United States: Considerations For REIT Or MLP Formation By Healthcare Not-For-Profit Organizations

Last Updated: June 30 2015
Article by Stephen Edward Older, Rakesh Gopalan and Gerald V. Thomas II

Healthcare not-for-profit corporations, or NFPs, and other organizations typically own significant real estate assets, the value of which often cannot be efficiently realized through monetization, particularly if the properties' values continue to appreciate.

Real estate investment trusts, or REITs, have been used by companies as a preferred vehicle to monetize real estate assets and access the capital markets. In this article we discuss why healthcare NFPs in particular may benefit from using the REIT structure, and further discuss other potential viable structures including master limited partnerships, or MLPs.

About REITs

A REIT is a corporation, trust or association that primarily invests and holds real estate assets.
The primary benefit of the REIT structure is that it is not subject to U.S. federal corporate income taxes, and in most cases, state corporate income taxes, provided it distributes at least 90% of its taxable income annually to shareholders. Because of this benefit, public REITs create an attractive opportunity for the investment community.

Why use a REIT structure for not-for-profit organizations?

Although NFPs would not gain any additional tax benefits from using a REIT structure, it could be used as a method to tap into markets to which the NFPs may not otherwise have had access, thereby receiving a public multiple on the real estate assets without losing their non-profit status. Furthermore, the portion of the REIT that is public (as 100% of a REIT's stock need not be publicly-traded), the fair market value of the REIT's property portfolio is updated every day the shares are traded. Because of the restrictions imposed by state laws governing NFPs, NFPs are generally restricted from raising funds on the capital markets, denying them the public company multiple and excluding them from the potential proceeds that can be received by offering securities for sale to the public. Forming a REIT that will offer and sell its equity securities to the public and then using the proceeds of that offering to purchase the NFP's real property assets could allow the NFP to realize the value of its real estate holdings and create liquidity for those investments without losing its NFP status.

Certain considerations of using a REIT

REITs are subject to myriad tax rules which will need to be considered in the context of each NFP's particular circumstances. For example, in order to comply with the REIT tax rules, healthcare REITs' operating hospitals and other health care facilities must lease the property to a taxable corporate subsidiary known as a "taxable REIT subsidiary" (TRS) in exchange for rent provided that the TRS hires an unrelated eligible independent contractor to manage the operations for a management fee. The rental income derived by the REIT can be structured to be qualifying income for REIT tax purposes. As a result of the REIT structure, NFPs will relinquish significant control over their real property assets.

There also are parameters around the ownership structure for REITs such as closely held ownership rules. However, IRS guidance indicates that a REIT may be owned primarily by a Section 501(c)(3) tax-exempt organization such that the sponsoring NFP would be able to retain control over management.

MLP formation as a viable alternative

An alternative to REIT formation is an MLP, which is a similar structure whereby assets can be owned in an entity with publicly traded securities that are treated as a flow-through entity for tax purposes and therefore pays no taxes at the partnership level. According to IRS regulations, 90% of the gross income of an MLP must be "qualifying." Qualifying income includes many activities related to the extraction of natural resources such as development, mining, production, refining and transportation. Real property rents (and income from the sale of real property) also qualify.

An MLP is typically formed by a sponsor (e.g. a health system) who becomes the General Partner ("GP"). Securities called "units" are sold publicly to Limited Partners ("LPs") (e.g. hospitals, foundations, physicians, investors, etc.). The GP makes all decisions about the operation of the business as defined by the Partnership Agreement. This gives the GP effective control over the assets with potentially little ownership. The simplified structure looks like this:

The partnership agreement serves as the mechanism to contractually define the relationship between the GP and LPs.

There are several key characteristics of MLPs that may make the structure worth consideration:

  1. Control. Because of the GP/LP structure, a sponsor can effectively maintain operational control of the assets while still monetizing them.
  2. Distribution of Cash. Unlike a REIT, the requirement to distribute dividends is governed by the partnership agreement and not by regulation. Typically MLP partnership agreements are drafted to maintain some flexibility to fund contingency or other reserves.
  3. Stable Cash Flows. The typical MLP investor is interested in the income characteristics of the MLP distributions with the most stable businesses commanding premium valuations.
  4. Growth. In addition to a stable distribution, most MLPs also have attractive growth characteristics. Many sponsors hold back a significant amount of assets when forming an MLP so that they can fuel future growth at the MLP via accretive acquisitions from the sponsor. A large "dropdown" backlog is viewed very positively by investors.
  5. Unrelated Business Taxable Income (UBTI). UBTI is a concept in the tax rules that make UBTI over $1,000 taxable to a tax-exempt organization. Because the MLP's income "flows through" to its GP and LP owners, an NFP could end up paying taxes that it otherwise wouldn't. The overall MLP structure can address this issue but needs to be considered upfront.

Comparing sale/leasebacks

NFPs and health systems historically have opted for sale/leaseback transactions to monetize their non-core real estate portfolio, taking advantage of attractive capital markets conditions. A real estate investor will typically require a long-term lease, with fixed or inflation-pegged annual increases in the lease rate to generate an investor's required rate of return. However, post-transaction, some executives feel trapped as rising rents are often hard to sustain in an era of declining reimbursements. Moreover, once the properties are sold, the former owner no longer partakes in the rising market value of the properties, losing potential upside. A recent example of this dynamic involves a large and reputable owner-operator of nursing homes across the US. They sold the properties to a leading health care REIT and signed a long-term lease that included aggressive rent escalations, in exchange for an attractive purchase price. A few years into the lease, amidst a challenging operating environment, the operator's net income no longer covered the contractual rent payments. Luckily, the REIT was willing to revise the lease rates in exchange for other conditions, but not all situations have an amicable ending. This potential lack of flexibility in revising lease terms, the clash between cultures of the property management firm and their physician tenants, or even altering once-limited capital maintenance and expansion rights are drivers behind the NFP's "seller's remorse". REIT or MLP formation allows organizations to retain control over their property leases and management, and captures any increases in market value over time through the constant update in fair market value either of these vehicles allow.

One option is to structure a REIT or MLP either as an affiliate of the NFP organization, or as a partnership with other NFPs with a similar mission (e.g. two regional health systems can form a multi-billion dollar REIT). From this standpoint, the real estate value will be updated to fair market at point of REIT or MLP formation, with the former owners dictating lease rates and terms. Moreover, unlike a sale/leaseback, the publicly-traded portion of a REIT or MLP (e.g. REIT can list 10% of its shares on a public exchange) can access capital from a variety of sources – including retail investors, institutional funds or foreign entities – and use this capital for new acquisitions, development or routine maintenance. These capital raises can even be periodic, fueling the the organization's need for facilities growth over time. A REIT or MLP can employ a property management/maintenance team, acquisitions and development team, and/or finance department that are dedicated to the operations of the REIT or MLP, thereby retaining control over quality of staff and outcomes. The separation of a real estate portfolio and its management from corporate operations typically advances efficiency and best practices.


Forming a REIT or MLP to hold an NFP's real property is a potential way for an NFP to raise funds in the capital markets and enjoy a potential public company multiple without risking its non-profit status or losing control over its real estate assets. While there are potential risks and structuring considerations to take into account, boards and management of NFPs should at least consider the viability of a REIT or MLP structure when considering long-term real estate management and financing strategies.

Previously published by Becker's Hospital Review

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions