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Analysis: Using REITs for Midstream Assets

Bracewell’s Steven Lorch and Elizabeth McGinley explain how an IRS Private Letter Ruling nearly a year ago possibly opens the door for energy midstream companies to utilize a real estate investment trust (REIT) structure in much the same way that they have been using master limited partnerships (MLP).

The REIT has been a preferred vehicle for investment in income producing real estate portfolios. The REIT provides investors with many federal income tax benefits associated with C-corporations, generally with only a single level of federal income taxation at the shareholder level. Several requirements must be met to qualify as a REIT, including owning assets comprised primarily of real property and generating income comprised primarily of rents from real property.

With the recent decline in the relative benefits of operating as an MLP, the REIT has been considered as an alternative vehicle for investment in oil and gas midstream assets. Private Letter Ruling 201907001 advanced the opportunity to utilize REITs for midstream investment by establishing that rental income and certain fees generated from the use of an offshore oil and gas platform, storage tank facilities and pipeline assets qualify as rents from real property.

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