Cortland/Pure Multi-Family -- summary under Corporation Acquisitions of LPs

Overview

It is proposed that an LLC (the “Purchaser”) that is an affiliate of a third party (Cortland) acquire for cash all the (listed) Class A units and (unlisted but convertible) Class B units of Pure Multi-Family REIT LP (“Pure Multi-Family”). The US rental portfolio of Pure Multi-Family is held through a US private REIT.

The LPA for Pure Multi-Family REIT LP will be amended to provide for a special allocation of income to the unitholders under s. 96(1.01). However, there is no mention of there being any foreign accrual income from the US REIT being allocated for s. 96(1.01) purposes to Pure Multi-Family REIT LP under the stub period accrual rule in s. 91(1.2) (there presumably is none).

Canadian unitholders will not be subject to FIRPTA tax assuming that they comply with the 5%/regularly traded exemption. Closing is conditional on an opinion that the US REIT qualifies as such.

Pure Multi-Family

A limited partnership formed under the Limited Partnership Act (Ontario), whose principal asset is the US REIT. The Pure Multi-Family Class A units trade on the TSX and are listed for quotation on the OTCQX International Marketplace. There are 77,667,465 Class A Units and 200,000 Class B Units outstanding. The issued and outstanding Class A Units and Class B Units represent 96.68% and 3.32% respectively, of the outstanding beneficial interests and voting rights in Pure Multi-Family.

Purchaser

A Delaware LLC and an affiliate of Cortland, a leading multi-family real estate investment, development and management company headquartered in Atlanta, Georgia.

Pure Multi-Family REIT (GP) Inc.

The Governing GP of Pure Multi-Family is a B.C. corporation and the general partner of the REIT LP, with the sole responsibility and authority for the governance of the REIT LP. The Governing GP's board of directors consists of seven members, the majority of whom are independent.

Pure Multifamily Management Limited Partnership

The Managing LP of Pure Multi-Family is a B.C. limited partnership, which was the managing general partner of Pure Multi-Family from the date of formation until May 24, 2018, at which time the unitholders approved the removal of the Managing LP as the general partner.

Pure Multi-Family Management Limited

Pure Multi-Family Management Limited is a B.C. corporation, whose sole shareholder is the US REIT.

Pure US Apartment REIT Inc.

The US REIT is a Maryland corporation, that owns and operates the Properties through separate underlying limited partnerships, and also has a Nevada subsidiary as a TRS. In order to qualify as US REIT, it has preferred shareholders.

The Properties

Multi-family rental properties in the U.S.

Consideration

US$7.61 per Class A Unit (and US$101.4350 per Class B Unit, being the equivalent price for the Class B Units as per the limited partnership agreement of Pure Multi-Family)…

Steps under Plan of Arrangement

1. The Purchaser will advance by way of a loan to Pure Multi-Family an amount equal to the aggregate amount of cash required to be paid by Pure Multi-Family for the cancellation of the Pure Deferred Units, the Pure RUs and the Pure Performance Units under the Plan of Arrangement and Pure Multi-Family will deliver to the Purchaser a demand interest-free promissory note.
2. The LP Agreement will be amended to provide for the allocation to the unitholders of the Net Income for the Fiscal Year in which the Closing Date occurs.
3. The Unitholder Rights Plan will be terminated.
4. Each Pure Deferred Pure Unit, RU and Pure Performance Unit will be cancelled in exchange for a Payment.
5. Each of the Units held by a Dissenting Holder will be deemed to have been transferred to the Purchaser in consideration for a debt claim against the Purchaser.
6. Concurrently with 5, each other Unit outstanding shall be deemed to be assigned in exchange for the Consideration.
7. All Pure Debentures will be deemed to be assigned to the Purchaser in exchange for the Debenture consideration.
8. All of the rights and obligations of the Governing GP under the LP Agreement shall be assigned by it to a transferee to be designated by the Purchaser.

Canadian tax consequences

S. 96(1.01) income allocation

The Arrangement requires that for the fiscal period of Pure Multi-Family in which the Effective Date of the Arrangement occurs, Pure Multi-Family compute its income or loss for the period from January 1 to the Effective Date and that Pure Multi-Family allocate such income or loss to the Unitholders (including Dissenting Holders). The amount of such income (loss) so allocated to a Unitholder will be added to (deducted from) the adjusted cost base of the Class A Units owned by the Unitholder for the purpose of the computation of the Unitholder’s capital gain or loss on the disposition of Class A Units to the Purchaser.

Gains on sale

The sale of Class A Units by a Resident Unitholder (including a Dissenting Holder) to the Purchaser will result in a disposition of such Class A Units by the Resident Unitholder for purposes of the Tax Act. The Resident Unitholder will realize a capital gain (or capital loss) equal to the amount, if any, by which the proceeds of disposition of the Class A Units, less any reasonable costs of disposition, exceed (or are less than) the adjusted cost base of such Class A Units to the Resident Unitholder.

