News & Insights

Newsletter

June 29, 2018

REIT Advisor - June 2018


Georgia Now Provides Sales and Use Tax Exemption to High-Technology Data Centers
Greg Lucas

On May 7, 2018, House Bill 696 was signed into law by Georgia Governor Nathan Deal. The new law exempts qualifying high-technology data centers from Georgia sales and use taxes. With Georgia sales and use tax rates ranging between 6% and 8.9% (as of April, 2018), the proposed exemption better positions Georgia as an appealing location for the growing data center industry. The law potentially could attract large technology companies such as Apple, Google, and Amazon to the state. It may also encourage data center REITs to follow the lead of CyrusOne and Equinix, both of which have recently developed multi-tenant data centers in the metro Atlanta area.

Data centers are the backbones for cloud computing and the social networking, electronic commerce, and online video industries. At their heart, data centers consist of a series of servers that use large quantities of electricity and must be kept in a cool, low-humidity environment in order to function. Accordingly, the storage of electronic data requires a facility with significantly more robust electrical and ventilation systems than standard industrial warehouses provide, including back-up electrical infrastructure. Advanced fire systems may also be necessary to protect the servers. Although some technology companies may find it economical to build their own data centers, it is more common for companies to lease space in a multi-tenant data center. In the latter circumstance, the technology company brings its servers to the data center, where it is provided with cabinet space for the servers, along with access to the electrical and ventilation infrastructure owned by the data center. Some data centers provide additional services to tenants, repairing hardware and ensuring that telecommunications connections are maintained. Given that the development of a data center requires substantial up-front expenditures on high-technology equipment, the sales and use tax exemption is likely to be an effective incentive to develop new facilities in Georgia.

The new law defines a high-technology data center as a facility, or group of connected facilities, that is developed to “power, cool, secure, and connect” data center computer equipment. The law provides the sales and use tax exemption for computers and related equipment (including backup generators, ventilation units and cooling towers, and energy storage and distribution equipment) bought or leased for use in a high-technology data center.

To qualify for the sales and use tax exemption, the high-technology data center must be prepared to meet a minimum investment threshold. The minimum investment threshold requires the high-technology data center to make between $100 million and $250 million (depending on the population of the county where the data center is located) in aggregate expenditures over a seven-year period and create 20 “new quality jobs.” A “new quality job” is a job that is located in Georgia, has a regular work week of at least 30 hours, is not already existing in Georgia, and that pays at or above 110% of the average wage of the county in which it is located.

A taxpayer seeking the sales and use tax exemption must apply to the Commissioner of the Georgia Department of Revenue. If granted, the exemption is valid for seven years. During that time, the Commissioner may require the high-technology data center to furnish information necessary to determine its compliance with the minimum investment threshold. If the Commissioner believes that a high-technology data center is unlikely to meet the minimum investment threshold, the Commissioner may revoke the exemption at any time. At the end of the seven-year exemption period, the high-technology data center must file a final report with the Commissioner listing the expenditures incurred in satisfying the minimum investment threshold and the number of new quality jobs created. If the Commissioner makes a determination that the high-technology data center failed to satisfy the minimum investment threshold requirements, the exempted sales and use taxes must be repaid (with interest) within 90 days. The Commissioner may require a bond from the high-technology data center applying for the exemption of up to $20 million to ensure repayment of such taxes.

The law takes effect on January 1, 2019, but would apply retroactively to transactions beginning on July 1, 2018. The exemption expires on December 31, 2028.

Hotel REIT M&A Heating Up
Robert Grue and Natalie Whitaker

Transactions in the hotel REIT industry have increased dramatically over the last year, thanks to factors such as a strong economy, steady inflation, low unemployment, lower corporate taxes and rising interest rates (which have lowered share prices, making hotel REITs attractive investments relative to net asset values). In fact, in the first four months of 2018, U.S. hotel transaction volumes increased by 93% from the same period last year. Meanwhile the 52-week moving average for hotel occupancy reached 66.4% - its highest level in the past decade. Given this recent growth, REIT M&A in the area has started heating up, leading to some high-profile bidding wars and disputes over shareholder value.

