Starlight No. 5

Overview

The existing unitholders of the Starlight Funds Nos. 1 to 4 will transfer their units into a new fund (the Starlight No. 5 fund) under Alberta Plans of Arrangement, with eligible Canadian residents able to do so on a s. 97(2) rollover basis. (Combining the multiple funds is attended with significant complexity.) The new Fund will have a multiple unit structure similar to that of the old funds and hold its indirect US apartment buildings under a similar structure. Ontario LPs beneath it will have elected to be corporations for U.S. tax purposes, and the underlying properties (or, to be more precise, the US LLCs holding each property) generally will be held by Maryland corporations which are intended to qualify as US private REITs. Recognition of FAPI is targeted to be avoided through reliance on the more-than-five full time employee exception and the s. 95(2)(a)(i) rule. The Fund is anticipated to have a lifetime of three years, subject to extension. The Fund will enter into FX derivatives, having a term of three years, so that the return of one of the Classes of units will be generated in Canadian dollars (e.g., if the U.S. dollar weakens over the three-year term, this will not adversely affect the return on those units).

Fund

A "closed-end" Ontario limited partnership, sponsored and asset managed by the Manager. The Fund will indirectly own the Existing Portfolio, being a property portfolio comprising an aggregate of 5,882 multi-family residential apartment suites in 20 properties located in the States of Florida, Georgia, North Carolina and Texas, which properties it will have acquired through its acquisition of the Existing Starlight Funds and Campar. The Fund LP Agreement provides for the management and control of the Fund by a general partner, which is an Alberta corporation. The directors of the General Partner, upon closing of the Offering, will be Daniel Drimmer, Graham Rosenberg and Harry Rosenbaum.

Manager

Starlight Investments Ltd. The Manager is owned by Daniel Drimmer. The Manager and President of the Fund as holders of the Class B partnership units of SIP, are entitled to a 25% carry.

Initial structure

The Fund will initially own all of the issued and outstanding units of the Existing Starlight Funds, all of the issued and outstanding Investment LP5 Units, all of the shares of Campar and the Class A partnership interests in SIP. The Existing Starlight Funds will own all of the issued and outstanding units of the Investment LPs, other than Investment LP5. The Investment LPs will initially own all of the issued and outstanding limited partnership interests of the Holding LPs, except in the case of Holding LP5, of which all of the issued and outstanding limited partnership interests are owned by Investment LP5 and Campar. The Holding LPs will initially own all of the issued and outstanding U.S. REITs Common Stock and U.S. REITs ROC Shares and may also own U.S. REITs Notes. Holding LP5 will, following the Reorganization, own all of the issued and outstanding Series C U.S. REIT 5 Preferred Stock. The Property known as Travesia Apartments is indirectly owned by the Fund through Fund2 and Travesia ULC.

Existing Starlight Funds

Collectively, Fund1, Fund2, Fund3 and Fund4 (namely, Starlight U.S. Multi-Family Core Fund; Starlight U.S. Multi-Family (No. 2) Core Fund; Starlight U.S. Multi-Family (No. 3) Core Fund; and Starlight U.S. Multi-Family (No. 4) Core Fund; respectively). The combined appraised value of the Existing Starlight Funds' portfolio is in aggregate US$882,400,000.

Fund1, Fund2 and Fund3

The Manager, as promoter, closed its first, second and third offerings on April 18, 2013, November 15, 2013 and July 9, 2014 through Fund1, Fund2 and Fund3, respectively and raised approximately US$47.2 million, US$32.7 million and US$49.6 million, respectively. These funds were substantially deployed in a portfolio of recently constructed, stabilized, Class "A", multi-family assets in Texas within five months of the closing of each offering.

Fund4

The Manager, as promoter, closed its fourth offering on April 10, 2015 through Fund4 and raised approximately US$51.4 million. These funds were substantially deployed to acquire four recently constructed, stabilized, Class "A", multi-family assets in Orlando and Tampa, Florida.

