www.pwc.

com/us/realestate

Unlocking
shareholder value
Real estate monetization
strategies

January 2016
Dear Friends,

In recent years, many companies have been reconsidering their real estate strategies. This is especially
true for companies that own and utilize significant real estate for their business. In many cases, this is
either part of an effort to unlock untapped shareholder value in existing assets or to provide growth
capital for the continued expansion of capital-intensive industries. Increasingly, activist investors are
driving these pressures.

The universe of what is considered to constitute real estate continues to expand to cover an ever-
broadening range of physical assets currently owned by companies and directly used in their businesses.
This is evident in the significant increase of sale-leaseback activity and in the rise of the so-called,
non-traditional REIT formations or conversions, which are being used to bring a wide variety of new
asset types into the REIT world. A few of these new asset types include: timber, farmland, cell towers,
billboards, and infrastructure assets of all types in the retail, healthcare, gaming, telecommunications,
energy, storage, and many other real estate-heavy sectors. We believe this transaction activity will
continue as the financial markets strive to satisfy the voracious need for real estate growth capitalboth
in the US and globally.

It is important to recognize that the pressure from shareholder activists is not likely to go away any
time soon. Management of companies of all sizes and in all industries need to be prepared to provide
shareholders and investors with a well-articulated strategy that is supported by a proactive assessment
of the companys existing property portfolio. By telling a clear story and openly communicating with
shareholders and investors, companies both minimize the risk of becoming an activist target and help
build shareholder value.

While recent legislation signed into law in December of 2015 will curtail certain tax free spins, we
expect these changes will merely impact the focus and structure of many monetization efforts, but not
eliminate them entirely. On the positive side, other changes in the legislation should spur further foreign
investment in US real estate and may make monetization transaction more attractive.

This is where we can help. Through our specialists global presence and extensive knowledge of
capital markets, PwC can provide you with the insight you need to achieve increased organizational
transparency for investors and shareholders. We believe PwC offers a powerful combination of personal
service, specialized experience, and global reach that sets us apart and helps you achieve your goals.

Byron Carlock, Jr.

