Under the JOBS Act, an emerging growth company (“EGC”) is required to include only summary compensation information in the IPO registration statement rather than the more extensive discussion and analysis of compensation required for a nonEGC. However, an EGC should always keep in mind that it may be required to include more substantial executive compensation disclosure in future filings or in the registration statement for marketing purposes, and should also consider how investors and proxy advisory firms will view the company’s executive compensation arrangements. For a comprehensive discussion of executive compensation in the REIT space, please see our “Guide to REIT Executive Compensation.” EXECUTIVE COMPENSATION PLANNING Systematizing compensation practices. Compensation decisions should be made more systematically—doing so will require: ■ Establishing an independent compensation committee of the board of directors; and ■ Using more formal market information to establish a compensation philosophy and set compensation, which can often be achieved by engaging a compensation consultant familiar with the REIT industry and establishing a regular compensation grant cycle. Adopting plans. An issuer will have greater flexibility to adopt equity compensation plans (including employee stock purchase plans) prior to its IPO. Accordingly, planning ahead is essential. In consultation with the lead underwriters and its legal counsel, an issuer should develop and adopt the equity incentive and other plans it will use to make awards as a public company. The number of shares reserved for future equity grants, after giving effect to any equity grants that will be made to directors and officers at the closing of the IPO, should be sufficient to enable the REIT to make equity awards for the first two or three years after the closing of the IPO. When the number of shares available for future issuance under the equity plan is reduced to a point that could make it challenging for the REIT to attract, recruit, and retain directors and officers, the REIT will be required to obtain stockholder approval to amend the equity plan to increase the share authorization or to adopt new plans. Section 162(m). Section 162(m) of the Code (“Section 162(m)”) generally precludes a publicly held corporation from taking a federal income tax deduction for annual compensation in excess of $1 million provided to certain of its executive officers. Before the Tax Cuts and Jobs Act of 2017 (“TCJA”) was signed into law in 2017, compensation that qualified as “performance-based” under Section 162(m) was not subject to Section 162(m). Under the TCJA, this performance-based exception was repealed, and the coverage of Section 162(m) was expanded to include additional executive officers. In REITs that utilize the UpREIT structure, often much of the compensation paid to executive officers relates to services that the executive officer provides to the operating partnership, rather than the REIT. The IRS issued private letter rulings addressing this structure in four letter rulings issued between 2006 and 2008. In these rulings, the IRS concluded that Section 162(m) did not apply to an operating partnership with respect to compensation paid for services performed as an employee of the operating partnership, nor did it apply to the REIT with respect to its distributive share of income or loss from the operating partnership that includes the compensation expense to the extent that such compensation expense is attributable to services performed as employees of the operating partnership. Consistent with these rulings, many REITs took the position that compensation expense for services performed for the operating partnership was not subject to the Section 162(m) deduction limit. However, following the changes to Section 162(m) ushered in by the TCJA, regulations were issued reversing the position expressed in these private letter rulings, effectively making them obsolete. Specifically, the regulations modified the definition of compensation for purposes of Section 162(m) to include an amount equal to a parent entity’s distributive share of the operating partnership’s deduction for compensation expense attributable to the compensation paid by the operating partnership after December 18, 2020, which was the date that the final regulations were made publicly available. Consequently, unless a limited grandfathering rule for compensation paid pursuant to a written binding contract that was in effect on December 20, 2019 (which was not subsequently materially modified) applies, the prior exception to Section 162(m) for compensation paid by the operating partnership is no longer available. 2024 Guide to REIT IPOs and Listing Transactions | 8
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