CAP REIT/ResREIT

Overview

CAP REIT proposes to acquire units of ResREIT for cash or CAP REIT units, with ResREIT unitholders who wish rollover treatment for the CAP REIT units to be received by them receiving such units on a s. 132.2 merger of ResREIT into CAP REIT. With a view to interest deductibility by CAP REIT for the related cash borrowed by it, the direct use by it of such cash is to acquire assets from ResREIT on the first stage of the merger, with ResREIT using such cash proceeds to pay-off a note which it had issued to CAP REIT in consideration for a CAP REIT note (which disappears by operation of law on the merger). The "cleansed" cash so paid to CAP REIT is used to satisfy its obligation for the ResREIT units which were tendered for cash consideration.

ResREIT

A closed-end Ontario TSX-listed REIT with 27.2M units outstanding and holding 10,890 apartment suites, 8,753 of them in Ontario. At the time of its IPO in 1998 it acquired 8 of 23 apartment buildings as the lessee under long-term (35 year) leases under which the rents were prepaid by it for $175M and with the option to purchase at lease maturity. It added 7 additional pre-paid leasehold properties between 1998 and 2004. See summary under Offerings – Domestic REITs.

CAP REIT

A closed-end TSX-listed Ontario REIT holding 13,438 apartment suites.

Special distribution

Immediately prior to the expiry time for the offer ResREIT and CAP REIT will each pay a special distribution of undistributed income.

Offer

Offer of CAP REIT to purchase ResREIT units for 1.216 CAP REIT units for each ResREIT unit or $18.60 cash for each ResREIT unit. However, the maximum cash is limited to $175M, so that pro-ration may apply. It is intended that take-up of ResREIT units under the Offer will occur after approval of the Merger and prior to effecting the Merger. Those ResREIT unitholders who do not elect to receive CAP REIT units on a taxable basis will receive CAP REIT units under the s. 132.2 merger.

Merger

1. ResREIT unitholders, who have the right to tender for cash, tender their units to CAP REIT for the right to receive the agreed cash consideration of up to $175M worth in 7 below. Those who are entitled to receive CAP REIT units and who have elected not to receive rollover treatment tender their ResREIT units for CAP REIT units.
2. ResREIT issues a $175M promissory note to CAP REIT (ResNote).
3. CAP REIT pays for the ResNote with a $175M note of its own (CapNote).
4. Presumably, CAP REIT borrows $175M cash from a third party.
5. ResREIT sells all of its real estate and other assets to CAP REIT for $175M cash plus the assumption of ResREIT liabilities (other than the ResNote which remains outstanding) plus the "Payment Units" of CAP REIT (so that one of the ResREIT assets transferred is the CapNote, which when acquired by CAP REIT is cancelled by operation of law).
6. ResREIT pays off the $175M owing to CAP REIT on the ResNote with the $175M cash so received by it.
7. CAP REIT uses this $175M cash to pay for the ResREIT units who deposited in 1 above. Presumably the $175M third party debt owing by CAP REIT remains in place, which is considered to have been borrowed to acquire the ResREIT assets which CAP REIT still owns after the transaction.
8. ResREIT causes all of the outstanding ResREIT units (other than certain units held by CAP REIT) to be redeemed or retracted in exchange for the distribution of the Payment Units. Payment Units received by CAP REIT will be cancelled.

CAP REIT and ResREIT intend to jointly elect under s. 132.2 In the event that less than $175M in cash in paid out in connection with the Offer, CAP REIT intends to use the balance to make a special post-Merger distribution to all CAP REIT unitholders (including former ResREIT unitholders) or apply it to a special issuer bid. A 31 May 2004 amendment (SEDAR filing on 1 June 2004) to the 29 March 2004 Combination Agreement (SEDAR filing on 6 April 2004) continued to contemplate that ResREIT would transfer all its assets to CAP REIT but provided that CAP REIT would not assume a mortgage on a B.C. property of ResREIT and reduced the number of Payment Units issued by Cap REIT to ResREIT by 1.56M units multiplied by the Exchange Ratio.

Non-resident unitholders

They are excluded from the Offer. Upon the conclusion of the Merger, CAP REIT units which they otherwise would be entitled to receive will be issued to a Depositary which shall, as their agent, sell such CAP REIT units through the TSX and distribute the net proceeds.

Canadian tax consequences

The merger will be a qualifying exchange which should not result in any net income to ResREIT. The receipt of CAP REIT units on the merger will occur on a s. 132.2 rollover basis, whereas an exchange of ResREIT units for CAP REIT units (or cash) under the Offer will occur on a taxable basis The special distributions will ensure that the REITs are not subject to taxation for their short taxation years ending with the Merger.