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Does Private Prison Decision Cut the Legs Out From Prison REITs?

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— Editor’s note: This story originally appeared on our partner site

Last week, the U.S. Justice Department delivered what undoubtedly was a blow to the three private-sector companies that operate prisons — two of which are REITs — when it announced that it would phase out or significantly limit its use of these correctional facilities. Specifically, Deputy Attorney General Sally Q. Yates announced that she:

sent a memo to the Acting Director of the Bureau of Prisons directing that, as each private prison contract reaches the end of its term, the bureau should either decline to renew that contract or substantially reduce its scope in a manner consistent with law and the overall decline of the bureau’s inmate population. This is the first step in the process of reducing — and ultimately ending — our use of privately operated prisons.

Officials made the decision, following an inspector general report that concluded these facilities had more safety and security incidents than the prisons operated by the federal Bureau of Prisons.

The report also found that in two of the three facilities the inspectors visited, new inmates were being housed in segregation or other cells normally used for disciplinary measures even though the inmates hadn’t violated any rules. The prisons have corrected this issue, according to the report.

Disappointment and Disagreement

The three companies, the publicly operated Corrections Corp. of America and the GEO Group, and the private company, Management and Training Corp., not surprisingly voiced disappointment in the decision and challenged some of the stats from the IG report.

Their chief argument was that the prisons that the private sector is running for the U.S. government have very different inmate populations from the federally run prisons, making it an apples-to-oranges comparison. They also took issue with the conclusion that their prisons are less safe.

As MTC said on its website, the inspector general’s report included many favorable findings about the contract prisons that are easy to overlook when just skimming the report, namely that there is 29% lower rate of disruptive behavior incidents in contract prisons and and that contract prisons had fewer allegations of sexual misconduct by staff against inmates.

Congress Takes Aim at Prison REITs

Still, it appears that the Justice Department is moving ahead on this path despite the counter arguments. And even if it wasn’t, privately run prisons — at least the two companies that are structured as REITs — are also under legislative scrutiny as well, although not for the same reasons cited by the Justice Department memo. Last month, Senate Finance Committee Ranking Member Ron Wyden, D-Ore., introduced legislation that would limit the ability of private companies that operate prisons to take advantage of special tax rules for REITs.

The measure, the Ending Tax Breaks for Private Prisons Act of 2016, takes aim at the compensation these REITs receive for providing both space and services at a prison. These services, which include security, food service for the inmates, rudimentary medical and dental services and mental health services, are all provided by a taxable REIT subsidiary within the prison REIT.

A Bigger, More Diverse Market

Leaving aside Congress’ move to limit the prison REITs’ tax exemption, a look at these companies’ larger market share suggest that they are only losing a part of a larger, and in some cases more diverse, market.

The IG report itself noted that as of December, contract prisons housed roughly 22,660 federal inmates, or approximately 12% of the Bureau of Prisons’ total inmate population. The two REITs’ own numbers tell a similar story: Of CCA’s total revenue, the Bureau of Prisons only accounted for 11% last year. In response to the Justice Department announcement, CCA told investors the Bureau of Prisons’ three contracts with the REIT were worth approximately $131.2 million in annual revenues, or 7% of CCA’s total annual revenue. For GEO Group, that percentage was 15% of total revenues for 2015, according to regulatory filings.

The states are another user of these prisons, as are other federal clients such as the Immigration and Customs Enforcement and the U.S. Marshals Service. While both law enforcement branches fall under the Justice Department, they reportedly are not affected by the new mandate.

And in the case of MTC, it is also involved in entirely different operations as well. It is the largest operator of the federal Job Corps program — at the start of this year, as one example, it was awarded a contract to operate the Hubert H. Humphrey Job Corps Center in St. Paul, Minnesota. A Larger Shift in Policy as Prison Reform Gains Ground

None of this is to say that the companies can afford to shrug off the Justice Department’s decision, which in some instances is having an immediate effect. The day after the Justice Department made its announcement, the GEO Group reported that the Bureau of Prisons rescinded its extension of GEO’s contract to operate the D. Ray James Correctional Facility under existing terms through Sept. 30, 2018. “Based on ongoing discussions between GEO and the BOP, GEO expects to receive a new contract modification to operate the facility under new terms to be negotiated,” it said.

Also, the prison reform movement is gaining momentum — in June, the Justice Department reached an agreement with the Mississippi county of Hinds to reform its prison system after finding numerous violations of the constitutional rights of its inmates.

Separately, the magazine Mother Jones published a devastating look at operations in one of these facilities recently.

CCA, whose facility was the target of the article, posted a rebuttal to the article here.

Meanwhile, prison reform advocates in Congress see the Justice Department’s measure as just the first step in a longer war.

Sen. Patrick Leahy, D-Vt., weighed in. “Today’s announcement from the Justice Department is an important first step,” he said.

“We must see greater transparency and accountability for the private facilities that continue to be used. And we must insist that these changes are adopted by all federal agencies, including the Department of Homeland Security, which relies heavily on private prisons even for housing vulnerable mothers and children. Incarceration should not be a for-profit business.”

Then there was Sen. Bernie Sanders, I-Vt., who will be returning to the Senate with a far, far louder microphone than he has ever had in the past. “We have got to end the private prison racket in America as quickly as possible,” he said.