Lawmakers Question Caesars REIT Spinoff Plan

Members of Congress say the spinoff would amount to "a taxpayer-funded subsidy" to the gaming company and its private-equity owners.
Matthew HellerJune 6, 2016

Caesars Entertainment Corp.’s plan to spin off the casinos owned by its bankrupt operating unit into a real estate investment trust has run into some congressional headwinds.

Under its $18 billion chapter 11 restructuring, the Caesars unit would be split into an REIT that would be controlled by creditors and another company that would operate the casinos. The company has applied to the IRS for a ruling that would confirm the REIT would be treated as a tax-free separation.

In return for paying out at least 90% of their taxable earnings to shareholders as dividends, REITs are exempt from paying federal income taxes on those earnings.

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But 15 members of Congress have written Treasury Secretary Jacob Lew that the Caesars spinoff would defeat the purpose of REITs, which were designed to allow small investors to diversify into real estate.

“The REIT would effectively shelter a considerable portion of the casinos’ profits, thus functioning as a taxpayer-funded subsidy to one of the largest casino companies in the U.S. and its private equity owners,” they said in a recent letter viewed by Reuters and The Wall Street Journal.

Caesars was acquired by Apollo Global Management and TPG Capital in a 2008 leveraged buyout. Its Caesars Entertainment Operating Co. (CEOC) unit filed bankruptcy in January 2015 with some $18 billion in debt.

As Reuters reports, the company has warned that if it fails to get tax-free status it could incur significant liabilities that would in effect reduce the value of the reorganization. “The REIT is a key component of the Caesars unit’s restructuring plan,” the WSJ said.

Caesars defended the proposed REIT. “The proposed financial restructuring of [CEOC], including the formation of a REIT, is designed to significantly reduce debt at [CEOC], preserving thousands of jobs across the Caesars network, and maximizing recoveries to creditors,” a spokesman said. “Efforts to derail this restructuring are ill intended and could cause very negative consequences for many stakeholders.”

CEOC operates 44 properties including Caesars’ namesake casinos in Las Vegas and Atlantic City. The restructuring is expected to trim debt by almost $10 billion.