SB No. 63: Real Estate Investment Trust Act
SB No. 63: Real Estate Investment Trust Act
by Catherine C. Dela Cruz
Senate Bill No. 63 known as “The Real Estate Investment Trust Act of 2007” (REIT) has been recently referred to the Senate’s Committee on Banks, Financial Institutions and Currencies and the Committee on Ways and Means.
Over the past few years, REIT was introduced in the US, as well as in other countries in Europe and Asia as more countries discover the benefits of REITs.
As explained in the bill, institutionalization of the REITs would allow the Philippines to participate in the globalization of the real estate investment markets thus contributing to the growth and development not only of the capital market but also the national economy through increased investment activities.
The proposed bill is timely as we are experiencing yet another boom in the real estate industry and the playing field is now open to all kinds of investors.
But first, what is a REIT?
A REIT is a corporation that derives most of its revenue from owning or managing real estate. The REIT structure was designed to provide a framework for investment in real estate in the same way that mutual funds provide for investment in stocks. Likewise, the bill defined “REIT” as a stock corporation formed for the sole purpose of investing in income-producing real estate assets. Income producing properties include apartment buildings, office buildings, warehouses, medical facilities, hospitals, mixed industrial/office buildings and other commercial and residential properties.
The bill proposes several incentives for establishing REITs. Among these are income tax exemptions on their revenue as well as on the dividends to be paid to its shareholders. REIT will also benefit from the documentary stamp tax exemption on its original issuance of shares of stock.
Please note however that in order to qualify for the tax exemption, a REIT must meet the following conditions:
- It must be listed in the Philippine Stock Exchange (PSE) and must distribute dividends of at least 90% of its net income (before extraordinary item, depreciation and amortization) to its shareholders.
- It must invest only in real estate and real estate-related assets (i.e., debt securities and listed shares issued by property companies or other funds and assets, including personal property, incidental to the ownership of real estate); debt securities and listed shares issued by local and foreign non-property corporations; government securities; and cash and cash equivalent items.
- It must invest at least 70% of its total assets. For newly-organized REITs, at least 70% of the total assets should be real estate and real estate-related assets. Moreover, not more than 15% of its assets must be invested in personal property.
- It must not undertake property development activities nor invest in unlisted property development companies, unless it intends to hold the developed property upon completion.
- It must invest at least 35% of its total assets in real estate.
- Not more than 5% of its investments in listed or unlisted debt securities and listed shares of or issued by property and non-property corporations (local or foreign) and other locally-registered REIT should be invested in any one issuer’s securities or any one manager’s funds.
- When investing in real estate as a joint owner, the REIT should acquire shares or interests in an unlisted special purpose vehicle (SPV) constituted to hold/own the real estate and the REIT should have freedom to dispose of such investment. The joint venture agreement, memorandum and articles of association and/or other constitutive document of the special purpose vehicle should provide for a minimum percentage of distributable profits of the SPV that will be distributed and grant the REIT veto rights over key operational issue of the SPV.
- Total borrowings and deferred paym
ents should not exceed 35% of its deposited property. Provided, however, that the total borrowings and deferred payments of a REIT that has a credit rating of “A” or higher, or a similar rating, by any rating agency recognized by the Philippine Securities and Exchange Commission may exceed 35% but not more than 60% of its deposited property.
- A full disclosure on the identity of the parties and the transaction should be made to the PSE if it acquires assets from or sells assets to interested parties or invests in securities of or issued by interested parties. Interested parties include the REIT sponsor or promoter, adviser, REIT Manager, director of the sponsor/promoter, adviser, REIT Manager and related corporation or partnership as may be defined by the Philippine SEC.
- It must conduct a full valuation of a REIT at least once a year.
- It must comply with the applicable minimum public ownership requirement of the Philippine SEC.
In addition, to qualify for the exemption of taxes imposed on the transfer or sale of assets, REIT must retain or hold the assets sold or transferred for a period of five years from the date of sale or transfer to the REIT. Otherwise, all of taxes shall be due and payable and subject to all interest and surcharges.
The conditions for the availment of tax-free treatment are exhaustive. However, these should be further evaluated by the legislative body in the light of its impact on existing similar businesses which are not covered by this Act.
This Act, promising as it is, should not only consider the incentives and opportunities it offers the investors but should be taken with caution as it may impact other existing similar industries and the fiscal position of the government. After all, a favorable investment opportunity should always create a balance between the fiscal requirements of the government, the interest of the investors and its effect on similar existing industries.(The author is a senior tax manager at Punongbayan & Araullo, member of Grant Thornton International. For comments and inquiries, please e-mail the author or call 886-5511.)