US Real Estate Leader
byron.carlock.jr@pwc.com
(214) 754 7580
Table of contents

Emerging trends 1

Market conditions 4

Factors to consider 6

Expanding the possibilities 9

Overview of various monetization transactions 12

PwCs strengths to serve you 17

Appendix A
Example of value creation through a credit lease 20

Appendix B
Other PwC real estate thought leadership publications 22

Contacts 24

Unlocking shareholder value | Real estate monetization strategies

Emerging trends
In an effort to realize
untapped value for
shareholders, many real
estate-heavy companies are
looking to the monetization
of their real estate assets to
fund core operations and
expansion plans. Traditional
real estate monetization
methodologies include non-
recourse financing, sale-
leaseback transactions,
and more recently, REIT
conversions/spin-offs.
Despite the fact that real estate may
make up the most significant portion
of a companys assets, operating
costs, or strategic value drivers,
the existing corporate real estate
structures currently used by many
were either initially designed to
support a very different operational
structure than needed today or
motivated by financing, accounting, or
tax considerations that are no longer
relevant. Furthermore, other factors
are on the horizonsuch as proposed
changes in lease accountingthat may
also affect the way many companies
think about their real estate operating
strategies. Real estate also plays
a key part in long-term corporate
sustainability.
In many organizations today, the
corporate real estate department is
viewed as more of an administrative
function or cost center, instead of as
a strategic or competitive advantage.
Also often overlooked is the fact that
market shifts frequently result in an
entitys real estate being valued at
amounts significantly higher than
beforeespecially for companies that
have built and developed a portfolio
of assets over a long period of time or
through substantial acquisitions.
Unfortunately, there is no one-size-
fits-all answer to how companies can
either realize or create enhanced real
estate value because the right answer
for one company may be completely
different for another. Optimal decisions
around real estate strategy are affected
by a large number of factors, including
the perceived need to control particular
assets, operational flexibility, the
availability of alternatives, common
industry practices, tax and regulatory
impacts, and the expectations of
management and investors; therefore,
a careful consideration of any given
companys unique circumstances is
crucial in deciding on an effective
approach to capitalizing on real
estates true value. Even within the
same company, different transaction
types may be more appropriate for
different departmental needs, making
it necessary to apply several different
methodologies to reach its ultimate
goals.
Unlocking shareholder value | Real estate monetization strategies
Today, many companies are evaluating
the feasibility, benefits, costs, and other
factors associated with potential real
estate monetization strategies. While
some of these strategic evaluation
initiatives have been spearheaded
by company management, others
have emerged as a result of pressure
from activist shareholder groups and
investment bankers.
Rise of activist investors and
real estate-driven M&A
Activist investors are increasingly
focusing on the value of a companys
real estate. Why now? These types
of monetization transactions are not
newthey have been employed by
many in the past.
Since World War II, owning real estate
has generally been viewed as favorable,
but now, we seem to be in an aggressive
cycle of trimming real estate ownership
in favor of selling and leasing back.
Who wins and who loses? In many
cases, everyone wins!
1
Many private equity firms that acquire
companies with large amounts of
owned real estate use sale/leaseback
structures as a means to finance their
acquisitions, but they are not the only
ones thinking about monetization.
As companies monitor and respond
to market trends, an increasingly
wide variety of transactions and
restructurings have emerged. Also
increasing is pressure companies
feel directly from corporate activist
investors or as a result of takeover
activity. A common focus of many
of these investors is identifying
companies they perceive have hidden
value that can be unlocked through
structural changes or divestitures, such
as a spin-off. Given the volatility of real
estate valuations, changing dynamics
in their use, and the markets quest for
yield, real estate is a common focus of
these activist investors and acquirers.
These activists may espouse
transactions where underlying
financial theory suggests that total
value can be created, through financial
surgery, to separate the bond-like
elements of a companysuch as real
estate that can pay a stable yield from
rental incomefrom the companys
more cyclical operations. As a result,
the operations of the company can be
free of the capital intensity often seen
in the real estate industry and offer
higher equity returns. Their premise
appears to be asset light. Companies
see their stock prices increase because
capital can be invested into higher
2 Unlocking shareholder value | Real estate monetization strategies
ROI-yielding activities, rather than
weighing down the balance sheet with
real estate capital investments. The real
estate could also trade in a separate
vehicle or be sold to realize its benefits.
Other drivers of activist pressure
on companies are the beliefs that: a
companys corporate structure may not
be the most tax-efficient way to hold
the real estate, assets are underutilized
by the existing company and would be
more valuable if repurposed or split
into separate parts, or a portion of the
business is capital-starved and needs to
be separated to reach its true potential.
Activist pressure on management
increases even more when a competitor
demonstrates the potential value
that can be derived from a real
estate monetization transaction.
When investors and shareholders see
how successful various real estate
monetization methodologies are for
others, they want to know why their
organization is not doing this, too.
As industry participants continue to
discover how broad the category of real
estate truly is, the number of methods
used for realizing the value of this
real estate also continues to expand.
Often, organizations attempt to share
the same success as competitors
by mimicking their real estate
monetization strategies, which, in turn,
instills those transactions/structures as
a normal operating procedure for the
entire sector, over the course of several
years. For example, over the past ten
to fifteen years, we have seen entire
industry business models migrate
to real estate structures, such as an
REIT through REIT conversions or the
consummation of REIT spin-offs. This
occurrence is even more pronounced
in so- called non-traditional real
estate transactions, such as timber,
cell towers, billboards, and, more
recently, power transmission and
telecommunications infrastructure.
Finally, the value of an organizations
real estate may not be leveraged to its
full potential or highest and best use.
This is often difficult for management
to address or even acceptespecially
for companies that are otherwise
performing well. For example, the
value of a specific property, used
by the company as a discount retail
operation, may be worth more used
by a high-end retailer, subdivided and
used by multiple users, or converted to
another usesuch as a hotel. In other
cases, for companies in the midst of an
operational transition or with financial
difficulties, it is clear to management
that real estate must be addressed
as a part of broad, strategic change.
Perhaps the most difficult situation for
management to acknowledgeand
the most significant source of activist
pressureis in cases where the value
of real estate is higher than the value of
an entire company.
Activist investors: Taking a
preemptive approach
Activist investors actively study many
company operations in an effort to
identify perceived inefficiencies that
indicate the potential opportunity for
outsized returnsone of which is the
potential to unlock the hidden value of
real estate holdings.
Before an activist investor becomes
a shareholder and raises this issue,
companies should analyze their real
estate holdings, evaluate whether or
not an opportunity to unlock tied-up
real estate value exists, consider tax
efficiencies, and develop a preemptive
response to anticipated future
questions.
In order to make this assessment,
management and the board should:
Be proactive. Dont wait until a
shareholder activist takes a position
in your company. Preemptive
measures can prevent the need for
reactive, defensive actions.
Be strategic. Assess if your
company owns or controls real
estate or qualifying real estate assets
that present valuable monetization
opportunities, drive tax efficiencies,
or provide cost effective ways
to redeploy capital that is more
strategically aligned with business
needsfactors that shareholder
activists are likely to focus on. Use
an integrated approach to conduct
an analysis and develop responses
that align with the overall objectives
of the company and its shareholders.
Unlocking shareholder value | Real estate monetization strategies 3
Market conditions
Real estate fundamentals
continue to steadily improve
along with a substantial
increase in their underlying
values in many geographic
markets across the globe.
The rapid pace of economic
recovery has bolstered
demand while limiting the
availability of new supply
being delivered to the
market. The improvement in
space market fundamentals
now often leads to
accelerated rent growth.
Investable, income-producing real
estate stock reached a record $13.6
trillion in 2014, increasing 5 percent
from 2013.1 Across the globe, a number
of regions have already recovered from
the economic downturn and exceeded
their previous real estate valuation
peaks. Real estate investment volume
is growing across the world, with
capital flow growth in Europe, North
America, and Asia Pacific. Global real
estate investment activity reached
$633 billion in 2014an increase of
20 percent over 2013. The positive
momentum has continued into 2015,
with a global, 12-month volume of
$653 billion at the end of March 2015.
The increase in transaction activity
is unlikely to slow in the near future,
and capital allocated to real estate
across the world is still on the rise.
According to the Q2 2015 Preqin Real
Estate Quarterly Update, managers of
closed-end private real estate funds
have $249 billion in capital available
1 DTZ Research, Money into Property, June 2015
2 Real Capital Analytics, June 2015
4 Unlocking shareholder value | Real estate monetization strategies
to invest, including the 84 real estate
funds that closed in the first half of
2015, and which raised an aggregate
of $61 billion. In addition, there are
currently 417 funds in the market
hoping to raise an additional $149
billion dollars to be deployed in real
estate.
The rising inflow of capital and
limited amount of new supply being
delivered to the market has increased
the competition for assets. This
competition is leading investors to
look for different investments in which
to allocate capital. The improving
economic situation in more markets,
along with improving real estate
fundamentals, is giving investors the
opportunity to look for enhanced
returns through value-added and
opportunistic investments. Core
real estate investments, however,
remain popular with investors. As of
the first quarter of 2015, 56 percent
of institutional investors planned to
target core investments within the
next 12 months. This is up from the 44
percent of investors targeting core in
2014. Net lease assets, both traditional
and non-traditional, from monetization
transactions are a good fit for many of
these investors.
While the varying nature of these
transactions make it difficult to
measure just how much the market
for these monetized assets has grown,
it has clearly increased over the past
5-7 years. This is evidenced by the
following market activity:
Traditional net lease or sale-
leaseback transactions were valued
at $20.5 billion, in 2013, and $26.5
billion, in 2014.2
As of July 2015, the REIT
conversions or spin-offs completed
since 2011 have a market cap of
approximately $130 billion.
While concerns about the expected rise
in interest rates in some markets, like
the US, may negatively impact the long-
term pace of growth, the transaction
volume continued to be significant in
2015 and does not appear to be abating
in the foreseeable future. In fact, in
the short-term, it may spur increased
transaction volumes, as companies
rush to take advantage of interest
rates still near historic lows despite
the recent Federal Reserve actions in
December 2015.
Value creation through lease
structure
Fundamentally, the value of the
same piece of real estate can vary
significantly depending on whether it
is vacant or occupied by a long-term
tenant. Buildings leased on a long-
term basis remain an attractive target
Unlocking shareholder value | Real estate monetization strategies
for core investors. Core real estate
investors benefit from the reduced risk
that accompanies this type of property,
as the income they provide is more
solidified and, in turn, often leads to a
significantly higher property values.
This value creation can be observed in
the potential value boost seen when
comparing a valuation for property
with a long-term tenant compared to
the same property as vacant. If you
assume standard market parameters
around leasing expenses, lease up
period, probability of renewal, discount
rate, terminal cap rate, and selling
costs, the fully leased property could
easily be valued 50 percent higher
than a similar, vacant property. An
illustration of how the creation of a
long term credit lease creates value has
been provided in Appendix A.
5
Factors to consider
Is your company is a
potential real estate
monetization candidate?
q Do you have a significant amount of
real estate (as broadly defined later
in this publication in the section
titled, Expanding the possibilities)
on your balance sheet or possess
long-term leases for real estate?
q Have you assessed the current usage
of the properties you own? Do you
have vacant, unused, or excess
properties, and would you benefit
from a hold vs. sell analysis?
q Are you looking for excess capital
to support growth or expansion
plansparticularly, real estate-
dependent growth?
q Are you reassessing your current
delivery model, and if so, how does
this impact your current real estate
footprint?
q Has your business model changed,
and should you consider repurposing
your assets?
q Does your existing delivery footprint
efficiently and effectively meet the
needs of both your organization and
customers?
6 Unlocking shareholder value | Real estate monetization strategies
q Do you have the right infrastructure
and positioning to support your
operations?
q Do you currently focus on real estate
as a critical success driver? Are you
supporting it that way?
q Do you have an abundance of net
operating losses (NOLs) ready to
expire?
q Are you coming to a juncture
