Milestone REIT -- summary under REIT sales proceeds distribution

Overview

The REIT will sell its assets (essentially only the shares of a U.S. LLC (“U.S. Holdco”) indirectly holding its U.S. apartment portfolio) to a Starwood-affiliated purchasing LP (the “Purchaser”). The sale will not be subject to FIRPTA withholding given that Milestone is a U.S. corporation (and U.S. REIT) for Code purposes. In the case of the REIT’s unitholders, their pro rata portion of the capital gain will be distributed to them and their units will be redeemed with the balance of their share of the net proceeds (i.e., US$16.15 per unit, minus the portion distributed as a capital gain). U.S. investors hold Class B exchangeable units of a subsidiary Delaware LP of U.S. Holdco (“MMI LP”). MMI LP will be merged into a subsidiary LP of the Purchaser (the “Partnership Merger Sub”) with MMI LP as the surviving entity and with each exchangeable unit being converted into the right to receive US$16.15 in cash. Non-U.S. holders owning less than 10% of the REIT units (actually or constructively) will not be subject to U.S. FIRPTA withholding on the transaction.

The REIT

An open-end Ontario unit trust holding the shares of a Delaware LLC (U.S. Holdco) and indirectly holding a portfolio of U.S. apartment buildings (held through Delaware LPs). Its units trade on the TSX. It is not subject to SIFT tax by virtue of not holding non-portfolio property, and is treated as a U.S. REIT for Code purposes.

U.S. Holdco

Milestone Apartment Holdings, LLC, a Delaware LLC, all of whose common and preferred shares are held by the REIT and holding all the Class A Units of MMI LP and controlling its general partner.

MMI LP

Milestone Multifamily Investors LP, a Delaware LP subsidiary of the REIT, had 11,116,687 class B limited partnership units ("Class B Units") outstanding, which: are non-voting; after a specified hold period, are redeemable by the holder thereof for cash or, at the option of MMI LP through its general partner, Units of the REIT on a one-for-one basis; and are entitled to cash distributions from MMI LP equal to the cash distributions paid in respect of each Unit. Most of the Class B Units are held by a Delaware LP ("Milesouth"), which is affiliated with Invesco Ltd., and by an affiliated LLC ("MST Investors"). Milesouth also holds REIT Units.

The Purchaser

Maple-SOF Partners, L.P., a Delaware LP in the Starwood group.

Partnership Merger Sub

Maple-SOF Partnership Merger Sub, L.P., a Delaware LP

The Transaction

1. The REIT will sell to the Purchaser all of the assets of the REIT including all of the equity of US Holdco (collectively, the "Purchased Assets"). In consideration the Purchaser will pay to the REIT an amount in cash equal to (i) US$16.15 multiplied by the number of Units outstanding immediately prior to the Closing assuming the settlement (for Units) or exercise of all Deferred Trust Units and Options, less (ii) the aggregate exercise price of all Options outstanding immediately prior to the Closing (the "REIT Consideration"). The Purchaser also will assume all obligations of the REIT.
2. Immediately following the acquisition of the Purchased Assets, the Partnership Merger Sub will merge with and into MMI LP, with MMI LP continuing under the name "Milestone Multifamily Investors LP" as the surviving entity in the merger (the "Partnership Surviving Entity").
3. At the partnership merger effective time, each issued and outstanding Class B Unit not held by US Holdco will be automatically converted into the right to receive an amount in cash equal to US$16.15 per Class B Unit.
4. Each of the REIT and each holder of Class B Units must deliver to the Purchaser a non-foreign affidavit issued in the manner described in Treasury Reg. s. 1.445-2(b).
5. The Board will accelerate the vesting of all unvested Options and Deferred Trust Units. The holders of Options will be permitted to elect, in lieu of exercising Options, to have the REIT purchase their Options for cancellation in consideration for a cash payment.
6. On the Closing Date and effective as of Closing, the REIT will amend the Deferred Trust Unit Plan to provide that all outstanding Deferred Trust Units shall be cancelled and holders of such cancelled Deferred Trust Units shall thereafter be entitled to the consideration they would have received in the Transaction had all outstanding Deferred Trust Units been settled for cash.
7. Immediately following resignations of the current Trustees and the appointment of a replacement trustee, the REIT will promptly redeem all of its then outstanding Units.
8. Following such redemption, the REIT will be wound-up.

