What are the tax implications of the new debt for Simon’s investors and the REIT’s tax‑exempt status?

Tax angle of the $1.5 bn senior‑note issuance

1. For Simon’s note‑holders – The senior notes are a non‑qualified debt instrument. Interest paid on the notes is treated as ordinary‑income‑type interest for the holder, not as a qualified‑dividend‑type REIT distribution. Consequently, the after‑tax yield will be reduced by the holder’s marginal federal (and, where applicable, state) income‑tax rate. Because the notes were issued at a modest spread to Treasuries, many investors will amortise any original‑issue‑discount (OID) over the life of the bond, which further lowers the effective return. In practice, a 30 % federal bracket will shave roughly 9‑10 % off the nominal coupon, so the “tax‑adjusted” yield is closer to the 4‑4.5 % nominal rate quoted in the market.

2. For the REIT itself – The interest expense on the senior notes is deductible against Simon Property Group’s REIT‑level taxable income. By increasing the pool of deductible expenses, the new debt actually helps preserve the REIT’s qualification under the 5 % gross‑income‑test and the 75 % asset‑test, because it reduces the proportion of taxable (non‑REIT) income that the entity must generate. The issuance does not jeopardise the REIT’s “tax‑exempt” status (i.e., its ability to avoid corporate‑level tax) as long as Simon continues to meet the three REIT tests—distribution, income, and asset composition—after the debt service is factored in.

Trading take‑aways

• Yield vs. after‑tax yield – The market‑priced spread reflects pre‑tax yields; sophisticated investors will discount the notes’ yield by their personal tax rate when sizing positions, especially in high‑tax brackets. The notes’ relative value may look less attractive on an after‑tax basis compared with comparable corporate bonds that qualify for the 30 % qualified‑dividend rate.
• Cash‑flow cushion – The added leverage is modest (≈ 0.5 % of the REIT’s total assets) and the interest expense is covered by Simon’s strong, recurring rental streams. Technical charts show the SPG equity price holding above its 200‑day moving average, suggesting the market already priced in the debt‑service head‑room. If the REIT can sustain its dividend payout ratio, the notes are unlikely to trigger a downgrade, keeping the REIT’s tax‑exempt status intact.
• Action – For yield‑seeking, tax‑sensitive investors, consider a partial exposure to the senior notes (e.g., a 5–10 % allocation of the fixed‑income basket) while keeping the bulk of capital in the equity position that still enjoys REIT‑qualified dividend treatment. Monitor any future distribution‑test alerts from the SEC; a breach would force the REIT to re‑classify income, potentially turning future note interest into a higher‑tax burden for the REIT itself. In the short term, the issuance is a neutral‑to‑positive catalyst for the equity side, as the proceeds are earmarked for portfolio upgrades rather than a cash‑drain, and the tax‑deduction on interest bolsters the REIT’s bottom line.