Summary
The Federal Trade Commission’s Bureau of Competition Premerger Notification Staff has announced that Hart-Scott-Rodino Rule 802.5 (the “investment rental property exemption”) will no longer be available if the buyer essentially intends to step out of the landlord’s shoes and, instead of simply collecting rents from the property, also intends to derive “revenue from a business service it provided on the property.”
Hart-Scott-Rodino (“HSR”) Rule 802.5 (Rule 802.5), the “investment rental property exemption,” has, for 15+ years, been interpreted by the Federal Trade Commission’s Bureau of Competition Premerger Notification Staff (“FTC PNO Staff”) to allow certain purchasers of real estate to use the exemption in deals where their post-acquisition involvement with the acquired property generated business revenue other than rent that a landlord would normally receive. Receipt of revenues associated with the activity occurring on or through the property did not, standing alone, eliminate access to the Rule 802.5 exemption.
On July 20, 2105, the FTC PNO Staff, in its “Competition Matters” blog update, reversed course. All prior interpretations of Rule 802.5 are now “no longer the position of the PNO” and the “PNO’s clarified position” would be as stated in the blog post. The FTC PNO Staff explained that it would return its interpretation of Rule 802.5 to its original intent, which it believes is much narrower than the position it had developed over 15+ years of interpretations. To oversimplify, the FTC PNO Staff seems to be indicating that the exemption will not be available to a buyer in a transaction in which business activities relating to the acquired assets result in business revenues other than rents that would be received as a “landlord” over the assets acquired.
This announcement is not an innocuous one and needs immediate assessment by all investment real estate buyers and sellers previously operating under the exemption with respect to the need to make an HSR filing in a thresholds-meeting transaction. Entire industries have relied upon and been structured around the FTC PNO Staff’s prior interpretations, including those set out regarding Rule 802.5 in the Premerger Notification Practice Manual (5th Ed.) (“PNPM”), which are now reversed. Various industries – particularly those specifically mentioned in the blog post – pipelines, billboards and telecom towers – will therefore need to revisit their acquisition and disposition strategies going forward in light of this about-face, as the Rule 802.5 exemption may apparently now be unavailable if the ownership structures previously resulting from the FTC PNO Staff’s prior positions are prospectively desired. This review needs to be done immediately, because the restated position on Rule 802.5 was declared effective immediately.
Hart-Scott-Rodino Custom and Practice
A bit of history is in order. As antitrust lawyers know, the HSR Exemption Rules (16 C.F.R. §§802.1 et seq.) are a dense minefield navigated most wisely and most often via informal, anonymous discussions with the FTC PNO Staff. In determining whether an exemption might apply, counsel very often will call or email the FTC PNO Staff and say “here are my facts, here are the HSR rules I think those facts implicate, and here’s what I think the answer is.” FTC PNO Staff does a fantastic job of responding to these inquiries, and many times, the inquiry rises to the level of an “Informal Interpretation” -- all of which are in a searchable database on the FTC’s website, and many of which are catalogued with explanations in the PNPM. The responses may say “agree” or “advised writer that……” and will note another staff counsel’s concurrence, etc.
Deals proceed on these interactions, and these Informal Interpretations are, in a word, invaluable, even with the FTC’s admonition that they “provide guidance from previous staff interpretations on the applicability of the HSR rules to specific fact situations. You should not rely on them as a substitute for reading the Act and the Rules themselves. These materials do not, and are not intended to, constitute legal advice.” (emphasis in original). Staff opinions can and do morph over time, most often as a result of the dynamic nature of deal facts and structures producing interpretative nuances that serve to move deals forward and keep the dialogue between the HSR bar and the FTC PNO Staff dynamic.
HSR Rule 802.5 – “Acquisitions of Investment Rental Property Assets.”
This time, that dynamism has resulted in what amounts to a staff reversal. With respect to Rule 802.5, the July 20, 2015 blog post quite directly states that there have been “several questions” recently about its application and meaning, and that the FTC PNO Staff, “[I]n responding to these questions… [has]… determined that prior informal interpretations…expanded the rule’s application well beyond the original intent….. [so]…. with this post, we are bringing the §802.5 exemption back into line with the original intent…”. (emphasis supplied).
What, exactly, is the change?
