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A company sign is seen at a Target store in Falls Church, Virginia August 19, 2008. REUTERS/Kevin Lamarque

NEW YORK (Reuters) - Hedge fund manager William Ackman unveiled on Wednesday his latest plan to boost Target Corp's (TGT.N: Quote, Profile, Research, Stock Buzz) stock price by forming a trust that owns the land under its discount stores, and then spinning off 20 percent of that trust in an initial public offering.

Target shares fell 13.5 percent as investors questioned whether an IPO of a real estate investment trust could be successful or the modified plan would be accepted by Target's management.

Ackman said on Wednesday that the $5 billion IPO would allow Target to unlock the value of its real estate, pay down debt, maintain its credit ratings and rejuvenate its stock.

A Target spokeswoman said the retailer continues to review the proposal and has not yet made a decision on it.

"You're basically just doing this deal to create some short-term value for shareholders," said Joseph Feldman, a retail analyst with Telsey Advisory Group, of the proposal. "But I'm not sure, in the end, where it leaves Target."

Ackman, whose New York-based hedge fund firm Pershing Square Capital Management owns a stake of about 10 percent in the Minneapolis-based retailer, said he revamped his original plan after speaking to other large investors and factoring in management's stated concerns.

The hedge fund manager, who has a reputation for politely but persuasively pushing companies like fast food chain Wendy's (WEN.N: Quote, Profile, Research, Stock Buzz) to spin off divisions or streamline management to lift share prices, now proposes that Target retain an 80 percent stake in the REIT and use the money from the public offering to pay down debt.

The first proposal, outlined late last month, had Target spinning off the entire REIT, sparking worries that the retailer would be vulnerable to a credit downgrade. That problem would now be eliminated, Ackman argued, although he said he has not received an opinion from the credit ratings agencies on the proposed transaction.

APPETITE FOR A REIT IPO?

Ackman's plans are ambitious and would take time to accomplish, putting the time frame for a spinoff into next year.

Ackman also stressed that this particular REIT, named TIP REIT, would have a different structure than a typical REIT in that it would own just land, not buildings. Target would sign a 75-year lease for the land under its stores.

"We think there is a market for this transaction when the company is ready to issue shares, which is going to take six to nine months from today," Ackman said.

But the market has been a rough one for new REITs. Of the 22 REITs that have gone public in the United States since the beginning of 2005, only three are trading above their offer price, according to Thomson Reuters data.

"We're not seeing commercial REIT IPOs at all, mainly because the existing ones have traded so poorly," said Kathleen Smith, chairwoman of Connecticut-based research firm Renaissance Capital.

Smith added: "If Target is the REIT's only lessee, it's not very diversified, so if something happens to Target, it would hurt all the REIT."

There are currently three commercial REIT IPOs in the pipeline, with estimated proceeds totaling $975 million.

Target shares were down $4.06 or 13.5 percent at $26.00 on the New York Stock Exchange on Wednesday afternoon.

(Additional reporting by Svea Herbst-Bayliss in Boston and Phil Wahba in New York; Editing by Brian Moss and Matthew Lewis)