NexPoint
Overview
Nexpoint Hospitality Trust (the “REIT”) is proposing to use the proceeds of an IPO to invest in 11 U.S. hotels. An affiliate of its advisor also is the advisor to the NYSE-listed NexPoint Residential Trust. The hotels will be held through an LLC that will elect to be a REIT for Code purposes. In order to comply with the U.S. REIT rules, the hotels will be leased to a taxable REIT subsidiary and will be managed by a third party manager. Part of the consideration received by affiliates of the Advisor for transferring the hotels into the structure will be Class B redeemable units of the hotel LLC owner. The REIT itself will elect to be a REIT for Code purposes. There will be a resulting prohibition against any unitholder or deemed unitholder holding more than 5% of its units.
For Canadian SIFT taxation purposes, the REIT will rely on not holding any non-portfolio property. Anticipated distributions may be sufficient to avoid significant issues arising under the FAPI rules.
The REIT
The REIT is a newly-created, unincorporated, open-ended real estate investment trust established under the laws of the Province of Ontario. It has applied to have its units traded on the TSX.
Structure
The REIT will wholly-own NHT Intermediary, LLC (“US Holdco”) which will wholly-own NHT Holding, LLC (“NHI”). NHI will hold all the Class A Units of NHT Operating Partnership, LLC (the “OP”), which will hold the Initial Portfolio. The managing member is an LLC not held directly or indirectly by the REIT and the Class B Units of the OP are held by the contributors of the Initial Portfolio and minority investors. In order for NHI, and thus the REIT, to be eligible to elect to be taxed as a real estate investment trust under the Code, the properties will be leased to taxable subsidiaries of the REIT (the “TRS Entities”), which will in turn contract with eligible independent contractors (as defined in the Code) to manage the day-to-day business operations of the hotels. The property managers for the properties in the Initial Portfolio are affiliates of AimBridge Hospitality Holdings, LLC (collectively, the “Manager”). The board of directors of NHI shall always be comprised of a majority of (a) U.S. residents; and (b) individuals who are neither employed by, affiliated with, and who are otherwise independent of, the Advisor.
Initial Portfolio
The Initial Portfolio is comprised of 11 properties located throughout the U.S. in the select service and extended stay hospitality categories. Each property has a long-term franchise agreement with Marriott, Hilton or InterContinental Hotels Group sponsored brands.
Advisor
A newly-formed Delaware LP (the “Advisor”) will manage the REIT. Its affiliate also advises NYSE-listed NexPoint Residential Trust (focusing on multi-family properties). As consideration for the Advisor’s services, the REIT will pay an advisory fee at an annualized rate of 1.00% of gross assets of the REIT, with certain adjustments, paid monthly (the “Advisory Fee”), together with reimbursement of certain general and administrative expenses. Additionally, a long term incentive plan (the “LTIP”) will be put in place pursuant to which restricted Units (the “RUs”) may be granted periodically by the Independent Trustees of the Board to officers and trustees. The LTIP plan implemented and effective on the date of the listing of the Units on the TSX will represent 10% of the market capitalization of the REIT.
Manager
All of the REIT’s hotel properties will be operated pursuant to hotel management agreements (the “Hotel Management Agreements”) between the Manager, a professional third-party hotel management company, and the TRS Entities that lease the property from the OP and its subsidiaries. The Hotel Management Agreement will require the TRS Entities to pay a base fee to the Manager calculated as a percentage of hotel revenues generated by the hotel operations plus an incentive fee.
OP Units
Upon Closing, the OP will have outstanding (i) Class A OP Units, all of which will be held by NHI, and (ii) Class B OP Units, all of which will be held by NREO (see below) and certain minority partners. The Class B OP Units will, in all material respects, be economically equivalent to the Units on a per unit basis, subject to certain customary anti-dilution adjustments. After holding Class B OP Units for at least 12 months (subject to acceleration in certain circumstances), the holders of Class B OP Units, acting individually, have the right to cause the OP to redeem all or a portion of such Class B OP Units for a cash payment of equivalent value or Units, as determined by the OP and as directed by the REIT in their sole discretion. If the OP elects to redeem Class B OP Units for Units, the REIT will generally deliver (indirectly) one Unit for each Class B OP Unit redeemed (subject to customary anti-dilution adjustments).
Distributions
The REIT initially intends to adopt a distribution policy pursuant to which it will make monthly cash distributions to Unitholders equal to, on an annual basis, approximately 65% of estimated Core FFO.
Hotel exit strategy
Generally, for each property the REIT may seek a liquidity event within three to five years after the original acquisition date of a property. In pursuing a liquidity event for a property, the REIT will take into consideration the prohibited transaction tax rules under the Code. Management’s primary goals of shareholder friendly capital allocation may potentially include a liquidity event involving the sale of assets, the entire company, a merger into an existing publicly traded real estate investment trust or other publicly traded vehicle, or a listing of its shares on a national securities exchange.
