Elad/Agellan REIT -- summary under LP Acquisitions of Trusts

Overview

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.

The REIT

The REIT is an unincorporated, open-ended Ontario real estate investment trust holding an interest in 46 properties located primarily in the United States under the structure described below. The Trust Units are listed on the TSX. The REIT currently pays monthly distributions of $0.810 per Unit. On December 6, 2018, there were 32,981,664 Trust Units, 871,080 Special Voting Units, 20,542 Deferred Units and 871,080 Class B LP Units. 7,965,032 Units (representing approximately 23.5% of the issued and outstanding Units, and including 6,239,246 of the Purchaser) were held, in aggregate, by the Purchaser, Management Unitholders and their respective related parties and joint actors.

Current structure

In addition to holding Canadian properties and the general partner of and Class A LP units of Agellan Management Limited Partnership (in which there are also Class B exchangeable LP units), the REIT directly holds interest-bearing U.S.-dollar notes of a Delaware holding company (“Agellan US Inc.”) with an accrued FX gain and indirectly holds all the shares of Agellan US Inc. through a wholly-owned Ontario subsidiary (“Agellan Canada”). Agellan US Inc. holds the general partner and the Class A units of a Delaware holding LP which, in turn, holds various U.S. property-specific entities, including the Agellan Participating US Subsidiaries

Agellan Participating US Subsidiaries

Comprising eight subsidiary Delaware LPs and a Texas LLC subsidiary of the Delaware holding LP.

Purchaser

The Purchaser is Elad Genesis Limited Partnership, a Ontario LP. The Purchaser is an indirect wholly-owned subsidiary of Elad Canada Inc. Established in 1997, Elad Canada Inc. entered the Canadian market by owning and providing asset management services for a significant real estate portfolio of varied asset classes that included approximately six million square feet of commercial space and over 17,000 residential units. More recently, Elad Canada Inc. has focused its activities on mid- and high-rise condominium development, master planned communities and asset management. Elad Canada Inc. is part of the ELAD Group real estate conglomerate.

Background to Parkway Place Sale

As first announced by the REIT on January 14, 2015, the REIT’s long-term business plan has been to seek to dispose of all or substantially all of its existing Canadian real estate assets, including all or a portion of the REIT’s approximate 824,000 square-foot office property and approximate 42,000 square-foot retail space and parking garage located on Consumers Road in Toronto, Ontario (“Parkway Place”), and to reinvest the net proceeds in U.S. real estate. Parkway Place represented the REIT’s largest single asset and one of its last remaining Canadian properties.

Parkway Place sale

On May 31, 2018, the REIT announced the closing of the sale of Parkway Place, which is expected to result in recapture of depreciation of $15 million and a capital gain of $49 million. Accordingly, the REIT expects that it will declare a special distribution on or prior to December 31, 2018. The special distribution will be comprised entirely of newly issued Trust Units. Immediately thereafter, the REIT will consolidate the number of outstanding Trust Units so that each Unitholder will hold exactly the same number of Trust Units as before, except that a non-resident Unitholder (subject to withholding tax) will hold a lesser number of Trust Units.

Plan of Arrangement

1. The proceeds of the Purchaser Debt Financing will be lent to the Agellan Participating US Subsidiaries in such amounts as specified by the Purchaser prior to the Effective Date.
2. Each Agellan Participating US Subsidiary will transfer to Agellan US Inc., by way of a non-interest bearing loan, the amount by which the proceeds received in 1 exceed the amount of all outstanding loans of such Agellan Participating US Subsidiary (the “Excess Funds”).
3. Agellan US Inc. will transfer any Excess Funds to the REIT as a repayment of all the notes owing by Agellan US Inc. to the REIT and, to the extent of any balance, make a non-interest bearing loan to the REIT.
4. The REIT will transfer any Excess Funds to the Purchaser by way of a non-interest bearing loan.
5. The Unitholder Rights Plan shall be terminated.
6. The Declaration of Trust (and Exchange Agreement respecting the Class B LP units of Agellan Management Limited Partnership) shall be amended to the extent necessary to facilitate the Transaction.
7. The REIT shall pay a special distribution to the Trust Unitholders of the amount of the estimated aggregate of (i) its undistributed taxable income for the portion of the taxation year of the REIT ending on the Effective Date and (ii) the non-taxable portion of any capital gain realized by the REIT in such period. Such income of the REIT shall include any foreign exchange gain realized by the REIT as a result of the repayment of the notes by Agellan US Inc. Such amount will be paid by the issuance of Trust Units valued based on their closing price on the TSX on the last trading day immediately prior to Effective Date.
8. The Trust Units will be consolidated to ensure that their number after the special distribution in 7 is the same as before - except so as to reflect the withholding of tax on the portion of the special distribution made to non-residents..
9. Each Class B LP Unit of Agellan Management Limited Partnership shall be exchanged for one Trust Unit.
10. Each Deferred Unit shall be cancelled in exchange for a cash payment from the REIT of an amount equal to the Consideration less applicable withholdings.
11. Each Unit Option shall be transferred by such holder to the REIT in exchange for a cash payment from the REIT equal to the amount (if any) by which the Consideration in respect of each Trust Unit underlying such Unit Option exceeds the exercise price of such Unit Option, less applicable withholdings.
12. Agellan Canada will issue one Agellan Canada Super Voting Share to the Purchaser for aggregate consideration of $10.00 in cash.
13. Concurrently with 12, each Dissenting Unit shall be transferred to the Purchaser.
14. Concurrently with 12, each Trust Unit (other than Dissenting Units and Trust Units held by the Purchaser or any of its affiliates) shall be transferred to the Purchaser (free and clear of any Liens) in exchange for the Consideration.
15. The specified resignations shall become effective.

Guarantee

The Purchaser will be required to fund approximately $394 million in cash to satisfy its obligations. El-Ad Group, Ltd., a Bermuda company and a significant member of the ELAD Group, has provided a guarantee of the obligations of the Purchaser under the Arrangement Agreement.

Canadian tax consequences

SIFT rules

It is expected that the REIT will qualify as a “mutual fund trust” and a “real estate investment trust” until the end of 2018. For its taxation year commencing on January 1, 2019, the REIT does not expect to qualify as a REIT and may be considered a “SIFT trust.” If the REIT is considered a “SIFT trust” for its taxation year commencing on January 1, 2019, the REIT does not expect to have material “non-portfolio earnings.”

Disposition to Purchaser

The Resident Unitholder will realize a capital gain (or capital loss) equal to the amount, if any, by which the Resident Unitholder’s proceeds of disposition exceed (or are exceeded by) the aggregate of the Trust Unitholder’s adjusted cost base of the Trust Units.

Special in-kind distributions

The REIT will pay the amount of any special distribution to Resident Unitholders in additional Trust Units. The cost to a Resident Unitholder of the additional Trust Units received by that Resident Unitholder generally will be equal to the fair market value of those Trust Units on the date they are acquired. REIT distributions (including distributions already received by Resident Unitholders) that might otherwise have been treated as returns of capital to a Resident Unitholder would instead be deducted by the REIT if necessary to ensure that the REIT does not have any income subject to tax under Part I of the Tax Act for its taxation year deemed to have ended as a result of the Transaction.