Fund2

The structure of Fund2 is different from the organizational structure of the other Existing Starlight Funds in that Travesia Apartments, a Property included as part of the Existing Portfolio, is indirectly owned by Fund2 through Travesia ULC, which is the sole limited partner of Starlight Investments Acquisition (No. 2) Partnership, a limited partnership formed pursuant to and governed by the laws of Ontario, and not through any of the Investment LPs, Holding LPs and U.S. REITs. Starlight Investments Acquisition (No. 2) Partnership's ownership interest in Travesia Apartments is indirectly held through its interest in Travesia Multi-Family Holding Limited Partnership, a Delaware LP, which in turn owns Travesia Acquisition Limited Partnership, also a Delaware LP, being the entity that owns Travesia Apartments.

The Investment LPs

The Investment LPs are Ontario LPs which will make an election to be classified as a corporation for Code purposes effective on the date of formation. The general partner of each Investment LP is an Ontario corporation. All of the issued and outstanding shares of the Investment GP5 are owned by the Fund and all of the issued and outstanding shares of the other Investment GPs are owned by the Existing Starlight Funds.

Campar

Campar Capital Corporation, a "capital pool company" which as its "qualifying transaction" (as per Exchange Policy 2.4) acquired an indirect 80% interest in Boardwalk Med Center, which is held by Boardwalk Acquisition LLC, a Delaware LLC, which prior to the Reorganization, was indirectly owned as to 80% by Campar and 20% by an entity formerly known as Boardwalk Acquisition Partnership, an entity owned principally by senior management of the Manager.

Holding LPs

The Holding LPs are Delaware LPs whose general partners are also Delaware LPs, whose general partner is Holding GP is ULC GP, an Alberta unlimited liability corporation. All of the issued and outstanding limited partnership units of the Holding GPs and all of the outstanding shares of ULC GP are owned by SIP.

SIP

Starlight Investments Partnership, an Ontario partnership all of whose outstanding units of SIP are owned directly or indirectly by the Fund, SIP GPco, the Manager and the President of the Fund. SIP indirectly owns all of the Carried Interests and directly owns the Travesia Carried Interest.

U.S. REITs

Starlight U.S. Multi-Family Core REIT Inc., Starlight U.S. Multi-Family (No. 2) Core REIT Inc., Starlight U.S. Multi-Family (No. 3) Core REIT Inc., Starlight U.S. Multi-Family (No. 4) Core REIT Inc. and U.S. REIT5. To assist each of the U.S. REITs in qualifying as a REIT under the Code, each U.S. REIT has issued shares of 12.5% Series A Cumulative Non-Voting Preferred Shares. Similarly, U.S. REIT5 expects to issue up to 125 shares of Series A U.S. REIT Preferred Stock at US$1,000 per share, with a liquidation preference of US$1,000 per share, or up to US$125,000 in the aggregate.

U.S. REITs ROC Shares

Shares in the capital of the U.S. REITs which are designated within such capital as Series B Cumulative Voting Preferred Shares; it is expected that, in addition to the Series A U.S. REIT5 Preferred Stock, U.S. REIT5 will issue 5% Series B Cumulative Voting Preferred Stock. Each share is entitled to a liquidation preference of US$1,000 per share, dividends accrue thereon on a daily basis at the rate of 5% per annum, it is voting on the basis that all votes in the aggregate for all outstanding U.S. REIT ROC Shares for the applicable U.S. REIT shall represent 10% of the total voting power of all classes of stock of the applicable U.S. REIT that are entitled to vote, and it is subject to redemption by the applicable U.S. REIT.

Offering proceeds by Unit classes

The forecast assumes that the Fund will raise gross proceeds of $49,658K pursuant to the Offering through the issuance of the Canadian dollar equivalent of $17,877K of Class A Units at C$10.00 per Unit, $4,469K of Class U Units at $10.00 per Unit, the Canadian dollar equivalent of $4,966K of Class C Units at C$10.00 per Unit and the Canadian dollar equivalent of $8,938K of Class D Units and the Canadian dollar equivalent of $5,810K of Class F and the Canadian dollar equivalent of $1,788K of Class H Units and $5,810K of Class E Units at $10.00 per Unit.

