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Hotel REITs and taxable REIT subsidiaries; lease amendments in response to coronavirus

Hotel REITs and taxable REIT subsidiaries

Real estate investment trusts (REITs) are allowed to organize “taxable REIT subsidiaries” (TRSs) that can engage in activities that would otherwise give rise to REIT qualification concerns. Additionally, notwithstanding that rents from related tenants are treated as nonqualifying income, a REIT can lease its hotels to a related TRS if the hotels are operated by “eligible independent contractors” on behalf of the TRS. This hotel lease arrangement between a REIT and its TRS is commonly referred to as the “qualified lodging exception.” Many REITs have been organized to use this structure to own and operate—through third-party managers—hotel properties.

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With the coronavirus (COVID-19) pandemic—which has already led to a reduction in travel (business or pleasure) and temporary closures (voluntarily or involuntarily)—many hotel TRSs are likely facing operational challenges in the near term. Thus, a threshold question is whether it is permissible for a hotel REIT and its TRS to modify an existing lease during its term.


Read a March 2020 report [PDF 70 KB] prepared by KPMG LLP: What’s News in Tax: A common question from hotel REITs: Should the TRS lease be amended during tough times?

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