The Bid for LaSalle
At the forefront of the current trend is LaSalle Hotel Properties (“LaSalle”), which has been the target of several strategic offers. Its initial suitor, Pebblebrook Hotel Trust (“Pebblebrook”), is a natural fit. Both LaSalle and Pebblebrook focus on acquiring and investing in upscale, independent, full-service hotels and resorts located in or around major urban markets throughout the United States. Both are based in Bethesda, Maryland and share a common founder, Jon Bortz. In the words of Bortz, “Our shareholders and LaSalle’s shareholders have long encouraged us to explore a combination to create a stronger industry leader. This combination is obvious and has been so for several years. Our companies have complementary assets and similar strategies, and we strongly believe bringing our two companies together is in the best interests of our respective shareholders. We believe the shareholders of both of our companies should know about this proposal, and it is our hope that LaSalle will decide to engage with us to reach a mutually beneficial agreement.”

In March, Pebblebrook proposed a share-for-share merger with LaSalle. The proposal included an implied merger price of $29.95 per LaSalle common share, representing a 17.4% premium to LaSalle’s trailing 10-day volume weighted average price and valuing the company at more than $3 billion. In spite of the premium, LaSalle rejected the bid, stating it undervalued the company and did not reflect the company’s potential for future value creation. Following the rejection, Pebblebrook upped its offer to buy LaSalle by almost 6%, suggesting an offer price of $31.75, with an option for shareholders to be paid cash up to a maximum of 15% of the value of their holdings. A bidding war ensued, and the prospect of a merger drove LaSalle’s stock price to above $35.00 per share.

Blackstone, which recently divested of its Hilton stake, has recently emerged as the winner of the battle. In spite of the higher per share price of $37.80 that was ultimately offered by Pebblebrook and an exit fee in the Blackstone agreement, LaSalle’s board favored the Blackstone all-cash offer, set at $33.50 per common share, citing the failure of Pebblebrook’s proposal to address the significant price risks and uncertainties inherent in a stock transaction. Specifically, Pebblebrook had repeatedly refused to agree to a pricing collar or similar pricing protection mechanism. In contrast, Blackstone’s all-cash offer provides price certainty. Currently, the deal is pending a shareholder vote requiring a 2/3 majority to proceed. Among LaSalle’s shareholders is Pebblebrook, which, following LaSalle’s rejection, increased its ownership in the company to 9%.

Maximizing Shareholder Value
The Pebblebrook/Blackstone bidding war represents a growing struggle in the industry as directors and shareholders quarrel over how to maximize shareholder value. Last year, the hotel REIT industry was caught up in similar M&A drama when RLJ Lodging Trust (“RLJ”) and FelCor Lodging Trust (“FelCor”) entered into a definitive merger agreement in a stock swap transaction. Similar to the LaSalle battle, Blackstone made an all-cash offer to acquire FelCor for a premium above where FelCor’s stock was then trading. Unlike LaSalle, Blackstone’s offer was rejected by FelCor’s board, to the dismay of some of the company’s shareholders. Around the same time, certain shareholders felt that the RLJ merger agreement would not adequately compensate shareholders given FelCor’s potential for growth. Those shareholders sued both companies, alleging, among other things, that FelCor’s board of directors had violated the Securities Exchange Act by omitting material details about financial projections and that the board had effectively precluded consideration of competing bids by approving a merger agreement that contained restrictive provisions.

Given the present strength of the hotel REIT market, more transactions similar to those described above are likely to occur. This is not the first time, and will certainly not be the last, that boards of directors and shareholders debate over what is best for the company and its shareholders. Only time will tell if cash is king in hotel REIT M&A.