Starlight No. 3 Fund will avoid FAPI treatment of gains on sale in three years’ time of U.S. apartment buildings by U.S. private REIT subsidiary

The public offering for the Starlight U.S. Multi-Family (No. 3) Core Fund (an Ontario LP) is similar to those for the No. 1 and No. 2 funds.  It will invest in U.S. apartment buildings through LLC subsidiaries of a private U.S. REIT.  An Ontario subsidiary LP (which will be a corporation for Code purposes) and a Delaware LP will be sandwiched between the public LP and the U.S. private REIT.  This will help insulate the public Ontario partnership from the U.S. public partnership rules and may simplify U.S. FIRPTA withholding requirements - while at the same time the structure will still be treated as transparent (under Art. IV.6) for the purposes of U.S. withholding on dividends and interest paid by the U.S. private REIT.

It is intending avoid FAPI treatment on the net rental income and gains on dispositions of the apartment buildings (expected to occur in three years’ time) by relying on the over-five employee safe harbor for leasing businesses and the mother ship tests.  3.5% of the anticipated annual returns of 12% per annum over the three year (partly extendible) term of the Fund are anticipated to come from gains from the sale of the buildings.  If the returns from the U.S. business came mostly from (income account) gains from the buildings, the FAPI exclusion would be quite problematic but, as noted, this is not projected to be the case.  From a U.S. REIT rule perspective, there is a safe harbour for properties that are held for at least two years if no more than seven properties are sold in a year.

Neal Armstrong and Abe Leitner.  Summary of preliminary prospectus for Starlight U.S. Multi-Family Core (No. 3) Fund under Offerings – REIT and LP Offerings - Foreign Asset Income Finds and LPs.