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NorthStar Realty Finance Corp. Message Board

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  • lner2512 lner2512 Jan 28, 2009 2:20 PM Flag

    Income from discount debt buyback

    This appears to be aimed at individuals who benefit from principal reductions on their loans, but REITs probably benefit as well--at least the way it is now written.

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    • Here's how that proposal works. To illustrate, assume nrf uses 40 million of cash to buy back 100 million of debt in 2009.

      Under today's law, nrf recognizes 60 million of ordinary income in 2009. It must pay out 90% of that before 3Q of 2010 to maintain reit status, or 54 million, which may be paid as little as 10% in cash with the balance in stock.

      If this propasal passes, none of the 60 million gain is recognized in 2009. Instead, 7.5 million (60/8) is recognized in 2010 and for the next 7 years (when presumably the economy has recovered and cash flow is plentiful again).

      So, for 2009 they don't have to pay out anything. For 2010, they have to pay out 90% of 7.5 million = 6.75 million before 3Q 2011 and they may (if the rule is still in effect) pay as little as 675,000 in cash.

      While escape from taxation is better for nrf and us, imo, that is less likely to pass because it will pressure companies to buy back discounted debt instead of buying new equipment and hiring new employees.

      Deferral of taxation is an incentive to rid the market (via buybacks) of distressed debt, but not so much of an incentive as an exclusion from income would be.

      • 1 Reply to dar200
      • OOPS:

        A 2009 gain is deferred two yesrs. A 2010 gain deferred one.

        So a 2009 gain gets reported over 8 yesrs beginning in 2011. No gain is recognized in 2009 or 2010. A 2010 gain is deferred one year recognized over 8 years beginning in 2011.

        <<<Such cancellation of indebtedness income realized in 2009 is deferred and included ratably in income in each of the eight taxable years beginning two years after the year of realization, and such cancellation of indebtedness income realized in 2010 is deferred and included ratably in income in each of the eight taxable years beginning one year after the year of realization.">>>>

    • The point is here's another arrow in the quiver of reit survival. I think this is a done deal.

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