Maryland sometimes gets knocked for a hostile business climate, but in one corner of the corporate world its reputation is just the opposite.
For real estate investment trusts — tax-preferred firms focused on real estate — Maryland is the legal home of choice.
"We didn't even consider another state," said John Good, president and chief operating officer of Jernigan Capital Inc., a Florida-based firm that organized in Maryland when it went public in March. "It was always going to be a Maryland REIT."
The REIT (rhymes with "beet") preference for the Old Line State is partly a quirk of history, a result of Maryland's legislators moving early to codify real estate investment trusts after Congress approved tax privileges for property businesses in 1960.
Decades of case law, as well as board-friendly clarifications and other amendments to the code, solidified the state's lead.
"Maryland really has the benefit of a long history, over 40 years, of REITs being formed under Maryland law," said James J. Hanks, a partner at Venable LLP who has written a 700-page book on Maryland corporate law and is known as a REIT authority. "There's a very high comfort level among people forming REITs — among investors, among underwriters and among lawyers — in Maryland as the legal home, as the domicile for REITs."
A Baltimore Sun search of 2014 annual SEC filings, turned up 231 REITs organized in Maryland — about two thirds of all REITs and more than half of Maryland-organized annual report filers.
The actual percentage is likely higher, since some of those entities are units of the same parent company. Venable, which has a large REIT practice, estimates that about 80 percent of all publicly registered REITs are domiciled in the state.
Del. Kumar Barve, a Montgomery County Democrat who has worked with Hanks and the Maryland Bar Association to make multiple REIT-related changes to Maryland law over the years, said they made a convincing case that the amendments would streamline the state code, create a stable business climate for REITs and keep the state competitive with Delaware.
"This was a situation where basically the pointy-headed experts of the bar association said we have by consensus decided this is good public policy. It seemed incredibly uncontroversial to me," said Barve, who was first elected in 1991. "These were all very common-sense and reasonable provisions."
If the presence of hundreds of companies that own billions of dollars in forests, farmland, hotels, malls and billboards has escaped your notice, that's no surprise. Just one of the REITs that had an initial public offering since 2012 is actually based here.
All told, Maryland is actually home to about 15 publicly traded REITs. They include Corporate Office Properties Trust, a Columbia-based investor in office properties, and Omega Healthcare Investors, which owns and manages an $8 billion portfolio of nursing home properties from a small Hunt Valley office. COPT recently made news buying downtown Baltimore's Transamerica building for $121 million and proposing a $1 billion mixed-use development on the Canton waterfront.
But their otherwise low profile can make it hard to quantify benefits to the state.
REITs pay few corporate taxes because they are required to pass nearly all of their profits on to shareholders. (To get the tax benefits of being a REIT, companies must meet other qualifications, too, such as a minimum number of shareholders.)
But Hanks said he believes the activity generated by their incorporation here brings benefits to Maryland, beyond the state's $300 annual filing fees and the retainers paid to lawyers and servicing firms by the companies.
REITs help make Maryland the third-most-popular state in the country for publicly traded companies to organize, bested only by Delaware and Nevada, according to the SEC filings.
"I think it's good for the state to be known as business-friendly [in] a sector of our economy that is as important as real estate," Hanks said.
Hanks said it's not clear why the 1963 General Assembly decided to get out in front on REITs. The bill, sponsored by the Senate president, attracted little fanfare, with no one speaking against it during the hearings, according to a Baltimore Sun article, found at the bottom of page 37 of a February edition of the newspaper.
But people in the industry today like the predictability of Maryland statutes.
REITs here don't face franchise taxes and their boards have flexibility when it comes to raising and classifying capital. Rules that many REITs include in their charters that outline consequences for investors who acquire more than a certain amount of stock — which can threaten a REIT's tax status — also have been clearly litigated and codified.
The rules are "user-friendly" and the local bar association is willing to lobby to keep them that way, said Peter M. Fass, a New York attorney with Proskauer Rose LLP, who estimates that he has worked on deals to take more than 40 real estate companies public in the last 10 years. In every single case, he said, he advised his clients to incorporate in Maryland.
"Early on, I may have done a couple in Massachusetts, but that was 25 years ago," he said. "All of the recent ones are in Maryland."
Today, with shareholder activism increasing, some of Maryland's laws are facing scrutiny.
This spring, Macerich, a California-based, Maryland-domiciled shopping mall REIT, used Maryland laws to help it fend off a takeover bid by its Delaware-incorporated rival Simon Property Group, moving to stagger its board elections to make winning a potential proxy fight more difficult. Neither firm responded to a request for comment.
Activist shareholders, who benefit if takeovers or leadership changes boost stock prices, face a more difficult battle in Maryland than a state like Delaware, said Peter Rothemund, a senior analyst at Green Street Advisors, a real estate research and advisory firm that recently put out a report critical of a Maryland law that allows boards to decide whether to have annual or staggered elections for their boards without shareholder approval.
"What we're pushing companies to do is to effectively neuter a lot of these provisions of Maryland law," Rothemund said. "If I had my choice, I'd have them incorporate in Delaware."
Many in the industry said pressure from shareholders isn't likely to threaten Maryland's status as the "Delaware for REITs" any time soon — if anything, with more activist investors, state provisions that inhibit takeovers may make the state more appealing.
"That's one of the largest attractions of being domiciled in Maryland or incorporated in Maryland," said Charles Lieberman, chief investment officer at New Jersey-based money manager Advisors Capital Management LLC.
Of the 39 REITs tracked by the National Association of Real Estate Investment Trusts that have gone public since 2012, all but three have organized in Maryland.
Good, the Jernigan president who worked for years as an attorney advising REITs, said shareholders understand that Maryland's provisions can be used to their benefit.
"I don't think activists are going to come out and say, 'Well, you need to be incorporated somewhere else,' just because I think they understand that there is a time and place for those provisions," Good said.
For his part, Lieberman said his firm is focused on whether companies they invest in will perform, not whether the state they're incorporated in makes them easy to acquire.
"I would call it at most a tertiary consideration," he said.