European Commercial REIT/CAPREIT -- summary under Asset Purchases

Overview

European Commercial REIT (the “REIT”) is substantially expanding its size by purchasing a Netherlands subsidiary (“BV”) of CAPREIT (holding a portfolio of Netherlands rental residential properties) in consideration for having a subsidiary LP of the REIT issue exchangeable units to CAPREIT. CAPREIT is also described as an $8M special distribution to be made by the REIT (presumably by ensuring that BV is in funds to this extent). As a result of this transaction, CAPREIT will hold over 80% of the consolidated equity of the REIT in the form of the exchangeable units, so that the transaction thus is akin to a reverse takeover of the REIT.

The REIT

The REIT is an unincorporated, open-ended real estate investment trust established under the laws of the Province of Ontario.

The following table sets forth the consolidated capitalization of the REIT on a Unit and Class B LP Unit basis before and after giving effect to the Acquisition described below (including the issuance of Class B LP Units to pay a portion of the aggregate purchase price):

CAPREIT

CAPREIT is Canada’s largest residential landlord.

Holding BV

CAPREIT NL Holding B.V., a private limited liability company is subject to tax at a rate of 20% on the first €200,000 of taxable income and 25% thereafter.

ECRE LP

Subsidiary LP of the REIT which has issued (exchangeable) Class B LP Units.

Acquisition Agreement

The REIT has agreed to indirectly acquire a portfolio of 41 multi-residential properties from CAPREIT (the “Acquisition Properties”) containing 2,091 residential suites and certain additional ancillary commercial space and parking facilities, located in the Netherlands.

Pursuant to the Acquisition Agreement, the REIT has agreed to indirectly acquire, through the acquisition of all of the issued and outstanding securities of Holding BV, the Acquisition Properties for an aggregate purchase price of $633,588,660, to be satisfied by a combination of: (i) the assumption of $307,023,820 aggregate principal amount of existing mortgage debt and other liabilities associated with the entities that hold the Acquisition Properties; and (ii) $326,564,840 by the issuance of 81,641,210 Class B LP Units to CAPREIT at a deemed issue price of $4.00 per Class B LP Unit.

Distribution

REIT unitholders and exchangeable LP unitholders have the option to receive the distribution in Units. In addition, in connection with the Acquisition, Unitholders and holders of Class B LP Units will receive a one-time special distribution of $0.50 per unit funded by CAPREIT.

Exchange of Existing Class B LP Units

Prior to Closing, all of the existing Class B LP Units (other than the Class B LP Units) will have been exchanged for Units.

Class B LP Units

Class B LP Units are intended to be, to the greatest extent practicable, the economic equivalent of Units. Holders of the Class B LP Units are entitled to receive distributions paid by ECRE LP equaling, to the greatest extent practicable, the distributions paid by the REIT to Unitholders. Each of the holders of Class B LP Units will receive one Special Voting Unit for each Class B LP Unit held. Each Class B LP Unit is indirectly exchangeable for one Unit, subject to the customary anti-dilution adjustments set out in the ECRE LP Agreement and the Exchange Agreement and in certain other circumstances. The Class B LP Units will not be listed.

Pipeline Agreement

On Closing, CAPREIT will enter into a pipeline agreement with the REIT pursuant to which CAPREIT, for a period ending on the two-year anniversary of the entering into of the Agreement, will make up to $250M available to acquire Pipeline Properties that comply with the REIT’s investment policy and do not contravene the investment policy or Constating Documents of CAPREIT or CAPREIT LP for which the REIT wishes to purchase but is unable to do so. Once any part of the $250M has been repaid, that part of will be available for reuse under the terms of the Agreement.

Canadian tax consequences

Special Distribution

The tax treatment to Holders of the Special Distribution will be determined in a manner similar to the tax treatment that applies to other distributions that have been paid or payable by the REIT to Holders, as described in greater detail below. Where a Holder elects to receive the Special Distributions in Units, the cost of Units acquired by such Holder will generally be equal to the fair market value of the Units on the date they are acquired.

SIFT rules

Based on the investment restrictions of the REIT, the REIT will not acquire any non-portfolio property and, therefore, will not be subject to the SIFT rules.

Loss restriction event (LRE)

The REIT may become subject to an LRE following an exchange of the Class B LP Units for Units of the REIT.

FAPI

ECRE LP will be required to compute its income for each of its fiscal periods for purposes of Part I of the Tax Act as if it were a separate taxpayer, for purposes of allocating the resulting net income to its partners. In computing its income, ECRE LP will be required to include any amounts that are deemed to accrue to it in respect of “foreign accrual property income” within the meaning of the Tax Act of any of its “controlled foreign affiliates” (as computed for purposes of the Tax Act), which will include Holding BV and its subsidiaries. To the extent that any CFA of ECRE LP earns income that is characterized as FAPI in a particular taxation year of the CFA, the FAPI of the CFA allocable to ECRE LP must be included in computing the income of ECRE LP for Canadian federal income tax purposes for the fiscal year of ECRE LP in which the taxation year of the CFA ends, whether or not ECRE LP actually receives a distribution of any income of a CFA that is characterized as FAPI. ECRE LP’s net income is then allocated to its partners, including the REIT, at the end of ECRE LP’s fiscal year. As it is the Trustees’ intention to make distributions to Unitholders each year in sufficient amounts that the REIT will not be liable to pay tax under Part I of the Tax Act, if FAPI is attributable to ECRE LP in a fiscal year of ECRE LP in which ECRE LP has not received any actual distributions in respect of such FAPI (and a portion of the FAPI is then allocated to the REIT), the Trustees may be required to make an in-kind distribution to its Unitholders in the form of additional Units to prevent the REIT from being liable to pay tax in that fiscal year, and the amount of the in-kind distribution (represented by the value of the additional Units) will be required to be included in the computation of the Unitholders’ income.

S. 97(2) election

It is expected that CAPREIT and ECRE Limited Partnership will make a joint election such that the indirect transfer of the Acquisition Properties from CAPREIT to ECRE Limited Partnership will occur on a fully or partially tax-deferred basis for CAPREIT’s Canadian federal income tax purposes.