Application of offering proceeds

Investment LP5 will invest the proceeds from the issuance of Investment LP5 Units to the Fund to acquire Holding LP5 Units. Holding LP5 will invest the proceeds from such issuance to acquire U.S. REIT5 Common Stock and U.S. REIT5 ROC Shares. Holding LP5 may also acquire U.S. REIT5 Notes. U.S. REIT5 will use the proceeds from the issuance of U.S. REIT5 Common Stock, U.S. REIT5 ROC Shares and U.S. REIT5 Notes (if any) to directly or indirectly acquire, from time to time, one or more additional Properties. The New Portfolio will be acquired indirectly by the Fund through its investment in Investment LP5 with the Investable Funds flowing down to U.S. REIT5. The fair value of the net assets thereby indirectly acquired by the Fund is $142.3M.

Reorganization

As a result of the Reorganization prior to Closing of the Offering, the Fund will have issued approximately 18,230,428 Class A Units, 2,582,853 Class U Units, 6,131,333 Class D Units, 1,047,476 Class E Units, 2,121,072 Class F Units, 344,553 Class H Units and 13,162,407 Class C Units to the former security holders of the Existing Starlight Funds and Campar and the former indirect holders of the "Carried Interests" in the Existing Starlight Funds, assuming an effective exchange rate of C$1.325 to US$1.00. As a consequence of the Reorganization, the tax cost of the Properties in the Existing Portfolio to the Fund and its Subsidiaries is expected to be significantly less than their fair market value.

Distributions

The Fund will target an annual pre-tax distribution yield of 6.5% (based on the original subscription price under the Offering and calculated in the currency of the Units held) across all Unit classes and aim to realize a targeted 12% pre-tax, investor internal rate of return across all Unit classes upon disposition (directly or indirectly) of the Fund's interests in its assets at or before the end of the targeted three-year investment horizon, although each of these figures will necessarily vary as between classes of Units based on the proportionate entitlements of each class of Unit, applicable Unit Class Expenses (as defined herein) and any unhedged exposure to Canadian/U.S. dollar exchange rates. In the case of the Class H Units, the targeted annual pre-tax distribution yield of 6.5% is to be reduced by the cost of the Class H Unit Liquidation Hedge which is expected to result in a targeted annual pre-tax distribution yield of 3.5%, with any additional costs in respect of such hedge to be accounted for upon termination or liquidation of the Fund.

Class H Unit Liquidation Hedge

The Fund intends to purchase U.S. dollar put options and/or Canadian dollar call options pursuant to which it will have the option to sell U.S. dollars and to buy Canadian dollars at the end of the Fund’s targeted three year investment horizon based on a reference notional amount equal to the net proceeds received by the fund from the issuance of Class H units. This hedge is intended to provide Class H unitholders with protection against the weakening of the U.S. dollar to the target date for the termination of the Fund.

Internal distributions and withholding tax

Each Investment LP has elected, or will elect, to be classified as a corporation for U.S. federal income tax purposes. Accordingly, each Investment LP will be subject to applicable U.S. income and withholding taxes. The Investment LPs will make sufficient reserves for its applicable U.S. taxes, prior to making distributions to the applicable Existing Starlight Fund or the Fund, as the case may be. The Fund will then distribute the Distributable Cash Flow (including distributions received from the Existing Starlight Funds) to the Unitholders, based, initially, on the proportionate interest of the Net Subscription Proceeds attributable to each class of Units. Dividends paid by the “Subsidiary Canadian Corporations” (Campar and Travesia ULC) will be subject to Canadian withholding tax to the extent attributable to Unitholders who are non-residents of Canada for purposes of the Tax Act.

Potential co-investments

If the General Partner determines that it is in the best interests of the Fund (i) to make a co-investment with a Canadian real estate investment trust, such a co-investor would be expected to subscribe for Investment LPs Units, and (ii) to make a co-investment with a Canadian pension fund, such a co-investor would be expected to subscribe for or purchase U.S. REITs Common Stock, U.S. REITs ROC Shares and U.S. REITs Notes (to the extent U.S. REITs Notes may be issued to the applicable Holding LP).

