One of the oddest things about the pandemic has been the way that it has changed our perceptions. One year ago it seemed like in-person retail was doomed, and e-commerce wasn't just our temporary default but our long-term solution.
However, the reopening of the United States has happened with more vehemence than many naysayers predicted. While some people are still avoiding malls, foot traffic is up dramatically compared to last year and slowly reaching levels not too far off from 2019.
Before this rapid resurgence, Illinois Congressman Brad Schneider introduced a bill in the House of Representatives. The bill was designed to encourage retail real estate investment trusts (REITs) to invest in their tenants at a time when REITs were receiving partial or delayed payments because many tenants were still closed and unable to generate enough revenue.
The Retail Revitalization Act of 2021 (H.R. 840) alters existing REIT legislation. With retail rising again, will this bill pass or linger in the House?
What would the Retail Revitalization Act of 2021 do?
The bill is short by government standards, just three pages long. It would incentivize REITs to invest in their tenants by updating some of the rules they're governed by. It was created as a private party solution that could potentially avert the need for government assistance.
Currently, REITs can own 10% of the equity of their tenants. The bill would change that amount to 50%. It would also remove some of the limitations on how much space a REIT can lease to a taxable REIT subsidiary. Meanwhile, the bill would also amend the "double downward" constructive ownership rules that require a REIT to examine not just its own holdings but also those of any stockholders who own more than 10%.
The bill was welcomed by various executives in the retail world, including Brian Kingston, the CEO of Brookfield Property Group, who said that a modernization of REIT rules would help save jobs.
This wasn't the first time this idea was proposed. A previous bill, the Retail Revitalization Act of 2020, sought to revise the rules in a similar manner. The core argument behind these bills is that the current REIT rules are too restrictive overall and don't allow REITs to assist tenants in times of crisis in a way where they, too, can benefit.
Is it still necessary?
With retail recovering, there hasn't been an urgent need for the bill to be passed, but that doesn't necessarily mean that it's not going to move forward. While the reopening of retail has been strong and hopes are high for a strong back-to-school season, the recovery is still fragile.
Second-quarter earnings should give us a window into how much rent malls are collecting from their tenants. And while the bill may not be essential for retail right now, if the rules it updates were put into place, it could pave the way for REITs to take a greater share in their tenants going forward.
This may be a bit of a mixed bag. Some real estate watchers are concerned that loosening the restrictions could make REITs a riskier investment. Also, in a situation where more and more retailers in a mall are owned by the mall itself, such as the case with Simon Property Group owning shares in Brooks Brothers and other brands, this could change how non-landlord-owned tenants may feel about their landlords.
So far in 2021, retail REITs have bounced back remarkably, and retail bankruptcies have slowed, but we may not be out of the woods yet. If tenants go through another round of struggles, the government may be more incentivized to look at these types of solutions again.