Foreign tax credit

Where Resident Unitholder are not entitled to all benefits under the Canada-U.S. Convention…the proceeds receivable on a disposition of Class A Units may not qualify as U.S. source income for purposes of the Tax Act (including for Canadian foreign tax credit purposes), and, where such Resident Unitholders are trusts, their beneficiaries may not be considered to have paid such tax for purposes of the Tax Act and, accordingly, may not be entitled to a foreign tax credit in respect of such U.S. tax for Canadian tax purposes.

No TCP

A Non-Resident Unitholder generally will not be subject to tax under Part I of the Tax Act on any capital gain realized by the Non-Resident Unitholder on the disposition of Class A Units.

US tax consequences

US tax opinion

The Purchaser is not required to complete the Arrangement unless the Purchaser has received a tax opinion that will be rendered by KPMG LLP providing that US REIT has been organized and operated in conformity with the requirements for qualification and taxation as a Real Estate Investment Trust under the Code.

Treatment as partnership

Management of Pure Multi-Family expects that the type and amount of Pure Multi-Family’s gross income allows Pure Multi-Family to be treated as a partnership for U.S. federal income tax purposes since formation through the Closing Date. However, no assurances can be given that Pure Multi-Family will be treated as a partnership for U.S. federal income tax purposes in its current year.

Debentures as debt

Holders of Pure Debentures should consult with their tax advisors regarding the consequences to them of the possible recharacterization of the Pure Debentures as equity…

Sale of Units

A non-U.S. Holder’s exchange of Class A Units for the Consideration will be a taxable transaction for U.S. federal income tax purposes, subject to the Unit 5 Percent Exception (below). Under a “look-through” rule, a non-U.S. person’s gain from disposition of an interest in an entity treated as a partnership for U.S. federal income tax purposes, wherever organized, is treated as gain from disposition of an interest in a USRPI to the extent gain on the disposition of the partnership interest is attributable to USRPIs, such as the US REIT stock owned by Pure Multi-Family. Therefore, subject to the Unit 5 Percent Exception described below, gain on the exchange of the Class A Units by a non-U.S. Holder under the Arrangement generally will be treated as ECI…

Unit 5 Percent Exception

A non-U.S. Holder of Class A Units generally will not be subject to U.S. federal income tax and should not generally have a U.S. federal income tax filing requirement on the exchange of the Class A Units under the Arrangement as long as the Class A Units are “regularly traded on an established securities market” and the holder does not hold, actually or constructively, more than 5 percent of the outstanding Class A Units at any time during the shorter of the five-year period ending on the date of disposition, or the period that such Class A Units were held (the “Unit 5 Percent Exception”)..

“Regularly traded” exception

Class A Units are currently listed on both the TSX and the OTCQX. The U.S. Treasury Regulations consider interests in a partnership traded on a non-U.S. exchange like the TSX to be regularly traded in a particular quarter if each of four tests is met (the “TSX Publicly Traded Exception”).

Where the Class A Units are regularly traded on both the TSX and a U.S. established securities market, such as the OTCQX, during a calendar year, the aforementioned four tests generally should not need to be met for such calendar year if trading activity on the U.S. established securities market satisfies different a set of requirements (the “U.S. Publicly Traded Exception”).

Due to the lack of guidance, non-U.S. Holders of Class A Units are cautioned that there can be no assurance that the IRS will concur that the U.S. Publicly Traded Exception is satisfied by Pure Multi- Family at any time.

Management of Pure Multi-Family has represented that it believes the Class A Units have satisfied the regularly traded standards of the U.S. Treasury Regulations in previous calendar quarters. Management has also represented that it has and will continue to have procedures in place to monitor the “regularly traded” standards of the U.S. Treasury Regulations.

Purchaser’s Withholding Obligations

A purchaser is generally required to withhold 15 percent U.S. tax upon the purchase of Class A Units from a non-U.S. Holder. However, a purchaser of Class A Units is not required to withhold such tax if the Class A Units are considered “regularly traded on an established securities market,” regardless of whether the selling non-U.S. Holder meets the Unit 5 Percent Exception discussed above. For this withholding purpose, a class of interests is presumed to be regularly traded during a calendar quarter if such interests were regularly traded on an established securities market during the previous calendar quarter.

If the Class A Units are not considered “regularly traded on an established securities market” for withholding purposes, a purchaser of Class A Units will be required to withhold tax at the rate of 15 percent of the amount realized from the sale and to report and remit such tax to the IRS. Such withheld amount would not be an additional tax but would be a credit against the selling non-U.S. Holder’s U.S. federal income tax liability arising from the sale.

Under the Arrangement Agreement, no withholding agent is permitted to make any such withholding (or withholding under Section 1446 of the Code) unless the Purchaser notifies Pure Multi-Family in writing of its determination to withhold and the reasons therefor at least 10 business days prior to the Meeting, in which event the parties agree to use commercially reasonable efforts to reduce or eliminate such proposed withholding, including but not limited to providing and accepting any certifications or representations that are reasonably available or appropriate to reduce or eliminate the withholding requirement.