IRS Rules That Interest In A Money Market Fund Is A Cash Item For REITS

The Internal Revenue Service (the "IRS") recently provided guidance to real estate investment trusts (a "REIT"), establishing that an interest in a money market fund qualifies as a cash item for purposes of the REIT asset test under Section 856(c)(4)(A) of the Internal Revenue Code of 1986, as amended (the "Code").1

Background

A REIT must satisfy numerous requirements in order to maintain its qualification as a REIT. One requirement is that, at the close of each quarter of the REIT's taxable year, at least 75% of the value of the REIT's total assets must consist of real estate assets, cash and cash items (including receivables), and Government securities (the "75% Asset Test").2 At the end of each quarter, not more than 25% of the value of the REIT's total assets may be represented by securities (other than securities that qualify for the 75% Asset Test) (the "25% Asset Test"), and, generally, not more than 5% of the REIT's total assets may be represented by securities of a single issuer (the "5% Asset Test"), and a REIT may not hold securities possessing more than 10% of the total voting power or value of the outstanding securities of a single issuer (the "10% Asset Test" and together with the 25% Asset Test, the 5% Asset Test and the 75% Asset, the "Asset Tests").3

Prior to the recent guidance provided in Rev. Rul. 2012-17, released on June 18, 2012, it was unclear whether an interest in a money market fund was a cash item. Some practitioners believed that bank money market funds were cash items, but there was no clear authority as the term cash item is not defined in the Code, the Treasury Regulations nor the legislative history of Code Section 856. If a money market fund was not a cash item, violations of the 75% Asset Test, the 25% Asset Test, the 5% Asset Test and the 10% Asset test could result. Commentators warned that if an interest in a money market fund was not a cash item, a violation of the 5% Asset Test could easily occur in connection with cash temporarily held in a money market fund as a result of a disposition of real property assets or in anticipation of other transactions.4

The Code states that those terms not defined for purposes of the REIT rules have the same meaning as when used in the Investment Company Act of 1940, as amended (15 U.S.C. 80a-1 and following) (the "1940 Act").5 Although the term cash item is not defined in the 1940 Act or the regulations under the 1940 Act, the IRS has previously applied 1940 Act...