where you are becoming taxable in
corporate form?
Perceived benefits
While one could argue that a primary
driver for many of these transactions is
the pursuit of corporate tax efficiency,
it is not all about tax benefits. In fact,
many argue that the tax effect of some
common real estate transactions are
not eliminated, but instead, are merely
moved from an inefficient double
taxation (i.e., taxation at both the
corporation and the investor level) to a
more efficient, single taxation regime,
at the investor level. There are a
number of other, key benefits that may
be part of such transactions, including:
Multiple expansion
Capturing real estates appeal to
yield hungry investors
Improved access to secured and
unsecured debt markets or equity
growth capital for real estate-based
capital projects
Facilitating a beneficial capital
reorganization or an operational
restructuring
Ability to use operating partnership
units as tax efficient currency
for acquisitions in fragmented
industriesspecifically, in REIT
conversions or spin-offs
Trading multiple expansion is
a common theme seen in many
divestiture strategies, and those
divestiturespartially driven by
significant real estate concentrations
are no different. For many spin-off
transactions, the increase in value,
which allows for trading multiple
expansion, is perceived to come from
separating businesses with different
characteristics, capital needs, or
specialized management requirements,
in order to fully capitalize on their
value.
However, recent trends in corporate
real estate transactions have often gone
a step further by separating the real
estate used in an operation from the
operation itself. For example, in a REIT
spin-off, one of the goals is to expand
the aggregate value of the company by
creating two securities: one with the
growth characteristics that appeal to
certain growth/operational investors
the operating company (OpCo)and
the other in the property company
(PropCo), which is either a partnership
or entity electing REIT status, that will
appeal to investors looking for fixed
income or dividend yields and better
financing costs. Such a separation may
also have a positive effect on actual
operating results, as the property
company would generally be managed
by real estate professionals that may
bring cost efficiencies throughout
the development and management
process (see Tax ramifications on
page 8 for recent tax law changes).
Further, these real estate professionals
may be able to utilize their skill sets
to implement strategies that optimize
assets no longer needed by the
operating company and could venture
out to acquire, develop, and manage
specialized properties used by and
leased to other parties.
Control verses flexibility
Clearly, one of the key drivers of real
estate monetization is the current,
voracious investor market demand for
yield. This has driven down cap rates
and in turn, increased the value of
properties with long-dated, bondable
credit tenant leases. In addition to
an overall increase in real estate
value, many monetization strategies
inherently rely on creating value
through transactions in which the
real estate ownership is removed from
an entity, then leased back. In this
scenario, its the lease that drives the
value. The better the lessees credit,
the longer the term, and the higher the
lease payments, the more perceived
value created.
One of the biggest concerns expressed
about monetization transactions is the
struggle for organizations to maintain
control of essential, physical assets
while, simultaneously, balancing
operational flexibility. While long-term
leases allow the operating company to
maintain property control, they also
limit the organizations operational
flexibility. For example, a retailer who
enters into a long-dated master lease
of multiple stores may not be able
to close underperforming locations
due to ongoing lease payments on
these locations. Shorter leases can
be utilized while still maintaining
control of critical assets, through the
use of optional extension periods, at
either fixed prices or at market rates.
While this creates more operational
flexibility for the operating company,
Unlocking shareholder value | Real estate monetization strategies
however, for the property company,
it creates an increase in certain risk
factorssuch as added uncertainty
around lease renewalsand is likely to
reduce the value of the real estate and,
therefore, reduce the benefits obtained
in the monetization transaction. The
potential impact on an assets value of
a shorter leases is typically correlated
with how unique the asset is and
how difficult it would be to find a
replacement tenant.
Similarly, higher lease payments
despite potentially enhancing
perceived real estate value and
tax efficiencies realized during
the transactionalso may put too
much financial stress on the lessees
operations, ultimately hurting both
parties. Many rating agencies treat
lease payments as a form of debt and
build them into their analyses.
Tailoring and optimizing the
transaction to a companys specific
circumstances requires careful
analysis and judgment. Optimizing
is a very different goal then merely
maximizing proceeds. Success depends
on an organizations ability to balance
competing elements of value creation,
control, and operational flexibility.
And its not just about financing, taxes,
accounting, and regulatory factors also
come in to play. It is no small endeavor
for companies to embark on, and many
times, it is only attempted as a result of
external or internal pressure. Merely
meeting the status quo is an entirely
different storyone which may not, in
fact, be optimal.
7
Tax ramifications
The tax ramifications of a particular
monetization transaction must
be carefully considered. Some
transactions such as secured
borrowings are not themselves taxable
events. Others, such as sale leasebacks
are taxable events and the acceleration
of tax impacts may represent a cost
to be considered in the transaction.
Through 2015, several monetization
transactions were structured as
tax free spin-offs which effectively
removed the real estate from a
corporate solution without the toll
charge of a taxable event. However,
the recently completed budget deal
in late December 2015 included
provisions relating to these types of
transactions.
The Protecting Americans From
Tax Hikes Act of 2015 (the Act)
significantly restricts the ability of a
corporation to do a tax-free spin-off
of a subsidiary if either the parent or
subsidiary is a REIT while the other
is not. The Act provides that REIT
spin-offs only qualify as tax-free if
immediately after the distribution
both the distributing corporation
and the controlled corporation are
REITs. Furthermore, a distributing
corporation or a controlled corporation
is not able to elect REIT status until
10 years following a tax-free spin-off
transaction when a C-corporation
distributes stock of a C-corporation.
That said, the Act did not restrict
such spin-offs that could be done as
taxable transactions or other types
of monetization strategies which
may become the preferred approach
for particular transaction goals. The
8 Unlocking shareholder value | Real estate monetization strategies
Act also reduced taxes on certain
foreign investment in US real estate
which could make investor interest in
monetization transactions as a whole
more attractive, resulting in increased
investor demand and improved pricing.
Accounting ramifications
Monetization transactions are often
associated with complex accounting
methods, such as a need to evaluate
the transactions under intricate
leasing and sale-leaseback rules in the
United States. These rules apply to any
transaction for which the real estate is
sold or transferred, then leased back
(e.g., sale-leasebacks, contribution
leasebacks, or spin-off leasebacks). For
many transactions, the ultimate goal
is achieving qualified sale-leaseback
treatment in which the leaseback is an
operating lease; therefore, the lessee
is able to eliminate both the asset and
liability of the lease on its books.
However, the benefits of achieving
such a goal may be short-lived. The
Financial Accounting Standards Board
(FASB), responsible for establishing
generally accepted accounting
principles in the United States, has
indicated that it expects to issue a
final standard in early 2016 that will
significantly change lease accounting.
These changes could take effect as
early as 2019.
If the lease standard is issued according
to plan, such changes would have
leased assets and a liability on the
books of the lessee. However, for
income statement purposes, the
expense charge would be similar
to todays operating leasesexcept
for those still considered to be
finance leases. From a balance sheet
perspective, this means there would
not be as significant of a difference
between leasing and owning assets.
Corporate real estate
departments
The drive to monetize real estate
assets often provides a catalyst for
change within an organization, with
an added focus on driving operational
efficiencies as it pertains to real estate.
As part of this process, companies
should consider how to best rationalize
their real estate functions.
The real estate departments of some
companies are considered key, strategic
value drivers and viewed as integral
to strategic planning and operations.
Such companies may be able to utilize
their strategic competency in real
estate for additional growth, utilizing
capital generated by monetization
transactions. This competency can also
be leveraged to create added value for
shareholders through the creation of a
PropCo REIT, which becomes an asset
accumulator or finance source for the
OpCo and other entities in the same or
similar industries.
On the other end of the spectrum,
many corporate real estate
departments are frequently
undermanned and often, do not
have the infrastructure or systems
to effectively track, manage, and
optimally finance the real estate
for which they are responsible.
These entities may benefit from the
introduction of professional real estate
finance and property managers.
Expanding the
possibilities
What is real estate?
Simple question, right?
Not exactly.
Traditional property generally
encompasses assets held by
mainstream REITs, such as office
buildings, apartments, retail strip
centers, malls, industrial warehouses,
and even hotels. Many monetization
transactions are, in fact, done with
traditional real estate assets. After all,
is there any real, physical difference
between a retail space owned by a
landlord and one owned by the retail
company itself? Generally, the only
real difference between the two is the
existence of a lease.
Non-traditional property
transactions, on the other hand, have
been more of a recent phenomenon
and represent anything that can be
categorized as real estate for finance,
accounting, and tax purposes but
does not fit into the category of
traditional real estate. Even real
estate professionals are sometimes
surprised at the broad scope of real
estates modern, defining spectrum.
The broadening range of transactions
involving non-traditional real estate
has resulted in the formation of various
niche finance players for unique assets
and the expansion of the net lease or
bondable lease marketan expansion
that has greatly bolstered the benefits
and desirability of such transactions.
As those markets have expanded,
they have become more efficient and
investor cap rates have declined,
making monetization transactions for
non-traditional real estate assets even
more desirable.
Real estate and rents from real
property
Because taxes play such a significant
role in real estate transactions, they
have also had a significant impact
on the trends mentioned above. Real
estate can have favorable tax treatment
for certain investors and structures,
Unlocking shareholder value | Real estate monetization strategies
like REITs. Accordingly, distinguishing
what real estate is has substantial
ramifications on a companys ability to
engage in certain types of transactions
with their physical assets.
In recent years, the IRS has considered
several Private Letter Ruling (PLR)
requests related to non-traditional
REIT assets. Favorable rulings in this
area are grounded on principles that
have been established and applied
by the IRS to distinguish real estate
from other property. However, the
current market activity regarding
REIT conversions has led to additional
scrutiny concerning the application of
the law in this area. The IRS recently
issued proposed regulations that clarify
the definitions of real property and
rents from real property for REIT
purposes. The following sections
outline these definitions.
9
Tax definitions
Real property Treas. Reg. Section 1.856-3(d) provides
that the term real property means
land or improvements thereon, such
as buildings or other inherently
permanent structures thereon
(including items which are structural
components of such buildings or
structures). In addition, the term
real property includes interests in
real property. Local law definitions
are not authoritative for purposes of
determining the meaning of the term
real property.
The term real property includes
things, such as the wiring in a building,
plumbing systems, central heating, or
central air-conditioning machinery,
Rents from real Section 856(d)(1) provides that the
term rents from real property
property includes (subject to exclusions provided
in Section 856(d)(2)): (a) rents from
interests in real property; (b) charges
for services customarily furnished
or rendered in connection with the
rental of real property, and (c) rent
attributable to personal property
which is leased under, or in connection
with, a lease of real property, but
only if the rent attributable to such
personal property does not exceed
15% of the total rent for the taxable
year attributable to both the real and
personal property leased under, or in
connection with, such lease.
10 Unlocking shareholder value | Real estate monetization strategies
pipes or ducts, elevators or escalators
installed in the building, or other items
which are structural components of a
building or other permanent structure.
The term real property does
not include assets accessory to
the operation of a business, such
as machinery, printing presses,
transportation equipment that is not
a structural component of a building,
office equipment, refrigerators,
individual air-conditioning units,
grocery counters, furnishings of a
motel, hotel, or office building even if
such items are termed fixtures under
local law.
The term rents from real property
does not include rents based on net
profits or income. However, the term
does include rents based on gross
revenues. The term also does not
include rents paid by related parties or
rents if certain services are provided.
Non-traditional real estate
trends
In recent years, we have seen a
significant activity involving the
monetization of non-traditional real
estate assets, generally accomplished
through borrowing, sale-leaseback
transactions, and REIT conversions
or spin-offs. We expect this trend to
continue. The following is a summary
of different types of non-traditional
real estate assets that have been
monetized through transactions similar
to those discussed above.

