Are Private Prisons in Trouble?

Will the private prison industry survive the increased obstacles?

The biggest question may revolve around who will finance the two largest private prison firms. Geo Group and CoreCivic operate as Real Estate Investment Trusts (REITs), which means most of their assets and income are connected to real estate investments. REITs are required to distribute at least 90 percent of taxable income as dividends for favorable tax benefits. This leaves them with little cash on hand to cover day-to-day operations, such as overhead costs at prisons and staff salaries. Therefore, they must rely on revolving credit from large banks to run their operations and pay their investors per the REIT requirements.

Some speculate that non-bank lenders, such as a private equity investors or hedge funds, will fill the void. However, these financiers are likely to charge higher rates given the riskiness of the loans. Alternatively, prison firms may seek capital from smaller banks that havenโ€™t historically partnered with the industry.

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