies based on speculative land values. True to form, these companies (REITS and other UK property companies) are now on the edge (i.e. are breaching their lending covenants) and have asked their shareholders for another £3 billion in the next four weeks.

Land Securities "added that its combined investment property portfolio had been valued at £9.97bn as at January 31, down from £12.5bn in September [2008]. After adjustments, the valuation deficit over the four-month period was £2.45bn, representing a decline of 20.1 per cent. Land Secs added that it was cutting its dividend payment pool from £307m in to £221m."

To put this in perspective:

a) Land Securities currently has a market capitalisation of £2.5 billion, so shareholders have already lost £7.5 billion in value and are now being asked for another £755 million to keep the wolf from the door.

b) It admits that its properties lost a fifth of their value in just four months.

c) It doesn't appear to grasp that cancelling dividends is a much cheaper way of preserving capital than paying a dividend of £221 million and then promptly asking shareholders to pay back £755 million.

d) The more prices fall, the higher the gearing. If and when commercial property prices bottom out, a REITS share will more or less equate to a call option on property prices, i.e. pretty much risk free with unlimited upside. But let's wait for another couple of waves of rights issues, debt-for-equity swaps and the like before we start buying.

UPDATE Per The FT (thanks to Umbongo & Lola for the steer):

The government is to consider whether to allow the payment of stock dividends by real estate investment trusts, a measure that would help alleviate the strain on balance sheets in the struggling listed property sector...

Whether stock dividends are allowed by existing rules is uncertain. Some accountants and analysts warn such a move would be a minor breach of the Reit legislation, which stipulates that Reits need to distribute 90 per cent of rental income to shareholders.

"UK commercial property values fall in March"

"British commercial property values fell 1.2 percent in March, taking the market's total loss since last summer's bull market peak to around 16 percent..."

Chuck in a bit of gearing, and share prices in UK property companies* are down by a third over the last year:
It's rather chortlesome, looking back at the crap they came out with when property companies were allowed to convert to REIT status**...

"Real estate investment trusts (REITs) which will enable small investors to put money in property without paying tax twice are on the way, Gordon Brown announced in his Budget speech. REITs will fill a big gap in the options open to small investors who do not want to risk their whole nest egg in one buy-to-let property, but for whom shares in property companies are highly taxed and subject to the often irrational booms and busts of the stock market".

Ah yes, better to lose a third of your money as a result of a perfectly rational collapse in commercial property prices, eh?

* The black line is Land Securities, the green line is FTSE Real Estate and Development.

** At the beginning of 2007.