Canadian tax considerations

Sale to Purchaser

The REIT will realize a capital gain on the disposition of the Purchased Assets. Management does not expect the REIT to realize any income for purposes of the Tax Act, other than net taxable capital gains, as a result of such disposition.

Redemption of Units

A Resident Holder generally will be required to include in income the portion of the net taxable capital gains realized by the REIT on the disposition allocated to the Resident Holder and paid on the redemption of the outstanding Units. Provided that the REIT makes (as intended) the appropriate designations, net taxable capital gains realized by the REIT will effectively retain their character and foreign source, and be treated as such in the hands of the Resident Holder, for purposes of the Tax Act. The non-taxable portion of the net capital gains of the REIT that is paid to the Resident Holder on the Redemption will not be included in computing the Resident Holder's income for the year. A Resident Holder will realize a capital gain (or capital loss) equal to the amount by which the Resident Holder's proceeds of disposition of the Units disposed of on the Redemption exceed (or are exceeded by) their adjusted cost bases. For this purpose, the Resident Holder's proceeds of disposition will not include net taxable capital gains realized by the REIT and allocated to the Resident Holder, nor will it include the amount paid or allocated to the Resident Holder by the REIT that represents the non-taxable portion of such capital gains.

U.S. tax consequences

REIT as U.S. corporation

Although the REIT is organized as an unincorporated trust under Canadian law, the REIT is classified as a corporation under the Code. Pursuant to S. 7874, the REIT is treated as a U.S. corporation for all purposes under the Code and, as a result, it is permitted to and has elected to be treated as a real estate investment trust under the Code, notwithstanding the fact that it is organized as a Canadian entity.

U.S. REIT status

It is a condition to closing that Vinson & Elkins LLP, U.S. counsel to the REIT (or other counsel reasonably satisfactory to Purchaser), render an opinion to the Purchaser to the effect that, the REIT qualified as a real estate investment trust under the Code for all taxable periods commencing with its initial taxable year ended December 31, 2013 through the Closing Date, and that the REIT's organization and actual method of operation has enabled it to meet the requirements for qualification and taxation as a real estate investment trust under the Code.

Exceptions from FIRPTA withholding

Distribution of proceeds attributable to the redemption of the Units will be treated as payments in exchange for the Units (and not as ordinary or capital gain dividends) and should not be subject to tax under FIRPTA or any U.S. withholding tax if (i) the distribution in redemption of the Units is made with regard to a class of shares that is considered to be regularly traded on an established securities market located in the U.S., (ii) the recipient Non-U.S. Holder does not own more than 10% of that class of Units at any time during the 1-year period ending on the date the distribution is received and (iii) the recipient Non-U.S. Holder is not a "qualified shareholder." A "qualified shareholder" is a foreign person that (i) either is eligible for the benefits of a comprehensive income tax treaty which includes an exchange of information program and whose principal class of interests is listed and regularly traded on one or more recognized stock exchanges (as defined in such comprehensive income tax treaty), or is a foreign partnership that is created or organized under foreign law as a limited partnership in a jurisdiction that has an agreement for the exchange of information with respect to taxes with the United States and has a class of limited partnership units representing greater than 50% of the value of all the partnership units that is regularly traded on the NYSE or NASDAQ markets, (ii) is a qualified collective investment vehicle, and (iii) maintains records on the identity of each person who, at any time during the foreign person's taxable year, is the direct owner of 5% or more of the class of interests or units (as applicable) described in (i), above. The REIT does not believe that it has any 10% Unitholders because it has not received notice that any Unitholder owns more than 5% of its outstanding Units. The Units are currently quoted and traded, and have been quoted since the REIT's election to be treated as a "real estate investment trust" under the Code, on the OTC Pink marketplace, which is an over-the-counter market with an interdealer quotation system that should be treated as an "established securities market" located in the U.S.

U.S. Holdco

The REIT has agreed to elect that US Holdco be taxed as an entity other than a corporation for U.S. federal income tax purposes to be effective at least two days prior to the Closing Time.