Of the four paired share REITs, three are highly involved in the hospitality industry. Starwood Lodging Trust, Patriot American Hospitality Inc. and Meditrust Corp. have taken full advantage of their unique structure to help finance acquisitions. With the acquisition of Westin and ITT Sheraton, Starwood has become the largest REIT in the US and the largest lodging and gaming company in the world. Its current holdings include over 800 hotels valued at over $18 billion.  With Wyndham and Carnival, Patriot American Hospitality is currently the second largest hotel REIT with over 90 hotels and resorts. Patriot has increased its room count by over 100 percent since January of 1997. Meditrust recently entered the hospitality arena by acquiring La Quinta in a $3 billion transaction. Meditrust is now the largest domestic owner and operator of mid-priced hotels, with 270 owned or managed hotels totaling approximately 35,000 rooms. 

REITs that don't have the paired share structure have also begun to explore different ways of creating a "paper clipped" structure, through which they can gain some of the advantages afforded to the paired share REITs. This structure is formed when a REIT creates an operating company in order to participate in joint ventures. However, unlike a paired share company that trades as a single unit, the paper clipped companies are separate public entities. A leader in this trend is Crescent Real Estate Equities, which used this structure to purchase and manage psychiatric facilities, spas, refrigerated warehouses and lately entered the hotel/gaming arena by acquiring Station Casinos in Las Vegas. Recently CapStar Hotel Co. and American General Hospitality Corp. agreed to merge as equals, forming the hotel industry's first dedicated paperclip RElT. 

The recent flurry of "high profile whole company" acquisitions sparked the interest of the Treasury Department, which led to the Clinton Administration's budget proposal aimed at closing off the potential for abuse of the paired share REIT structure.  Many of the largest REIT owners are pension funds and the earnings paid out to these shareholders are therefore exempt from Federal taxation. The government has proposed a set of initiatives to revise the paired share status. These REITs would be allowed to keep their status, but could not engage in further acquisition activity, while allowing a "generous" time frame in which all pending deals may be consummated. The proposal would in effect establish the two components of the company as separate entities, with the management company still paying out a large portion of its cash flow as rent but not having the same tax advantages as previously held under paired share rules. The proposal sent shock waves through the stock market as the news reduced Starwood's market value by $85 million in a single day. 

Now that the initial shock of the proposal has worn off, clearer heads have begun to prevail. After all, it is highly unlikely that the paired share structure will he severely limited. The legislation, if approved as currently drafted, would only raise what has been estimated at between $130 to $250 million over a five year period hardly budget balancing numbers. 

Starwood has hired former Senators Bob Dole and George Mitchell to lobby Congress against approving this aspect of the Administration's budget proposal. Barry Sternlicht has also raised the possibility of converting Starwood into a C-corporation structure. This would give Starwood the flexibility of both owning and operating hotels with no restrictions on dividend payouts, share ownership or operational activities although the company would be subjected to a 35 percent federal corporate income tax.  In the highly unlikely event that the Administration's proposal does pass it would be a minor scrape to the large REITs, as it would only limit future acquisitions and would not effect existing assets. Since the two REITs that provoked the government response (Starwood Hotels & Resorts and Patriot American Hospitality) are currently in a digestive mode, the proposal should not have a cataclysmic effect on their company strategies. 

One aspect of the REIT structure that is getting upstaged by the news of the Administration's proposal is the accelerating growth of the small and mid-cap REITs. The basic growth pattern for these companies is to begin by acquiring individual assets, then pairs, until eventually building large portfolios. FelCor Suites Hotel purchased 32 hotels in 1997, while CapStar Hotels acquired 19 properties. These and numerous other REITs are purchasing property without the paired share status and are thriving in today's lusty real estate market. 

Another factor which will increase the size of the smaller hotel REITs is that some will begin to consolidate in order to grow. This consolidation has been anticipated by many analysts with some analysts forecasting that certain hotel REITs will double in size by year's end. CapStar and American General Hospitality Corporation's recent merger will make the combined entity the third largest REIT and second largest independent hotel management company, all without the advantage of the paired share structure. 

The current proposal by the Clinton Administration should not have a material effect on the larger REIT industry. The current pub-licity that has surrounded this proposal has led many to believe that REITs have reached their pinnacle. The fact is that as long as the real estate market is growing and the hotel industry is prospering, REITs in one form or another will continue to expand. There is also a feeling among certain analysts that REITs will become the "take out" lender of the hotel industry, replacing insurance companies who have been in that position for the last twenty years. There is still plenty of room for growth. REITs currently own only 8 percent of the $1.3 trillion institutionally - owned commercial real estate market. We expect that REITs will continue to provide an efficient tax structure while transferring real estate from private ownership and debt-oriented financing to Wall Street and the public markets.