As tax inversions and earnings stripping have increasingly become a hot-button financial issue on Wall Street and Capitol Hill, the related debt versus equity question is highly relevant to United Development Funding IV (UDF), a Texas-based REIT which primarily originates, and holds for investment, loans issued to residential land developers and home builders.
While UDF IV purports to primarily generate income from loans secured by real estate, which would otherwise qualify as REIT income, there is a reasonable basis to question whether UDF’s loans are fairly characterized as debt, rather than equity.
Hayman’s latest presentation outlines the restrictions placed on REITs, the tax consequences of income derived from “prohibited transactions” and case law that provides guidelines for determining the “debt versus equity” question. Based on patterns outlined in the presentation to follow, there is a reasonable basis question whether purported loans issued by UDF are appropriately characterized as debt rather than equity. If it is determined that any, if not a material number, of UDF’s loans are equity investments rather than debt, then there could be significant tax consequences (including potential REIT qualification consequences) and financial disclosure consequences.
The information in this presentation is relevant to investors, regulators, tax authorities as well as former and current auditors and is being made public for any and all interested stakeholders to review.