FX hedging

The Manager intends to monitor the exchange rate between the Canadian dollar and U.S. dollar and may acquire derivative instruments to hedge, in whole or in part, its foreign currency risk in respect of the U.S. dollar amounts the Fund will be required to convert into Canadian dollars to pay expected distributions on the Canadian Dollar Units.

Canadian tax consequences

SIFT taxation

The Funds believe that they will not hold any "non-portfolio property" and should not be SIFT partnerships.

Canadian corporate taxation

The Fund has estimated the entity-level income tax to be payable by the Canadian subsidiary corporations (Campar and Travesia ULC) under the ITA to be $0.384M for the 12 months ended September 30, 2017, taking into account foreign taxes expected to be payable by and foreign tax credits expected to be available to such corporations. While the subsidiary Canadian corporations will generally themselves be entitled to claim foreign tax credits or foreign tax deductions in respect of such taxes, the maximum credit available to the subsidiary Canadian corporations will generally be limited to their Canadian tax otherwise payable in respect of the underlying U.S. source income.

Internal withholding tax

Each of the Fund and Fund2 will be deemed to be a non-resident person in respect of certain amounts paid or credited to it by a person resident or deemed to be resident in Canada, including dividends paid by the Subsidiary Canadian Corporations. Such dividends will be subject to withholding tax under Part XIII at the rate of 25%. However, the CRA's administrative practice in similar circumstances is to permit the rate of Canadian federal withholding tax applicable to such payments to be computed by looking through a partnership and taking into account the residency of its partners (including partners who are resident in Canada) and any reduced rates of Canadian federal withholding tax that any non-Canadian limited partners may be entitled to under an applicable income tax treaty or convention, provided that the residency status and entitlement to treaty benefits can be established. The Canadian Subsidiary Corporations intends to rely on this administrative practice.

Foreign accrual property income

FAPI does not include income from a business carried on by a CFA that is an "active business" within the meaning of the FAPI provisions. This should generally include income of a CFA where, throughout the period in the taxation year during which the business was carried on, the business is the leasing of property conducted principally with persons with whom the CFA deals at arm's length for purposes of the Tax Act and the CFA employs more than five employees full-time in the active conduct of the business (the "Employee Exception") and should also generally include income derived by a CFA from activities that can reasonably be considered to be directly related to active business activities carried on in a country other than Canada by another CFA (including a CFA that is considered to carry on an active business by virtue of the Employee Exception) to the extent that such income would, if it were earned by such other CFA, be included in computing amounts prescribed to be its earnings or loss from an active business carried on in a country other than Canada for purposes of the FAPI provisions of the Tax Act (the "Direct Relation Exception"). The Fund has represented that it intends that any CFA held by each Holding LP will either meet the Employee Exception or the Direct Relation Exception at all relevant times.

Foreign tax credits

Taxes paid or considered to have been paid by Investment L.P.'s or SIP will be allocated pursuant to their limited partnership agreements and the Fund's allocated share will be allocated to Unitholders pursuant to the Fund limited partnership agreement. Although the foreign tax credit provisions are designed to avoid double taxation, the maximum credit is limited. Because of this, and because of timing differences in recognition of expenses and income and other factors, double taxation may arise.

