International Bar Association Conference
Real Estate Investment Trusts
Panel 2 - REIT formation
17 October 2007
Singapore
9142562_1
REITs
 Growth in global REIT market in last 5 years = 350% 1
 Proportion of value of global real estate currently in listed form = 8.8%
 Number of countries which now have REIT-type legislation = 25+
 Proportion of Australian REIT asset base which is offshore = 40%+
Sources: NAREIT, ASX
Note (1): Jan 2002, 237 REITs with combined value of USD270.7B;
Jan 2007, 334 REITs combined value USD 944.6B
1
REITs Worldwide
Dubai (2006)
Germany (2007E)
UK (2007E)
Finland (2007E)
Bulgaria (2004)
India (2007E)
The Netherlands
(1969)
Israel (2006)
Belgium (1995)
Turkey (1998)
France (2003)
Singapore (2002)
Canada (1994)
South Korea (2001)
USA (1960)
Taiwan (2003)
Mexico (2004)
Hongkong (2005)
Brasil (1993)
Malaysia (1989/2005)
Australia (1971)
Japan (2000)
Luxembourg (1988/2002)
Spain (2003)
Countries in which REIT structures
already exist
Italy (1994)
New Zealand (1956)
Countries in which structures similar to
REIT structures already exist
South Africa (1981)
Greece (1999)
Countries in which the introduction of
REITs is already planned
2
REIT Formation – Discussion Points
 What are typical structures for REITs and why have they
developed?
 Tax is an important factor. What are the key considerations?
 A regulator perspective. What are regulators focussed on?
 REIT IPOs. Why list a REIT? What are key trends in major
markets? How does the process differ to a corporate float?
3
REIT Formation - Panel
 John Sullivan, Partner, Mallesons Stephen Jaques (Chair)
 Michael Blair, Partner, Mayer Brown LLP
 Scott Newman, Partner, K&L Gates
 Jan Peeters, Partner, Stibbe
 Mark Berman, Principal, CompliGlobe Ltd
 Peter de Ridder, Partner, Loyens & Loeff
4
REIT – basic structure
Investors
 Trust or corporate
structure
Securities
 REIT buys property
(diversified or sector
focus - offices, shopping
centres, logistics)
 Issues securities which
are listed on stock
exchange
Dividend/
distribution
REIT
(trust structure)
Fees
Management
services
Manager
Services
Property
income
Fees
Trustee
 Professional manager
(and in some cases
trustee)
 Income fully distributed
to investors
Holds property
(directly or through SPV)
5
Structures: North America
Regulatory Requirements
US
Canada
Structure/Name
REIT (company/trust)
REIT (trust)
First REIT listed
1960
Modern era 1991
Mid 70’s
Number of REITS/Market
Capitalisation
 165 publicly traded REITs in FTSE
NAREIT Index
32 REITs/C$33billion (2006)
 US$344 billion capitalisation (July 2007)
Main regulatory body
SEC/Stock Exchanges
Provincial Securities Commission
Main Regulation
Securities Act of 1933
Securities Exchange Act of 1934
 No applicable Incorporation
Statute
Trust Indenture Act of 1930 (for debt)
 Subject to all securities laws
Management
Internal or External
Internal or external
Local listing required
May list, but some REITs don’t
Yes
Shareholder base
100 holders, 5 or fewer individuals may
not have more than 50% in value
6
United States – UPREIT Structure
100%
Public
REIT
Limited
Partners
Operating
Partnership
Assets
7
Structures: Asia Pacific
Regulatory Requirements
Hong Kong
Singapore
Australia
Structure/Name
REIT (trust)
S-REIT (trust)
First REIT listed
2005
2002
1971
7 / US$8.7Bn
18 / US$17.8Bn
(incl bus trusts)
69 / US$ 115Bn
Number of REITS/Capitalisation
Main regulatory body
Main Regulation
Management
Local listing required
Shareholder base
SFC
Securities and
Futures Ordinance
and Code on REITS
MAS/SGX
Securities and
Futures Act and
Property Funds
Guidelines
LPT (A-REIT)
ASIC/ASX
Corporations
Act
External
External
External or
Internal
Yes
25% units
held publicly
Yes
No
400 + holders with
A$2,000 holdings
25% units by
500 + holders
8
Structures: Europe
Regulatory
Requirements
France
Belgium
Germany
UK
Netherlands
Structure/Name
SIIC
SICAFI
REIT-Aktien
gesellschaft
REIT
Fiscale belegings
instelling
First REIT listed
2003
1995
None listed yet
1 January 2007
1969
Number of REITS/
30/ US$38bn
14 / US$ 10,5bn
Pre Reits 4;
applications for pre
Reits 6; Corporates
intending to apply for
status 11
17/US$67bn
9 / US$19bn
Main regulatory body
FTA (Tax authorities)
CBFA
Bundesanstalt für
Finanzdienstleistungs
aufsicht (BaFin)
HM Revenue &
Customs UK Listing
Authority
Autoriteit Financiële
Markten (AFM) –
Belastingdienst
Main Regulation
Finance Act
Law 20 July 2004
Reit-Gesetz
Finance Act 2006
Wet Financieel
Toezicht; Corporate
Income Tax Code
Capitalisation
RD 10 April 1995
UK Listing Authority
Listing Rules
Management
Internal/external
Internal/external
Internal
Internal/external
Internal/external
Local listing required
Yes
Yes (EU)
Yes (EU)
No (but need a
“recognised Stock
Exchange)
No (no formal listing
requirement)
Shareholder base
15% of capital by
holders of 2% or less.
Max 60% any
holder/group.
Minimum free float of
30 %
15% (25 %) of capital
by holders of 3% or
less. Max 9.99% any
holder.
Must not have less
than six controlling
members. Max 10%
any holder.
No individual may hold
25% or more of shares
in the listed entity.
Other restrictions apply
9
Belgium – Corporate Structure with General Partner
Public
General
Partner
Commanditaire Vennootschap
op aandelen (CVA)
Assets
10
Tax considerations
 Trust, Limited Partnership or Limited Liability Company in order to
achieve tax neutrality concept of the REIT?
 Capitalisation of the REIT: equity and debt/borrowings – does it matter
for tax purposes?
 Investor home tax considerations and structuring opportunities
11
REIT Formation – U.S. Tax Requirements
 REIT provisions initially enacted by the U.S. in 1960
 Designed to allow individual investors to invest in real estate through a
public, liquid vehicle as if such investors had invested directly in the
underlying real estate
 If properly structured and operated, REIT is a “conduit” for purposes of
U.S. income taxation (i.e., no corporate level tax and only one level of
tax imposed at the shareholder level)
 U.S. REITs: Equity versus Mortgage
 Can be a corporation, trust or association, provided the following
conditions are met:
⇒ Managed by one or more trustees or directors
⇒ Beneficial ownership of which is evidenced by transferable shares, or by
transferable certificates of beneficial interest
⇒ Would be taxable as a domestic corporation if not a REIT
12
REIT Formation – U.S. Tax Requirements
 Not a financial institution such as a bank, savings bank, domestic
building and loan associations or an insurance company
 Beneficial ownership of which is held by 100 or more persons
 Not closely-held (i.e., not more than 50% of the value of the stock of the
REIT may be owned, actually or constructively, by or for not more than 5
individuals
 Elects to be taxed as a REIT
 Satisfies certain gross income, asset and distribution tests to be
discussed in connection with “REIT Operating Considerations” and which
are generally designed to insure that the REIT operates as a “passive”
investment vehicle
13
REIT Formation - Canada
 Many jurisdictions, including Canada, have adopted legislation designed
to accomplish the same or substantially similar objectives as prompted
the U.S. to enact legislation authorizing REITs
 Although Canada’s REIT legislation, which was initially enacted in 1994
and has recently been amended, is in many respects similar to that of
the U.S., there are significant differences.
14
Regulatory Issues
 Disclosure: fees, transactions with affiliates/interested party transactions,
valuations, projections and forecasts, materiality threshold for disclosure,
restatements and decisions on impairment, leverage
 Operational issues: caps on holdings (concentrations) and on non-real
estate investments, uses of guarantees and cross-suretyships, paying
dividends in excess of current income
 Enforcement issues: misuse of material non-public information,
restatements, options grants, timing of revenue recognition, suitability
(via regulatory inspections), failure to disclose adequately interested
party transactions, misrepresentation (of listing/market), failure to
disclose commissions/fees
 Valuations: assumptions, exposure to “sub-prime” issues
 Significant transactions: M&A activity, fairness opinions in LBOs, proxy
contests
15
Hot topics for regulators
 Disclosure of forecasts and projections of distributions, including
assumptions and risks
 Short-term yield enhancing arrangements/financial engineering (more on
this in panel 3)
 Funding distributions through debt or return of capital
 Manager entrenchment and disincentives to removal: rights in trust
deeds vs regulatory/legal requirements
 Gearing levels and related risks
 Clear, concise and effective disclosure
 Approach varies between jurisdictions – regulation v disclosure
16
Key Benefits of Listing a REIT
Investors
Vendors / Sponsors