Existing In process Potential future candidates

Timber Schools/higher education

facilities
Railroads PwC observation
Agriculture/farmland Docks/marinas
Cell towers Landfills Recent non-traditional
Hotels Toll roads/bridges REIT activity in the form
Casinos/gaming Energy infrastructure of conversions and spin-
Hospitals/nursing homes Pipelines
offs have been driven
Golf courses Solar/wind farms
by investors search for
Data centers Whats next?
yield and the companys
Billboards
desires to free up capital
Prisons
for investment in the core
Record warehousing
business. In some cases,
Telecom infrastructure
entire sectors have engaged
Transmission/distribution
lines in transactions related to
Cold storage real estate. For example,
in recent years, many
companies in the timber
sector have implemented
REIT structures, and many
companies in the cell tower
and billboard sectors are
either in the process of
converting to REITs or have
done so already.

Unlocking shareholder value | Real estate monetization strategies 11

Overview of various
monetization transactions
Real estate monetization transactions
may be transactional or transformative,
depending on the various, unique
circumstances of any given company.
Monetization, in its simplest form, can be
merely consummating secured borrowings
against operating assets; however, the
range of possible transactions and their
associated complexity is substantially
broader than that.

While some of this complexity is A careful evaluation of the different

necessary to derive specific benefits, transaction strategies is crucial in
it may significantly increase the time, order to make the right decision for the
effort, and cost of these activities. future.

Types of real estate monetization strategies

Value

Spin off/Split off

Publicly traded REIT

UPREIT joint venture

High dependency
Prepaid lease/leaseback on tax & finance
considerations
(e.g., taxpayer)
Individual sale-leaseback transactions

