Acquisition of Agellan REIT entails planning to realize accrued gain on cross-border USD loans
It is proposed that an Ontario LP within the Elad group (the “Purchaser”) will acquire all the units of Agellan REIT for cash under a plan of arrangement. The REIT holds U.S.-dollar notes of a U.S. subsidiary with an accrued FX gain. In order for this gain to be realized in the hands of the current unitholders, the Purchaser will lend the requisite funds to Agellan U.S. subsidiaries, with the funds being used by them to repay the USD debt owing to the REIT, with the REIT then lending the money back to the Purchaser. The resulting FX capital gain to the REIT will then be distributed to the REIT unitholders through a special distribution, that will be paid in kind though the issuance of REIT units. There is no prejudice to the resident (as contrasted to the non-resident) unitholders in this, as this distributed capital gain reduces the capital gain realized by them on the immediately following sale to the Purchaser.
In order to produce greater precision and control respecting the application of the rules associated with a loss restriction event, one of the plan of arrangement steps entails the issuance by the Canadian holding company (through which the REIT holds the U.S. structure) of a super special voting share to the Purchaser.
The REIT sold its last major Canadian real estate asset earlier in 2018, and distributed the resulting gain to its unitholders on December 31, 2018 through the issuance of further REIT units, immediately followed by a unit consolidation. The non-resident withholding tax will be handled in a manner that results in the non-resident unitholders holding fewer REIT units than they would had they been residents. The 2018 sale of the Canadian property is expected to result in the REIT not qualifying as a REIT for ITA purposes in 2019, but this is not expected to be problematic as at that point virtually all of its property will be non-portfolio property.
Neal Armstrong. Summary of Agellan Commercial REIT Circular under Mergers & Acquisitions –REIT/Income Fund/ LP Acquisitions - LP Acquisitions of Trusts.