OneREIT asset sale and merger into SmartREIT entails an allocation of recapture of depreciation to its existing unitholders

OneREIT is proposing to sell a substantial portion of its rental assets (held through subsidiary LPs) in a taxable sale to a third party (Strathallen) and then, as part of the same Plan of Arrangement, to be merged into SmartREIT (which is an Alberta unit trust and REIT) under s. 132.2. Those OneREIT unitholders who elect to receive cash for their units, will have their units redeemed immediately after the closing of the Strathallen sale, with all the recapture of depreciation of around $0.15 per unit (as well as capital gains) from that sale being allocated to them. Those electing to receive their consideration as SmartREIT units, will have this result effected through the usual s. 132.2 mechanics. The projected value of the SmartREIT units to be received is estimated to be somewhat lower than for the cash alternative ($4.20 v. $4.275 per unit).

All the properties of OneREIT are held through subsidiary LPs. Applications are being made to CRA for approval of a stub fiscal period in order that the LPs can allocate their capital gains and recapture from the Strathallen sale, and other income to date, to OneREIT for allocation, in turn, to its current unitholders. Unitholders can avoid this allocation by selling on the TSX. Since the cash part of the transaction is structured as a redemption, non-residents will be subject to Part XIII.2 and XIII withholding on the full proceeds if they elect to receive cash.

There are no corporate steps in the Ontario Plan of Arrangement other than an amalgamation of, and $10 unit subscription by, the corporate trustee for the general partner of a subsidiary LP.

Neal Armstrong. Summary of OneREIT Circular under Mergers & Acquisitions – REIT/Income Fund/LP Acquisitions – REIT Mergers.