Private Real Estate Investment Trusts: A Smart Plan For Business Growth – Fund Management/ REITs – Finance and Banking

Overview

When thinking Real Estate Investment Trust, or REIT, most
picture a large public company with an extensive portfolio of
assets. However, a private real estate investment trust (Private
REIT) can be an excellent vehicle for commercial real estate
investment. Real estate investors can create a Private REIT by
optimizing the use of a mutual fund trust (per the Income Tax
Act).

A Private REIT is a great alternative to the standard limited
partner (LP)/general partner (GP) investment structures that are
commonly used in the real estate investment sector as there are
many benefits of the Private REIT that are not available with any
other structure.

There is not much involved in converting a standard LP/GP
structure to a Private REIT. Typically, minimal changes are
required to be made to the limited partnership agreement. Private
REITs are set up as mutual fund trusts (MFTs) which make an
election to be treated as such within 90 days after the end of its
first taxation year. MFTs must also have 150 distinct holders of
units, with each holding a required minimum value of units, within
90 days after the end of its first taxation year.

Why create a Private REIT?

• Private REITS offer a favourable tax structure not afforded to
  standard corporations as they are typically deemed
  “flow-through” vehicles.




• Units of Private REITS are eligible for registered plans (RRSP,
  RESP, TFSA, etc.) which increases the pool of investor
  capital.




• Private REITs are efficient holding vehicles for
  “non-reporting” issuers in Canada due to their tax
  efficiency and simplicity of creating eligibility for registered
  plans without having to go through the cost of creating a public
  company.




• As the pool of investor capital is larger, more funds are
  available and can be used to maximize rents, develop properties,
  fund real estate expansion and other business strategies. Private
  REITS allow businesses to get more out of their hard assets by
  increasing cash flow without having to liquidate assets. Ownership
  and control stay with the business, and unit sale cash flow can be
  used to fund expansion and other business growth strategies.




• Private REITs do not have to meet the disclosure (including
  financial) obligations of publicly traded REITs.




• Converting an existing structure to a Private REIT can also be
  used for retirement, exit, and succession planning.




• The general partner continues to control the management of the
  hard assets; all the unitholders are passive investors.




• The Private REIT documents can be drafted to allow for an IPO
  and the conversion to a public REIT.

A typical private REIT structure would be as follows:

Legal concerns

While there are many benefits to creating a Private REIT, there
are also some considerations from a legal perspective:

• Although private REITS are not regulated by corporate statute,
  the market demands that trust units have similar features to shares
  of a corporation such as shareholder protection.




• Managed by a board of trustees that have a similar function as
  a board of directors – slightly higher duty of care.




• Can be structured to hold US/International real estate.




• Private REIT units are retractable by holder (subject to
  reasonable limits).




• Large number of investors introduces complexity from a
  securities law compliance perspective, and clients should be aware
  of exempt market dealer requirements, investment management
  regulations and securities filing obligations.

BLG’s Corporate Group, Investment Management Group, Tax Group and Real Estate Group can help those already
investing in real estate get more out of their real estate. Reach
out to any of the key contacts below for more information on
reorganizing SPV/LP into Private REITs or for help with navigating
the regulatory and tax environment applicable to REITs and
MFTs.

About BLG

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.