Due to certain aspects of the Company's relationship with CCA, the Internal Revenue Service (the "IRS") will not consider the payments that the Company received from CCA under the CCA Leases to be Rents from Real Property. First, the IRS will recharacterize the CCA Leases as service contracts or partnership agreements, rather than as "true leases." Second, the application of the Code's complex constructive ownership rules, together with the failure of the Ownership Limit contained in the Company's Charter to prevent such constructive ownership, will lead the IRS to recharacterize CCA as a Related Party Tenant. In either event, based upon the amount of rent payments received under the CCA Leases, the Company will not satisfy either the 75% Income Test or the 95% Income Test and, as a result, will lose its REIT status and default on its loans.
"Second, the application of the Code's complex constructive ownership rules, together with the failure of the Ownership Limit contained in the Company's Charter to prevent such constructive ownership, will lead the IRS to recharacterize CCA as a Related Party Tenant""""
AGAIN...PZN OWNS 9.8% of the private operating company. This is not a controlling interest. If PZN owned a "substantial" position in the Opco then it could be said the leases were NOT written at "arms length". No court, IRS or whatever is going to say that 9.8% is a controlling interesting. Because the leases are written with "a non-controlling" party it's up to the leasee to determine the rate. Since the private Opco is making 9% on the contracts the there is certainly a economic interest in Opco to write the leases. If there was no economic interest then we'd have a problem.
r7uailj.....you OR I are not going to find loopholes that 3 major accounting firms missed here, IMO. The rules are NOT that complicated. The income tests, etc. are straight forward. PZN has written leases with an "arms length" company as the law defines, an "arms lenght" company.
From my understanding some of the most knowledgeable people in the REIT business put this together. Bob Crants being one of them. Can the IRS challenge it, of course. Did they do anything wrong.. IMO, no. THe IRS will have make a long hard case if they wish to go up against PZN as I understand it. They will have to prove that the private sub is "controlled" by PZN. Again 9.8% is not.
Since Real Estate Value by an real standard is determined by the value of it's income stream then you'd have a hard arguement against the appraised values of the prison beds. See how that works? SO the IRS would have to come in and say that a 9.8% interesting is contro
"conversation" before? read the reply from last time.
True the IRS challenge the structure. Where the question would come in is in the valuations of the properties in order to charge lease rates that include ALL...repeat ALL services rendered from Opco.
"Defaulting on it's loans" is an irresponsible statement.
So what happens if the IRS comes down on PZN ? Well lets see, shareholders drove CCA from $35 to $11 because they hated the REIT. You tell me. Starwoods is up 25% since converting from a REIT.
What is your point in this repeated discussion? I assume to incide fear by your mention of loan defaults. Are you aware of the other private subs in other REIT's....Starwoods has one too..did you know that?
Did you know that firms now are suing for liable for passing on misinformation? Becareful what rumors you decide to spread.
You point is a valid one that this structure is aggressive and the IRS can bring it to court. If you thing this companies going belly up because of it, then you are not reading the same income statements I am.
Indeed, Flipper, I'm focussing on the fundamentals, and all of them point to a bright future for PZN. The only question I have is how they will finance all these new prisons they're building. Equity? Debt? Half and Half? The last balance sheet I saw showed a pretty conservative debt/equity ratio, something I like (just look at Loewen Group implode under the crushing weight of its massive debtload). Will the new financing required dilute FFO per share?