Dundee (Dream Global)
REIT subscriptions
REIT offering of 27M units at $10 per unit (with over-allotment option for 4M units) and $140M principal amount of convertible debentures - plus Dundee Corporation and Dundee Realty Corporation ("DRC") will purchase 12M units - for total net proceeds of perhaps $565M.
Caymans/Lux structure
The main asset of the REIT will be its units of a Caymans subsidiary LP (Dundee LP) which, in turn, will hold a Gibralter corporation (Dundee Gibralter), which will hold a Luxembourg s.à r.l. (Dundee Lux Holdco) that invests in the Dundee FCP Unitholders described below.
German structure
Real estate that is purchased from Lorac Investment Management S.à r.l. ("Lorac") for €736M (€60 per sq. foot of gross leasable area) will be leased to Deutsche Post under 15 "contractual co-ownership arrangement" (i.e., with 15 Dundee s.à r.l. co-owners, referred to as "Dundee FCP Unitholders," each of which will be the sole unitholder of the respective Dundee FCP) that are governed by Luxembourg law and constitute mutual investment funds without legal personality. These arrangements are referred to as "fonds commun de placement" or "FCPs."
Dundee Lux Holdco will acquire 50% of the shares of Lorac for €62,500 (with the acquisition of a further 44.9% contemplated), and a separate company for holding any trade fixtures included in the properties (Dundee Fixtures) will purchase the trade fixtures for €702,500 (presumably in order to avoid municipal trade tax on the net rental income).
Exchangeable notes
Notes totalling the euro equivalent of $80M are issued by Dundee Lux Holdco to a Lorac-group company (LSF REIT Holdings s.à r.l., or "LSF"). They are exchangeable into 8M REIT units, bear interest which tracks the distributions on those units and have a term of 10 years. Until exchange, LSF also will hold 8M special voting units of the REIT.
Distributions
Expected to be $.06667 per unit per month (45% tax deferred for 2012), representing approx. 90% of AFFO (i.e., 90% of $.89 p.a.) including interest on the exchangeable notes. A DRIP with 4% bonus distributions, with the right to make additional optional cash purchases of up to $250,000 per year. Where the Canadian taxable income is not otherwise fully distributed in a year, additional units will be issued.
Management
DRC is the asset manager and is entitled to fees: a base annual fee of .35% of the purchase price of the assets; an incentive fee of 15% of the per unit AFFO in excess of $.85 per unit (50% indexed to inflation); a capital expenditure fee of 5%; and a finacing fee of .25%. Lorac will act as management company of the Dundee FCPs.
Two wholly-owned subsidiaries of of Dundee Lux Holdco (Dundee Lux Manager - a s.à r.l.; and Dundee Germany Sub-Manager - a GmbH) will be portfolio managers.
The senior management team will consist of DRC employees (not REIT employees). Deferred Unit Incentive Plan.
Convertible debentures
Bear 5.5% semi-annual interest (with typical Unit Interest Payment Option provision). Convertible at $13.00 per unit (i.e., a 30% conversion premium). Conversion can be forced after August 31, 2014 based on the weighted-average unit trading price exceeding 125% of this conversion price for 20 consecutive trading days. May be redeemed at par (plus accrued interest) after August 31, 2016. On the July 31, 2018 maturity date, the REIT may elect to repay in units.
Canadian taxation
Because it does not hold taxable Canadian property, the REIT is not subject to restrictions on ownership by non-resident investors. It will not invest in Canadian business assets or Canadian resident entities that are not portfolio investment entities, so that it will not be required to comply with the Canadian REIT rules in order to not be subject to taxation under the SIFT rules.
The Dundee FCPs will be characterized as contractual co-ownership arrangements so that income or loss of the Dundee FCPs will be computed at the level of the FCP Unitholders. Income earned by the Dundee FCP Unitholders will be foreign accrual property income that is included in the income of Dundee LP. The adjusted cost base to Dundee LP of its shares of Dundee Gibralter will be increased by the net fapi amount included in the income of Dundee LP. At such times as Dundee LP receives a dividend of amounts that previously were included in its income as fapi, that amount effectively will not be taxable to it, and will reduce the adjusted cost base of of its shares of Dundee Gibralter.
If a Dundee FCP Unitholder makes a distribution to Dundee Lux Holdco that is in excess of the fapi of the Dundee FCP Unitholder, such excess amount will reduce Dundee Lux Holdco's adjusted cost base of its shares of the Dundee FCP Unitholder, thereby potentially giving rise to a capital gain under the negative ACB rules, with a resulting 1/2 inclusion in the fapi of Dundee Lux Holdco. Fapi (other than fapi attributable to FX) will be fully distributed.
German taxation
Each Dundee FCP should be fiscally transparent, so that the FCP Unitholders will be considered to be a Luxembourg-resident holders of ownership interests in the German properties. Although whether such FCP Unitholders are subject to German income taxation on net rental income or capital gains from such properties is not clear, they will take the position that they are not subject to German income tax on such income and will not file returns unless demanded. The rate of German corporate income tax if it were applicable to the FCP Unitholders would be 15.825%. No municipal trade tax is applicable as there is no permanent establishment in Germany.