Access to quality property


Replicates direct ownership
(with tax pass through)
May maximise sale price
(broader pool of investors)

May be more attractive than
private sale

Ongoing management fee
income stream

Free up capital on balance
sheet for other uses

Potential purchaser for
developed assets

Potential value uplift in REIT
structure

Liquidity

Diversification of risk

Transparency
17
REIT IPOs
 Market trends
•
strong deal flow in some markets, less in others – cost of capital is a
key driver; property capitalisation rates another factor
•
•
•
off-shore and cross-border REITs
broader asset classes – hotels, tourism, retirement villages etc
subsidiary wholesale funds/private real estate funds
 Offering process and disclosure
•
•
•
•
relatively highly regulated
speed to market varies between jurisdictions
offer document:
− length and regulatory involvement varies
− incorporation by reference
related party aspects important – like other spin off transactions
18
REIT IPOs
 Regulatory requirements
•
•
•
•
listing (spread, scale and suitability) or means to sell if not listed
collective investment authorisation required?
ongoing reporting and disclosure obligations
future acquisitions, capital raising and takeovers
 Key design factors
•
•
•
•
tax efficiency
pipeline of properties to underpin future growth
management structure and protections
ownership of assets (including co-ownership and pre-emptive rights)
19
Example Australian REIT IPO Structure
Sponsor/
Vendor
Public Investors
Often
sponsor is
also spinning
off properties
- related party
consideration
s
Units
Units
REIT
Responsible
Entity (RE)
Management
agreement
External
manager –
fixed term
management
contract as
protection
feature
Manager
Trust 1
Trust 2
Stapled
Extra layer of
collective
investment
regulation as
well as
securities law
and stock
exchange
rules
Co-owner
of asset
Passive
Assets
Active
(development)
Assets
Often sponsor has pre-emptive rights to take
assets back if RE removed
20
International Bar Association Conference
Real Estate Investment Trusts
Panel 2 - REIT formation
17 October 2007
Singapore
9142562_1