Rule 802.5 exempts “acquisitions of investment rental property assets” which are defined as “real property that will not be rented to entities included within the acquiring person except for the sole purpose of maintaining, managing or supervising the operation of the real property, and will be held solely for rental or investment purposes.” (emphasis supplied) It has been commonly understood, as the blog post puts it, that a “key question” is whether the buyer intends to behave like a landlord, and only like a landlord, or whether and to what extent the buyer will also participate in the business conducted on or through the property. Evidently, the FTC PNO Staff reached a conclusion that prior interpretations and opinions went too far and allowed non-landlord-like activities to fall within the exemption – this much is clear from the statements now being attached as a preface to prior staff positions:
“The below interpretation, as it relates to 802.5, is no longer the position of the PNO. The PNO’s clarified position, found at “HSR Rule 802.5: the Investment Rental Property Exemption”, supersedes all prior 802.5 interpretations, including those found in the Premerger Notification Practice Manual, 5th ed.”
(italics supplied)(“Clarified 802.5 Position Statement”). FTC PNO Staff is indicating that there will be a much stricter construction, going forward, and that the exemption will not be available if the buyer essentially intends to step out of the landlord’s shoes and, instead of simply collecting rents from the property, also intends to derive “revenue from a business service it provided on the property.”
The blog post gives illustrations in three industries in which the Rule 802.5 exemption has played a key role – pipelines, billboards and telecom towers. In each illustration, it appears that availability of the 802.5 exemption will depend on whether the buyer will do anything more than “hold” the real estate on which the (pipeline)(billboard)(telecom tower) sits and collect what simply looks like rent. If the pipeline buyer post-closing operates, and offers and collects revenue for midstream transportation services; if the billboard buyer post-closing operates an outdoor advertising business and collects revenue from it; or if the telecom tower buyer post-closing sells to and collects revenue from wireless providers for colocation services – none of those acquisitions would qualify for the exemption.1
The Clarified 802.5 Position Statement has now been appended as a preface to numerous prior interpretations – including, for example, 9903010, a March 1999 staff advice stating that a REIT’s purchase of wireless communication tower sites which, post-closing, the REIT would then lease to unrelated third-party wireless communication companies, was exempt under 802.5. In the factual summary leading to the staff’s advice, the attorney inquiring stated that 802.5 “is not limited to REITs” and that the rule did not “require that the acquirer be a REIT provided it has the required rental or investment purposes… the exemption would be available to it even if it were not a REIT provided it has the required investment intent at the time of acquisition…” The inquirer was looking then to receive confirmation that the exemption was available whether or not the acquirer was a REIT. The Clarified 802.5 Position Statement allows the REIT to be more than a landlord because it is otherwise exempt from HSR filing outside of Rule 802.5, but the Rule 802.5 exemption has been scaled back to avoid non-REITs operating as more than landlords collecting rent.
This is a complete turnaround, for example, from the interpretation given by FTC PNO Staff on August 15, 2014, in a transaction where all size thresholds were met concerning the U.S. piece of an asset acquisition, and Rule 802.5 was applied to exempt its reportability – Informal Interpretation 1408001 issued July 14, 2015, now states very clearly “this is no longer the position of the PNO.” In that prior transaction, the U.S. target’s asset was the U.S. segment of a pipeline in which petrochemical feedstock was transported through the pipeline to the Canadian border (at which point the pipeline was owned by a Canadian target.)
That transaction was exempted at the time, but now, the same transaction “could work” and qualify for the Rule 802.5 exemption if the seller of the pipeline owned it and leased it to a third party which operated the midstream transportation services, and the buyer came along and purchased the pipeline, did not operate any other pipelines, and simply continued the lease to the third party. Apparently, if the buyer intends to directly or indirectly “cause anything to be put in the pipe” by offering the service, it will be viewed as acting like more than a landlord and the exemption does not apply.
What Does This All Mean?
All companies in industries that have relied on the FTC PNO Staff’s prior interpretations of the Rule 802.5 exemption, and are currently considering transactions which implicate the potential application of Rule 802.5, will need to determine whether the exemption is still available under the Clarified 802.5 Position Statement. This writer suggests that as always, the nuanced facts of every deal ought to be analyzed and presented to the FTC PNO Staff so as to allow the changed Rule 802.5 position to be tested. The failure to make this effort might result in failing to file when a filing is necessary, which could result in fines of $16,000 per day, among other things. As with all HSR matters, the facts are important, and what remains to be seen is how the FTC PNO Staff will opine on an exemption as critical as Rule 802.5 going forward. Buyers, sellers and their HSR counsel would be wise to get on top of the real-time implications of the change in position given that it is effective immediately.
1. Unless the buyer is a REIT, which most likely enjoys HSR exemption status under other exemption rules.
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