Securitize debt with existing real estate

Isolated transactions New business setup Business transformation

3 6 months 18 30 months
Implementation time

12 Unlocking shareholder value | Real estate monetization strategies

The term REIT conversion is used
broadly to describe a very wide
range of transactions in which the
original entity transformseither
partially or entirelyinto an REIT,
including spin-off transactions. Such a
transaction may be considered either
traditional, if the property involved is
similar to those normally seen in an
REIT (e.g., retail or office buildings),
or non-traditional, if the property is
more unique to the REIT market (e.g.,
billboard, timber, wires/infrastructure,
etc.).
These transactions have notable
complexitiesmost of which are
further elaborated upon in PwCs
guide for these transactions entitled,
Non-traditional REIT Transactions:
An emerging trend, which is available
on our website: cfodirect.com.
A brief description of each transaction
type, their associated pros and cons,
and other, key characteristics are
provided below. Additionally, the
unique needs and desires of any given
organization are accounted for by
leveraging the different variations of
each type of transaction to more closely
satisfy its particular needs.
Factors that impact how you
considered monetization
strategies
Transformation or growth plans and
their related costs
External borrowing ability and debt
limitations or covenants
Fair market value of the real estate
and its tax basis, and whether or not
there would there be a significant
tax gain if sold
Long-term need to control specific
real estate by ownership or lease
Time required to implement
monetization strategies
Existing debt covenants and other
restrictions of third party leases and
transactions
Relative cost to implement different
real estate monetization strategies
verses their benefits
Market conditions for real estate
transactions with single-tenant
properties
Unlocking shareholder value | Real estate monetization strategies
Secured borrowings/
securitization transactions
Perhaps the simplest form of
monetization is merely to borrow
money against the asset. These
transactions can take the form of
a simple commercial mortgage,
from a bank, or a more complicated
transaction, such as an attempt to
take advantage of the Commercial
Mortgage Backed Securities market.
These transactions can be on individual
properties or on cross-collateralized or
cross-defaulted pools.
These transactions have also been
increasingly done in local currencies
to take advantage of lower borrowing
rates in international markets.
Pros
Simple, well understood
Relatively short time to complete
transactions
Relatively low transaction costs
(e.g., no transfer taxes)
Limited corporate-level tax
consequences
13
 Cons
Limitation on borrowing amounts
(e.g., 50-75 percent loan-to-value)
Increases companys leverage for
debt covenant purposes
Cross-collateralization or cross-
default provisions may limit
operational flexibility
Company still exposed to residual
real estate risks
Individual or portfolio sale-
leaseback transactions
The property is sold to a third party
and leased back to the company. These
transactions can be on individual
properties or under a master lease for
multiple properties.
These transactions have potentially
significant tax costs to sellers if the tax
basis in the assets are low. This creates
a significant toll charge on completing
such transactions, which may
discourage potential, and otherwise
qualified, candidates from engaging in
these transactions. On the other hand,
some have utilized sale-leasebacks to
trigger tax gains, utilizing tax assets
such as accumulated net operating
losses (NOLs)before they expire.
The financial accounting for these
transactions can be complex, especially
in the United States, which has
specialized rules in this area. The lease
literature in this sector is proscriptively
rule-based and prohibits many forms
of continuing involvement in the assets
other than the leaseback. Failure to
comply with these rules can cause the
14 Unlocking shareholder value | Real estate monetization strategies
transaction to be treated as a financing
or deposit, instead of as a sale. Even if
the sale is recognized, some or all of the
gain may be deferred and recognized
over the term of the leaseback, making
a careful evaluation of each proposed
transaction essential.
Generally, the owner of mission-
critical real estate assets wants to
maintain the control and use of an
asset throughout the terms of the lease
either through the initial term or its
potential extension options. This puts
stress on qualifying for sale-leaseback
accounting and ensuring the leaseback
is not a considered a capital lease. In
either case, the asset might not be
removed from the balance sheet and a
liability will be recorded for the failed
sale-leaseback or capital lease.
Pros
Moderate transaction costs
potentially including transfer taxes
Increasing number of buyers for
bondable leases has led to improved
pricing
Many buyers exist and they can
close transaction in reasonably short
periods
Full realization of monetization
value
Company no longer exposed to
residual real estate risks
Cons
Toll charge of tax consequences can
be significant (depending on tax
basis of assets )
Operating charge to P&L where
there previously was no rent
expense or need to pay market-
based rents
Buyer generally looking for longer
lease durations
Cross-collateralization or cross-
default provisions may limit
operational flexibility
Accounting can be complex unless
normal leaseback is attained
Pre-paid leasebacks
This transaction type is a variation
on the sale-leaseback. Rather than
selling the asset, the company
enters into a lease whereby it leases
the property to a third party. The
terms of this lease-out provide for
a single, lump-sum payment by the
counterparty to the company at the
inception of the lease
The company then leases the property
back from the counterparty for
payments over the agreed upon term.
Pros
Low transaction costs
Corporate tax consequences are
limited
Cons
Company still exposed to residual
real estate risks
No derecognition of assets
More complex, may take relatively
longer to close than alternative
 financing or sale-leaseback
transactions
Additional leverage of financial
statements added in the form of
prepaid lease liability
Contribution leasebacks
In these transactions, the company
contributes real estate into partnership
structures, which may either be a
separate vehicle or part of an Umbrella
Partnership REIT (UPREIT) or
DownREIT of an existing, public
REIT. The company would then lease
back the property from the vehicle.
In exchange for the contributed real
estate, the contributing companies
would receive Operating Partnership
Unitsunits potentially convertible to
shares of an existing third-party REIT.
This may allow for monetization over
time, as units are converted and sold
into the market.
Pros
Limitation on amount of borrowings
Potential access to professional real
estate management of the property
at lower operating cost
Immediate corporate tax
consequences limited
Cons
Potentially disguised sale issues for
tax
More complex, may take relatively
longer to close than alternative
financing or sale-leaseback
transactions
Buyer generally looking for longer
lease durations
Cross-collateralization or cross-
default provisions may limit
operational flexibility
Accounting can be complex unless
normal leaseback is attained
Company still exposed to residual
real estate risks
REIT conversions
The term REIT conversion is used
broadly to describe a very wide
range of transactions in which the
original entity transformseither
partially or entirelyinto an REIT,
including spin-off transactions. Such a
transaction may be considered either
traditional, if the property involved
is similar to those normally seen in an
REIT (e.g., retail or office buildings),
or non-traditional, if the property is
more unique to the REIT market (e.g.,
billboard, timber, wires/infrastructure,
etc.).
In a simple REIT conversion, the
majority of the companys assets
and operations qualify under the
REIT tax requirements and are
either owned directly by the REIT
or its subsidiaries. Any remaining,
nonqualified operations can reside in a
taxable subsidiaries. In some cases, the
company may need to divest itself of
non-qualifying operations, if they are
too large.
While their potential for tax savings
clearly benefits an organization,
the decision to undergo a REIT
Unlocking shareholder value | Real estate monetization strategies
conversion or spin-off is often made
for additional reasons. There are
other, potential benefits, including the
perceived impact on financing costs,
monetization of non-core assets, and
the companys share price. Over the
last few years, investors have been
searching for yield and have been
willing to pay more for higher dividend
stocks, including REITs. Investor
interest may see a slight decline in the
face of potential interest rate hikes and
other factors impacting the market,
but all indications are that these
investment types are here to stay.
Many common REIT structures,
like the Umbrella Partnership REIT
(UPREIT), provide a company with a
tax advantaged currency to acquire
properties in fragmented industries.
Finally, some companies are taking
advantage of these transactions to
reorganize themselves and recapitalize
their balance sheets.
A REIT conversion is certainly not
without challenges. A company may
need to substantially change the way
it does business with its customers
to bring its business in line with the
technical REIT requirements. In other
cases, a company may need to sell or
spin-off portions of its business so that
the remainder can elect REIT status.
There will likely be many challenges in
both completing the REIT conversion
transaction itself and in maintaining
REIT status post-conversion. There
are also REIT-specific tax, operational,
accounting, and financial and investor
reporting issues that will need to be
addressed considered from a costs/
benefit standpoint.
15
 Pro
Significant reduction in ongoing,
combined taxes at entity level due
to REIT statuspresumably, this
drives an increase in aggregate
shareholder value
Cons
Complex transaction or
reorganization may be required,
generating significant transaction
costs, need for management
attention, and time to consummate
May need to make a significant
distribution to purge pre-REIT
accumulated taxable earnings and
profits
Operating as a REIT may require the
reorganization of or modification to
business operations, contracts, and
processes
Company still exposed to residual
real estate risks
Spin-off leaseback
This transaction involves separating
out the real estate from an existing
company and moving it into a new
company. This new real estate
company will, then, frequently elect
to be taxed as an REIT. In such cases,
the existing company continues to own
the operating business and leases the
real property from the REIT entity at
current market rates.
Whenever possible, it is preferred that
this transaction is structured to qualify
as a tax-free spin-off transaction.
16 Unlocking shareholder value | Real estate monetization strategies
The successful execution of this as a
tax-free transaction requires other
considerations, adding additional
complexities. One of the issues is that
there must be another significant trade
or business distributed as part of the
spin-off. The real estate subject to
lease does not qualify. Often another
business is distributed, and its income
is still taxable within the REIT, through
a taxable subsidiary.
As discussed in Tax ramifications on
page 8, new legislation in December
will curtail certain tax-free spin-offs
for many monetization transactions.
Taxable spins and non-REIT would
still be allowed accordingly. Assessing
the amount of the tax due as a toll
charge on getting the real estate
out of a corporation will be critical
to the economic analysis of possible
alternatives.
Pros
Reduction in combined taxes for
recurring operations
Potential to structure as a tax-free
spin-off (may now be limited, see
above), but requires an additional,
unrelated business that meets size
limitations
Cons
Tax toll charge can be significant if
taxable spin-off
Complex, significant transaction
costs and time to consummate
Tax-free spin-off requirements can
add complexity to the transaction
from a business, tax, and regulatory
filing perspective
May need to make a significant
distribution to purge pre-REIT tax
earnings and profits
Concentration of credit with single
tenant may not price favorably, so
PropCo may need or want to acquire
additional properties after the
transaction to diversify the credit
exposure and continue adding value
for shareholders
Market pricing needed in setting
initial rents
Business concerns around whether
OpCo will be comfortable with an
independent PropCo as its landlord,
dictating lease renewal terms,
dealing with underperforming
properties, and potentially leasing
property to OpCos competitors
PropCo REIT exposed to residual
real estate risks
PwCs strengths
to serve you
A proven track record of
assisting clients who are
contemplating real estate
monetization
Our approach to serving clients
who are contemplating real estate
monetization transactions leverages
collaboration efforts between real
estate specialists, specialists specific
to your industry (including tax,
accounting, valuation and systems),
and expert project managers for insight
and assistance specially tailored to
your unique organizational needs.
We believe this approach encompasses
a powerful combination of personal
service, specialized experience, and
global reach, setting PwC apart from
the rest.
The process of evaluating and
executing various real estate
monetization strategies can be
extremely complex and time-
consuming, so the support of a
professional services firm that truly
understands your business and its
financial transactions is pivotal to
successful decision-making. PwCs
experts possess extensive accounting,
tax, and regulatory knowledge,
equipping them with an exceptional
ability to navigate through various
monetization transaction types and
mitigate associated risks.
Today, PwC is one of the preeminent
providers of services that help you
navigate the intricacies of evaluating
and executing complex real estate
monetization strategies. We also have
a long track record of delivering a
knowledgeable perspective on what
it will take to support the evaluation
and implementation of various real
estate monetization strategies without
disrupting business operations.
Unlocking shareholder value | Real estate monetization strategies
A practice built on industry-
specific knowledge and
experience
We also serve a wide range of clients
in the real estate industry, including
many of the largest and most
prominent public REITs, real estate
opportunity funds, private real estate
owners, operators and developers,
homebuilders, traditional real estate
advisors, separate insurance company
accounts, international real estate
investment vehicles, and public real
estate operating companies. Insights
garnered from our experience with
these clients will help us provide
insight on how various transactions
may be perceived by various
stakeholders, including investors,
analysts, lenders, and the SEC.
Our experience in these areas
will enable us to help you address
todays problems, as well as assist
you in identifying opportunities or
challenges which will affect you
tomorrow as you implement your
long-range business plans. Our real
estate professionals have a first hand,
in-depth understanding of every aspect
of real estate operations/transactions,
including valuation, reorganization,
transaction advisory, corporate
services, accounting, and tax.
17
The PwC advantage: Cultivated
experience and in-depth
knowledge
We have been a market leader in
providing tax, audit, and advisory
services for major REIT conversion
transactions for more than a dozen
years, including many of the
most recent non-traditional REIT
conversions. We also have extensive
experience with real estate sale-
leaseback transactions and similar
exchanges, which are essential tools
for many holistic real estate portfolio
monetizations. Our depth of experience
has made us a leading professional
services firm in this specialized area.
18 Unlocking shareholder value | Real estate monetization strategies
In addition to real estate transaction
advisory, securitization, and litigation
services, PwC has overseen the
valuation of multi-billion dollar real
estate and enterprise valuations of
TSRs and participated in multiple,
high-profile real estate transactions
for various real estate lenders and
investors. Our knowledgeable real
estate professionals take great pride in
anticipating and responding to market
trends and are recognized as thought
leaders in the industry.
PwC provides audit, tax, or advisory services to
80% of the REITs listed in the
S&P 500 index.
In addition, PwC has provided audit, tax, or
advisory services to
15 of the 20 publicly
announced REIT conversions/spin-offs that
have occurred since 2011.
Appendices
a. Example of value
creation through a
credit lease
b. Other PwC real estate
thought leadership

