As a result of the COVID-19 crisis, many REITs are facing significant liquidity problems. These liquidity concerns are further exacerbated by the 90% Distribution Requirement. On March 18, 2020, Nareit requested that the IRS issue guidance increasing the percentage of stock that may be issued in Qualifying Distributions from 80% to 90% for both the 2020 and 2021 taxable years. Revenue Procedure 2020-19, which is partially responsive to Nareit’s request, harkens back to temporary guidance in the financial-crisis era that also permitted Qualifying Distributions to be made in a mix of up to 90% stock/10% cash.

Revenue Procedure 2020-19 does this by modifying Revenue Procedure 2017-45, pursuant to which “publicly offered REITs” (i.e., REITs that are required to file annual and periodic reports with the Securities and Exchange Commission under the Securities Exchange Act of 1934) have been able to make Qualifying Distributions in a mix of up to 80% stock/20% cash.

To take advantage of the Revenue Procedure 2020-19, a publicly offered REIT must declare the relevant distribution on or after April 1, 2020 and on or before December 31, 2020, with a cash-or-stock election attached, and:

• the declaration must entitle each shareholder to elect to receive part or all of its distribution in either cash or stock;
• the cap on the cash amount of the declared distribution (the “Temporary Cash Limitation Amount,” and, expressed as a percentage of the declared distribution, the “Temporary Cash Limitation Percentage”) must be 10% or greater;
• if the aggregate cash amount to be distributed is not limited by the Temporary Cash Limitation, then each shareholder electing cash must receive cash equal to the elected amount;
• if the cash election is oversubscribed (i.e., the aggregate cash amount is limited by the Temporary Cash Limitation), then each shareholder electing to receive a percentage of cash over and above the Temporary Cash Limitation Percentage must instead receive an amount of cash which is as close in amount as practicable to the sum of:
  • the product of the Temporary Cash Limitation Percentage and the shareholder’s entire dividend entitlement (to the extent subject to a cash/stock election) under the declaration, and
  • the shareholder’s pro rata portion, based on its elected cash amount, of available cash above the Temporary Cash Limitation;
• regardless of whether the cash election is oversubscribed, every shareholder electing to receive a percentage of cash less than or equal to the Temporary Cash Limitation Percentage must receive the elected amount of cash; and
• the number of shares received by any shareholder receiving stock must be determined by a formula which:
  • utilizes the market value of the stock,
  • is designed to link the value of the stock distributed as closely as practicable to the amount of cash otherwise paid, and
  • uses data from a period of no more than two weeks ending as close as practicable to the payment date.

In light of the additional flexibility afforded under this guidance, publicly offered REITs should consider whether to take advantage of the ability to make distributions for the remainder of the 2020 taxable year in a combination of cash and stock. Publicly offered REITs may further want to consider combining the relief afforded by Revenue Procedure 2020-19 with the statutory ability to declare a distribution in the fourth quarter of 2020 and issue the cash and stock in January 2021. If the amount of the January 2021 distribution, when combined with the REIT’s 2020 distributions, exceeds the REIT’s 2020 taxable income, the excess will not go unused, but will be treated as a distribution that counts towards the REIT’s 2021 90% Distribution Requirement. Such a strategy could effectively allow a REIT to retain 90% of its 2020 taxable income in cash.