Evidence suggests the firms’ apparent efforts to cut labor costs may violate the IRS requirement that Real Estate Investment Trusts not operate hotels

UNITE HERE Local 11 Co-President Kurt Petersen wrote to California Attorney General Rob Bonta, California Franchise Tax Board Executive Officer Selvi Stanislaus and California Franchise Tax Board Chair and California Controller Malia Cohen on October 16, 2024 calling for the agencies to investigate whether Real Estate Investment Trusts (“REITs”) Ashford Hospitality Trust (“AHT”) and Braemar Hotels and Resorts (“BHR”) are violating IRS provisions that provide them with lucrative tax breaks on their corporate income.

See the letter here.

REITs like AHT and BHR generally face no federal or state corporate taxes on their earnings, so long as they meet certain criteria, which include that they not operate real estate assets.

But evidence suggests that AHT and BHR, which together own 14 California hotels, may be in violation of the IRS rules prohibiting them from operating their hotel properties. On quarterly earnings calls from the onset of the pandemic in Q1 2020 to present, AHT and BHR executives have regularly discussed their companies’ efforts to cut labor costs and streamline operations. During these calls, REIT management discussed working with property managers to aggressively cut costs by eliminating housekeeping during stayovers and other guest services and keeping staffing lower than pre-COVID levels.

For example, on AHT’s Q2 2023 earnings call, AHT Senior Vice President and Head of Asset Management Chris Nixon stated, “And so we’ve been laser-focused on managing labor. We’ve been able to keep it flat year-over-year with servicing additional rooms, which has been great.” The letter reviews a litany of similar statements that appear to indicate direct involvement by REIT leadership in hotel operations, which would make them ineligible for the REIT tax break.

The abuse of REIT status is drawing growing attention. On September 4, 2024, Senator Elizabeth Warren (D-MA) urged the IRS to increase its scrutiny of private companies’ potential abuse of REIT tax breaks, stating: “REITs are supposed to be passive investment opportunities for smaller-scale investors …(but) REITs in the health care and hotel industries may be violating these tax rules.”

UNITE HERE Local 11 estimates that overall, the REIT tax break likely costs California taxpayers hundreds of millions per year in lost revenue, and urges the Attorney General and Franchise Tax Board to investigate whether the concerns identified regarding AHT and BHR are prevalent with respect to other REITs, particularly in the hotel sector, in order to ensure that the state receives the revenue to which it is entitled to fund the services our members and others need and all companies are operating on a level playing field.

UNITE HERE Local 11 is a labor union representing more than 32,000 hospitality workers in Southern California and Arizona that work in hotels, restaurants, universities, convention centers and airports

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