Unlocking shareholder value | Real estate monetization strategies 19

Appendix A: Example of Properties that are subject to longer-
dated or bondable leases are highly
value creation through sought out by many investors. Their
a credit lease valuation is often tied more to the
credit of the tenant than traditional
real estate, which may subject to
additional market risks (e.g., nearer
term lease renewal and market rent
adjustments) and other costs. Such
assets are more efficiently financed.
A hypothetical example comparing the
valuation of vacant real estate to that of
a credit-tenant lease asset is presented
below.

Value as vacant
Annual rent $ 5,000
Leasing commission 6.00%
Standard lease term
Value as vacant 5 years (May or may not have options to renew)
Lease
Annualup period
rent $ 5,0009 months
Probability
Leasing of renewal
commission 75.0%
6.00%
Escalationlease
Standard of rent
termupon renewal 10.0%5 years (May or may not have options to renew)
Discount
Lease up rate
period 8.0%9 months
Terminal cap
Probability of rate
renewal 7.0%
75.0%
Cost to sellofinrent
Escalation yearupon
11 renewal 4.0%
10.0%
Discount rate 8.0% (000's omitted)
Terminal cap rate 7.0% Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Operating
Cost to sellcash flow11
in year 4.0%
Rent 1,250 $ 5,000 $ 5,000 (000's
$ 5,000 $ 5,000 $ 3,750 $ 2,750 $ 5,500 $ 5,500 $ 5,500
omitted)
Leasing commission (1,500)
Year 1 Year- 2 Year- 3 Year- 4 Year- 5 (1,650)
Year 6 Year- 7 Year- 8 Year- 9 Year -10
Net operating
Operating cashcash
flowflow (250) 5,000 5,000 5,000 5,000 2,100 2,750 5,500 5,500 5,500
Assumed sale beginning of year 11
Rent 1,250 $ 5,000 $ 5,000 $ 5,000 $ 5,000 $ 3,750 $ 2,750 $ 5,500 $ 5,500 $ 78,571 5,500
Cost to sell
Leasing commission (1,500) - - - - (1,650) - - - (3,143)
-
cash flow cash flow
Net operating (250) 5,000 5,000 5,000 5,000 2,100 2,750 5,500 5,500 80,929
5,500
Assumed sale beginning of year 11 78,571
Cost to sell
DCF value $61,239 A (3,143)
Net cash flow (250) 5,000 5,000 5,000 5,000 2,100 2,750 5,500 5,500 80,929
Value with bondable lease
Annual
DCF rent
value $ 5,000 $61,239 A
Leasing commission 0.00%
Standard
Value withlease term lease
bondable 20 years (May or may not have options to renew)
Lease
Annualup period
rent $ 5,0000 months
Probability
Leasing of renewal
commission 75.0%
0.00%
Escalationlease
Standard of rent
termafter 5 years 10.0%
20 years (May or may not have options to renew)
Discount
Lease up rate
period 6.0%0 months
Terminal cap
Probability of rate
renewal 5.5%
75.0%
Cost to sellofinrent
Escalation yearafter
11 5 years 4.0%
10.0%
Discount rate 6.0% (000's omitted)
Terminal cap rate 5.5% Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Operating
Cost to sellcash flow11
in year 4.0%
Rent 5,000 $ 5,000 $ 5,000 (000's
$ 5,000 $ 5,000 $ 5,500 $ 5,500 $ 5,500 $ 5,500 $ 5,500
omitted)
Leasing commission Year- 1 Year- 2 Year- 3 Year- 4 Year- 5 Year- 6 Year- 7 Year- 8 Year- 9 Year -10
Net operating
Operating cashcash
flowflow 5,000 5,000 5,000 5,000 5,000 5,500 5,500 5,500 5,500 5,500
Assumed sale beginning of year 11
Rent 5,000 $ 5,000 $ 5,000 $ 5,000 $ 5,000 $ 5,500 $ 5,500 $ 5,500 $ 5,500 $100,0005,500
Cost to sell
Leasing commission - - - - - - - - - (4,000)
-
Net cash flow cash flow
operating 5,000 5,000 5,000 5,000 5,000 5,500 5,500 5,500 5,500 101,500
5,500
Assumed sale beginning of year 11 100,000
Cost to sell
DCF value $91,980 B (4,000)
Net cash flow 5,000 5,000 5,000 5,000 5,000 5,500 5,500 5,500 5,500 101,500
Difference in value $30,741 B-A
DCF value $91,980 B

