Milestone Apartments REIT sale of its U.S. portfolio is not subject to FIRPTA withholding and achieves flow-through capital gains treatment for Canadian purposes
Milestone Apartments REIT (a TSX-listed Ontario unit trust) will sell its assets (essentially only the shares of a U.S. LLC indirectly holding its U.S. apartment portfolio) to a Starwood-affiliated purchasing LP. 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 Milestone’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 (MMI LP) of the LLC being sold. MMI LP will be merged into a subsidiary LP of the purchasing LP 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 Milestone units (actually or constructively) will not be subject to U.S. FIRPTA withholding on the transaction.
The Circular includes interesting commentary on the low cap rates now applicable in the U.S. market (in part, due to private purchasers using 80% leverage.)
Neal Armstrong. Summary of Milestone Apartments REIT Circular under Spin-offs & Distributions – REIT sales proceeds distribution.