On October 11, Senator Warren reintroduced the Stop Wall Street Looting Act of 2024 (the “Proposed Legislation”). Senator Warren previously introduced substantially similar proposals in 2019 and 2021, which both failed to advance. The press release accompanying the Proposed Legislation states that one purpose of the Proposed Legislation is to “Drive REITs out of Health Care.”

New in the 2024 version are three provisions related to REITs. First, the Proposed Legislation would exclude entities that either sell assets to a REIT or pledge assets to a REIT as collateral for a loan from receiving payments under any Federal health care program (for example, Medicare/Medicaid). Second, the Proposed Legislation would repeal the ability of taxable REIT subsidiaries (“TRSs”) to own qualified health care properties (often referred to as the “RIDEA structure”). Third, the Proposed Legislation would make all REIT dividends ineligible for the 20% pass-through deduction under Section 199A of the Internal Revenue Code. Section 199A expires by its terms at the end of 2025, but whether and how to extend it has been a separate topic of debate. Senator Warren has stated that the Proposed Legislation is motivated in part by the May 2024 bankruptcy of Steward Health Care, which entered into a sale-leaseback transaction with a REIT.

The Proposed Legislation follows summer correspondence from the IRS and Senator Warren touching on both health care and lodging REITs. In August 2024, the IRS Chief Counsel responded to a letter from Senator Ron Wyden, Chairman of the Senate Committee on Finance, that inquired about lodging REITs. In her letter, the IRS Chief Counsel restated the law in Section 856(l)(3) of the Internal Revenue Code that a TRS may not directly or indirectly operate or manage a lodging facility. The IRS Chief Counsel noted that day-to-day operation of a lodging facility “may include recruiting, hiring, daily supervision, and direction of the employees.” Senator Warren responded with a September 3 letter to the Commissioner of the IRS, encouraging him to increase scrutiny of both lodging and health care REITs and pointing him to the Steward Health Care bankruptcy.

No revisions to the TRS provisions applicable to lodging REITs have been proposed at this point. It is possible, however, that we may see increased audit activity in both the health care and lodging space following on from the public statements described above. Health care and lodging REITs should keep in mind that management agreements with eligible independent contractors should not give the TRS lessee the power to control day-to-day operation of the health care property or lodging facility.

Emily Benedict and Zachary Roop also contributed to this article.