Consent dividends

In the Tax Certificate, the General Partner has stated that it intends to consent on behalf of the Fund, and to cause the Fund's Subsidiaries to similarly consent, where necessary to the filing of "consent dividend" U.S. tax elections under section 565 of the Code in respect of shares of any U.S. REIT, where such consent dividends are necessary for such U.S. REIT to distribute any balances of taxable income for U.S. tax purposes that have not been distributed by dividends paid with cash. In general terms, a "consent dividend" election would give rise to a dividend deemed paid by the applicable U.S. REIT for U.S. tax purposes (without a corresponding amount of cash being distributed to the Fund, through the applicable Holding LP, the applicable Investment LP and, except in the case of U.S. REIT5, the applicable Existing Starlight Fund) together with a U.S. withholding tax liability to be paid by such U.S. REIT or Holding LP on behalf of its shareholders. The CRA has stated that generally, "consent dividends" under the Code in respect of shares of U.S. corporations are not dividends required to be included in the income of the holders of such shares for purposes of the Tax Act, nor would such consent dividends result in an increase to the adjusted cost base of such shares. However, the CRA has also expressed the view that the amount of any U.S. tax remitted by a U.S. corporation on behalf of a shareholder in respect of dividends deemed paid for U.S. tax purposes by virtue of a consent dividend election would constitute a taxable benefit conferred on such shareholder, but such amount would also qualify as non-business income tax for purposes of the provisions of the Tax Act governing foreign tax credits and foreign tax deductions.

U.S. tax consequences

Funds

The Manager expects that 90% or more of the Fund's gross income will consist of qualifying income each year and that the Fund will not elect to be treated as a corporation for U.S. federal income tax purposes. Therefore, the Fund should be treated as a partnership for U.S. federal income tax purposes.

U.S. REITs

The U.S. REITs generally will not be subject to U.S. federal income tax on their taxable income to the extent such income is distributed as a dividend to its stockholders annually. The Funds intend to operate the U.S. REITs in such a manner so as to qualify as real estate investment trusts on a continuous basis in the future. The U.S. REITs own the properties indirectly through Delaware limited liability companies which have elected to be taxed as partnerships for United States Federal income tax purposes.

Investment LPs

The Investment LPs are treated as partnerships for Canadian tax purposes but will elect to be treated as corporations for Code purposes. As such, the Investment LPs are generally subject to U.S. tax in respect of their allocable share of (i) capital gains distributions made by the U.S. REITs, (ii) gain upon a sale of the shares of U.S. REITs and (iii) distributions made by the U.S.REITs in excess of both their (a) current and/or accumulated earnings and profits (as determined under U.S. tax principles) and (b) the adjusted tax basis in the U.S. REITs' shares held by the Holding LPs. The Investment LPs are also liable for U.S. withholding tax with respect to the ordinary dividends from the U.S. REITs received through the Holding LPs to the extent that the amount exceeds the current and/or accumulated earnings and profits of the U.S. REITs as determined under U.S. tax principles.

Texas franchise tax

Texas imposes an annual franchise tax on modified gross income of taxable entities known as the Texas Margin Tax, which is equal to one percent of the lesser of: (i) 33.1% of a taxable entity's total revenue; or (ii) 100% of total revenue less, at the election of the taxpayer: (a) cost of goods sold; (b) compensation; or (c) one million dollars. A taxable entity is defined to include partnerships, corporations, limited liability companies and other legal entities.

Overview

The existing unitholders of the Starlight Funds Nos. 1 to 4 will transfer their units into a new fund (the Starlight No. 5 fund) under Alberta Plans of Arrangement, with eligible Canadian residents able to do so on a s. 97(2) rollover basis. (Combining the multiple funds is attended with significant complexity.) The new Fund will have a multiple unit structure similar to that of the old funds and hold its indirect US apartment buildings under a similar structure. Ontario LPs beneath it will have elected to be corporations for U.S. tax purposes, and the underlying properties (or, to be more precise, the US LLCs holding each property) generally will be held by Maryland corporations which are intended to qualify as US private REITs. Recognition of FAPI is targeted to be avoided through reliance on the more-than-five full time employee exception and the s. 95(2)(a)(i) rule. The Fund is anticipated to have a lifetime of three years, subject to extension. The Fund will enter into FX derivatives, having a term of three years, so that the return of one of the Classes of units will be generated in Canadian dollars (e.g., if the U.S. dollar weakens over the three-year term, this will not adversely affect the return on those units).

See detailed summary under Tax Topics - Public Transactions - Offerings - REIT and LP Offerings - Foreign Asset Income Funds and LPs.