Difference in value $30,741 B-A

20 Unlocking shareholder value | Real estate monetization strategies

Value creation attributed to
operational components
Higher income from lease in place
No leasing commissions or downtime
due to length of lease

Value creation attributed to enhanced

credit quality
Credit quality of tenant results in higher
certainty of income stream
Lower discount rate for credit quality tenant
in place
Reduced terminal cap rate due to reduced
uncertainty around year 11 income

Potential value creation not considered in the above

Assets may also be more efficiently financed
Tax efficiency may be improved by holding the real estate
in an entity that does not pay corporate level taxes (e.g., a
partnership or a REIT)

Unlocking shareholder value | Real estate monetization strategies 21

Appendix B: Other PwC From providing up-to-date thinking trends and ideas impacting the global
about the regulatory landscape to real estate industry.
real estate thought evaluating emerging trends, our
leadership thought leadership publications put us Our knowledgeable real estate
directly in-touch with industry leaders, professionals take great pride in being
allowing us to hear first-hand about the proactive with market trends.

www.pwc.com Roadmap for a REIT IPO or www.pwc.com/us/realestate

Non-traditional REIT
Roadmap for a REIT
conversion for traditional and Non-traditional Transactions: An emerging trend
REIT transactions
IPO or conversion
Your guide to going public
non-traditional real estate An emerging trend This free-standing guide is focused
or converting to a REIT
companies October 2014 exclusively on the unique issues
Third edition
Third These PwC guides are prepared to and considerations that REIT
help both traditional and non- transactions face.
traditional real estate companies
address the IPO and REIT
conversion process.

As confidence returns to real estate, the industry faces a number of

fundamental shifts that will shape its future.
Real Estate 2020: Building the Emerging Trends in Real Estate
future Based on personal interviews with
We have looked into the likely changes in the real estate landscape over
the coming years and identified the key trends which, we believe, will have
profound implications for real estate investment and development.

As confidence returns to real and surveys from more than 1,000

Real Estate 2020
Building the future estate, the industry faces a number of the most influential leaders in
of fundamental shifts that will the real estate industry, this annual
JUSTIN MERKOVICH, BKV GROUP

shape its future. PwC has looked
into the likely changes in the
real estate landscape over the
coming years and identified the
www.pwc.com/realestate
key trends which, we believe,
will have profound implications
forecast will give you a heads-
Emerging Trends
in Real Estate
up on where to invest, which
United States and Canada 2015
sectors and markets offer the best
prospects, and trends in the capital
markets that will affect real estate.
EmergTrends US 2015_C1_4.indd 3 10/6/14 9:42 AM

for real estate investment and

development.

US Real estate insights: Spring Beijing

Berlin
Buenos Aires
Chicago
Istanbul
Jakarta
Johannesburg
Kuala Lumpur
Madrid
Mexico City
Milan
Moscow
New York
Paris
Rio de Janeiro
San Francisco
Shanghai
Singapore
Stockholm
Sydney
Cities of Opportunity 6
2015 This report analyzes the trajectory
Dubai London Mumbai So Paulo Tokyo
Hong Kong Los Angeles Nairobi Seoul Toronto

US Real Estate
Insights
www.pwc.com/us/realestate
This issue features an article of 30 cities, all capitals of finance,
that expands on the trend of US commerce, and cultureand,
Spring 2015

investors deploying capital in through their current performance,

foreign markets, as well as the seeks to open a window on what
effect of changing demographics makes cities function best. We also
on the real estate investing investigate both the urbanization
landscape. Cities of Opportunity 6
and demographic megatrends that
shape our cities.

22 Unlocking shareholder value | Real estate monetization strategies

18th Annual Global CEO Survey
New ways to compete p2 / Growth, but not as we know it p6/ What business are you in? p12 /
Global CEO Survey August 2015 PwC Hospitality Directions US
The annual survey aims to inform This quarterly publication is a near-
Creating new value in new ways through digital transformation p18/ Developing diverse and
dynamic partnerships p24 / Finding different ways of thinking and working p28 / The CEO agenda p34

Hospitality Directions US
A marketplace without Our updated lodging outlook
boundaries? and stimulate the debate on how Steady growth expectations, as increases in average daily rate start to
become more meaningful
term outlook for the US lodging
Responding to disruption
businesses are facing todays Our outlook for 2015 anticipates:

Peak occupancy levels

driving RevPAR increase of
As the economy rebounded from a first quarter
slump, driven by the absence of transitory factors,
performance of the US lodging sector in the second
quarter generally met expectations, with a year-over-
sector, commonly used by industry
1,322
challenges. decision-makers and stakeholders
year RevPAR increase of 6.5%. During the second
6.9%, driven primarily quarter, ADR growth drove RevPAR increases to a
by average daily rate. larger degree than prior quarters. Lodging demand
trends in the US remain robust both transient
CEOs interviewed in 77 countries and group demand have continued to show strong
Our outlook for 2016 anticipates:
momentum, with increases of 1.4% and 1.5% in

78%
transient and group occupancy levels, respectively,

to better understand the impact

Supply growth, at As occupancy levels during the first-half of the year, compared to year-
2.0% , exceeding begin to stabilize, ago levels. Indeed, occupancy levels in the first-half
were at the highest level since 1987, giving operators
of CEOs are concerned about long-term average of average daily rate the confidence to test targeted price increases
over-regulation 1.9% for the first growth drives in many markets. Overall, our outlook for 2015
time since remains consistent, with a RevPAR increase of 6.9%,
RevPAR increase

of policy and other macro-

driven primarily by contribution from ADR growth.

56%
2009. of 5.9%. Combination of strong demand trends and low supply
growth is expected to drive peak occupancy levels, with
US lodging occupancy expected to reach 65.6%, the
of CEOs think cross-sector highest level since 1981. As industry occupancy peaks,
competition is on the rise average daily rate growth is expected to become more

environmental factors on the

meaningful, as the effects of the rise in the value of the
US Dollar wane, giving operators more pricing power,
especially in certain gateway markets.

In 2016, our outlook anticipates a stabilization in

occupancy, albeit at peak levels, as lodging demand
and the supply dynamic change. Supply growth is

sectors operating performance.

expected to accelerate to 2.0% in 2016, with the
increase in available hotel rooms slightly exceeding
the long-term average for the first time since 2009.
As a result, while occupancy levels are expected to
stabilize, these peak levels, coupled with the absence
of this years drag on the US Dollar, are expected to
give hotel operators more confidence to increase room
rates, resulting in an average daily rate-driven RevPAR
increase of 5.9%.

www.pwc.com/ceosurvey

www.pwc.com

PwC Manhattan Lodging Index www.pwc.com/us/realestatesurvey

PwC Real Estate Investor Survey
Manhattan lodging index Provides quarterly updates on The quarterly PwC Real Estate
First quarter 2015
Manhattans lodging market, Investor Survey is widely
widely used by lodging brands, Investors Monitor
recognized as an authoritative
Second Quarter 2015

Construction Levels

Manhattan lodging overview

developers, and owners. Across Markets source for capitalization and
discount rates, cash flow
This quarter: After a tepid fourth quarter, lodging performance
Manhattan Lodging decelerated significantly in the first three months of the
Overview year, with a modest decrease in occupancy levels and PwC Real Estate Investor Survey
larger decline in average daily rate (ADR), resulting in a
Employment Trends 4.9 percent decrease in revenue per available room
Gross Metro Product and (RevPAR).
Consumer Price Index

assumptions, and actual criteria of

Office Market Statistics
Air Traffic Statistics
Recent Manhattan Hotel
Transactions
Manhattans lodging performance suffered significantly in the
beginning of the first quarter, with RevPAR decreasing 13.6 percent
in January, driven partially by a tough comparable (Super Bowl last
January). As the quarter progressed, this downward trend was less
pronounced, with RevPAR decreasing 3.8 percent in February and

active investors, as well as property

Recent and Planned increasing 1.3 percent in March, for a decline of 4.9 percent for the
Hotel Openings and quarter overall. This quarterly decline was primarily driven by
Closings ADR, which decreased 4.1 percent, compared to year-ago levels.
First Quarter
Performance

market information.

www.pwc.com/assetmanagement
w w w.pwc.com/assetmanagement

Compare and contrast: Real

Real Estate Estate
Tax Alert Tax Alert
Real estate tax news alerts
Compare
C ompare a and
nd contrast:
contrast: Worldwide Real Estate Investment PwC releases real estate tax
W orldwide Real
Worldwide Real Estate
Estate
IInvestment
R
nvestment Trust
egimes
Regimes
Trrust (REIT)
T (REIT)
Trust (REIT) Regimes Fargo v. Commissioner Unsolicited Property Sale
Treated as Sale to Customers in the Ordinary Course of a
Trade or Business
news alerts on timely hot topics
PwC has a global team of real Background
In a recent case, Fargo v. Commissioner1, the tax court concluded that a property was held for sale to customers
in the ordinary course of a trade or business (a dealer sale or sale of dealer property). The court reached this
conclusion even though the property was disposed of in a single sale to a buyer that made an unsolicited offer,
impacting the industry. Headlines
estate tax and legal professionals include Proposed regulations
the interests in the property were acquired over ten years prior to sale and the property generated rental income
during the time it was held. While these factors would weigh against treating a sale as a dealer sale, the court
reached its conclusion relying heavily on the intent of the taxpayer to develop townhouses for sale and that the
sales price was based, in part, on profits that would result from the purchasers eventual sale of the properties.

Thi s booklet will keep you The classification of a sale as a sale of dealer property is important from a tax perspective for a variety of
up to speed and allow you to reasons. For example, the partners of a real estate fund selling dealer property would be subject to ordinary

who have conceived this booklet on the definition of real property

compare the var iou s global income as opposed to capital gain tax rates, the sale may be ineligible for installment sale treatment, tax exempt
R EIT reg imes investors may be subject to tax on gain from the sale as the sale generally would generally be subject to the
July 2011 unrelated business income tax, REITs may be subject to a 100% prohibited transaction tax on such a sale and
gain would not be eligible for a deferral exchanges under 1031.2

Facts

to keep you up to speed and for REITs, REIT Preferential

In 1988, Fargo and King (the Taxpayers), through a wholly owned corporation, Fargo Industries Corporation
(FIC), entered into a transaction to acquire leasehold, which included a building, other improvements, and site
development plans from an unrelated third party subject to a ground lease with the fee owner. The lease
agreement between FIC and fee owner initially ran through 2008 but was extended through 2042 to allow the
Taxpayers additional time to develop the property. The Taxpayers acquired the leasehold with the intent to

allow you to compare the various dividends and management fee

develop a 72-unit residential complex and retail space.

The decision does not provide much insight as to what FIC intended to do with the property after it was
developed (i.e. whether FIC intended to sell the units in the residential complex, hold the complex for rental
income, etc.). However, in its analysis the court notes that the original intent was to develop the property for sale
to customers.

regimes. The booklet is a high level structures, and Fargo versus

In 1991, FIC contributed the leasehold into Girard Development, L.P. (the Partnership) in exchange for an
interest in the Partnership. After the contribution, the real estate market declined dramatically and as a result,
development was suspended. In 1997, the Partnership purchased a fee interest in the property.

From purchase in 1988 through 20o1, when the property was sold, the extent of the physical improvements were
minor, and included a new roof and some repairs. However, the Partnership incurred significant costs
associated with architecture, engineering, appraisal, permit and licensing fees. Although it was not explicitly

comparison of key attributes of Commissioner: Unsolicited

stated, the plans appear to have been to develop townhouses which the court appears to have concluded would
have been sold to customers if constructed.

1 T.C. Memo 2015-96.

2 All references are to the provisions of the Internal Revenue Code of 1986, as amended.

selected REIT regimes. property sale treated as sale to

customers in the ordinary course
of a trade or business.

Unlocking shareholder value | Real estate monetization strategies 23

Contact us PwC is ready to serve you. For
more information on real estate
monetization, please contact any of the
following real estate professionals:

National contacts
Real Estate Leader Byron Carlock byron.carlock.jr@pwc.com 214.754.7580
Real Estate Life Cycles and REIT Leader Tom Wilkin tom.wilkin@pwc.com 646.471.7090
Real Estate Tax Clients Markets Leader Paul Ryan paul.ryan@pwc.com 646.471.8419
Real Estate REIT Tax Services Principal Adam Feuerstein adam.s.feuerstein@pwc.com 703.918.6802
Real Estate REIT Tax Services Principal David Leavitt david.leavitt@pwc.com 646.471.6776
Real Estate REIT Tax Services Principal Adam Handler adam.handler@pwc.com 213.356.6499
Real Estate Assurance Partner William Croteau william.croteau@pwc.com 415.498.7405
Real Estate Valuation Services Partner Kevin Maguire kevin.p.maguire@pwc.com 617.530.6130
Real Estate Capital Markets and Accounting Tina Pantaleo christina.a.pantaleo@pwc.com 617.530.4599
Advisory Services Partner
Real Estate Tax Services Managing Director Robert Lund robert.c.lund.jr@pwc.com 720.931.7358

Industry sector contacts

Healthcare Joel Jaglin joel.jaglin@pwc.com 312.298.3824
Hospitality and Gaming Warren Marr warren.marr@pwc.com 267.330.3062
Hospitality and Gaming Abhishek Jain a.jain@pwc.com 646.471.2016
Oil & Gas Tracy Herrmann tracy.w.herrmann@pwc.com 713.356.6583
Power/Utilities Casey Herman michael.a.herman@pwc.com 312.298.4462
Power/Utilities Robin Miller robin.d.miller@pwc.com 312.298.2357
Retail & Consumer Rebecca Byam rebecca.byam@pwc.com 646.471.3256
Telecom Infrastructure Stefanie Kane stefanie.kane@pwc.com 646.471.0465

Geographic offices
Atlanta Jill Niland jill.niland@pwc.com 678.419.3454
Boston Chris Whitley chris.whitley@pwc.com 617.530.7331
Chicago Brett Matzek brett.a.matzek@pwc.com 312.298.5821
Cleveland Lisa Shapiro lisa.a.shapiro@pwc.com 216.875.3198
Dallas Leah Waldrum leah.waldrum@us.pwc.com 214.756.1768
Dallas Jason Waldie jason.waldie@pwc.com 214.754.7642
Denver Wendy McCray-Benoit wendy.mccray-benoit@pwc.com 720.931.7353
Los Angeles Erica Hanson erica.d.hanson@pwc.com 213.217.3290
New York Bill Staffieri william.a.staffieri@pwc.com 646.471.0047
San Francisco Nick Mitchell n.mitchell@pwc.com 415.498.6517
Washington, DC Tim Bodner tim.r.bodner@pwc.com 703.918.2839

24 Unlocking shareholder value | Real estate monetization strategies

www.pwc.com/us/realestate

2016 PricewaterhouseCoopers LLP. All rights reserved. PwC refers to the United States member firm, and may sometimes refer to the PwC network.
Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This document is for general information purposes
only, and should not be used as a substitute for consultation with professional advisors.
Solicitation