Contributions of the hotels
Ten of the 11 hotels in the Initial Portfolio will be contributed by four different groups of parties (the “Contributors”) to the REIT or the OP (the “Contributions”). The four groups of Contributors will be three Maryland or Delaware corporations wholly owned by affiliates of the Advisor (“NMCT,” “HCBH” and “Meritage”), a Delaware limited liability company wholly owned by affiliates of the Advisor; and a LLC (“NREO”), along with minority investors in the properties being contributed by NREO. Upon completion of the Contributions and related transactions, the contributed assets and assumed liabilities will be held by the OP and its subsidiaries, and each hotel property will be leased to the TRS Entities under a long-term lease. In order to fund the Contribution, the REIT, through NHI and the OP, will assume or enter into multiple mortgages collateralized by the properties. Upon completion of the Contributions and Acquisition (as defined below), the REIT will have a consolidated gross book value of approximately $368.4 million with an equity value of approximately $115.8 million, exclusive of preferred equity issued by NMCT.
- NMCT Shareholders will, indirectly through a series of transactions, contribute 100% of the shares of NMCT to the REIT in exchange for Units of the REIT.
- HCBH will contribute 100% of its PLC interests in four LLCs to HCRE Hotel Partner, LLC (“HCREHP”). HCBH will then, indirectly through a series of transactions, contribute 100% of its LLC interests in HCREHP to the REIT in exchange for Units of the REIT.
- Meritage will, indirectly through a series of transactions, contribute 100% of its interest in a Delaware LLLC to the REIT in exchange for Units of the REIT.
- NREO and minority members will contribute 100% of the LLC interests in two LLCs - one of which, in turn, holds five hotel-specific LLCs – to the OP in exchange for Class B units of the OP.
- NHT Nashville, LLC, a subsidiary of NMCT, will exercise its rights under a purchase agreement to acquire Holiday Inn Express Nashville.
Canadian tax consequences
Non-SIFT
The REIT will not be considered to be a SIFT trust in respect of a particular taxation year and, accordingly, will not be subject to the SIFT Rules in that year, if it does not own any non-portfolio property and does not carry on business in Canada in that year. Management has advised counsel that the REIT has not and does not currently intend to own any non-portfolio property or carry on a business in Canada.
Treatment of FAPI
US Holdco will be a “foreign affiliate” and a “controlled foreign affiliate” of the REIT for purposes of the Tax Act. To the extent that US Holdco earns foreign accrual property income in a particular taxation year, the FAPI allocable to the REIT must be included in computing the income of the REIT for its taxation year in which the taxation year of US Holdco ends. If FAPI is included in the income of the REIT, an amount may be deductible in respect of the “foreign accrual tax” (“FAT”) applicable to the FAPI. The adjusted cost base to the REIT of its shares in US Holdco will be increased by the net amount of FAPI included in the income of the REIT. As the REIT receives a dividend of amounts that were previously included in its income as FAPI, that dividend will effectively not be taxable to the REIT and there will be a corresponding deduction in the adjusted cost base to the REIT of its shares in US Holdco.
Foreign tax credit
The U.S. withholding tax deducted in respect of a distribution paid on a Unit in a taxation year will generally be characterized as “non-business income tax”, as defined in the Tax Act, and may be deductible as a foreign tax credit from the Holder’s Canadian federal income tax otherwise payable for that year where the Holder has sufficient non-business income from U.S. sources, to the extent permitted by the Tax Act and that such tax has not been deducted in computing the Holder’s income. Alternatively, such non-business income tax (including any amount not deductible from tax otherwise payable as a foreign tax credit) generally may be deducted by the Holder in computing the Holder’s net income for the purposes of the Tax Act.
U.S. tax consequences
Election by the REIT and NHI to be REITs
The REIT intends to take the position that, pursuant to s. 7874 of the Code, the REIT is treated as a U.S. corporation for all purposes under the Code and, as a result, it is permitted to elect to be treated as a real estate investment trust under the Code, notwithstanding the fact that it is organized as a Canadian entity. Baker & McKenzie LLP, U.S. counsel to the REIT, will render an opinion in connection with the Closing in respect of the treatment of the REIT as a U.S. corporation under s. 7874. The REIT and NHI each will elect under the Code to be a real estate investment trust, commencing with its taxable year ending December 31, 2019. The REIT expects to receive an opinion of Baker & McKenzie LLP with respect to its qualification as a real estate investment trust.
TRS
A real estate investment trust may jointly elect with a subsidiary corporation, whether or not wholly-owned, to treat such subsidiary corporation as a TRS. A TRS or other taxable subsidiary corporation generally is subject to U.S. federal income tax on its earnings. A real estate investment trust is not treated as holding the assets of a TRS or other taxable subsidiary corporation (including a subsidiary that is also a real estate investment trust) or as receiving any income that the subsidiary earns. NHI will indirectly own, through the OP, shares of NMCT, a taxable subsidiary that will elect real estate investment trust status beginning with its taxable year ending December 31, 2019. NHI will not be treated as holding the assets of NMCT or currently earning any income that NMCT earns.
Eligible independent contractor rule
A TRS will not be considered to operate or manage a qualified lodging facility solely because the TRS directly or indirectly possesses a licence, permit, or similar instrument enabling it to do so. Rent that the REIT receives from a TRS will qualify as “rents from real property” as long as the property is operated on behalf of the TRS by an “independent contractor” who is adequately compensated, who does not, directly or through its shareholders, own more than 35% of the Units, taking into account certain ownership attribution rules, and who is, or is related to a person who is, actively engaged in the trade or business of operating “qualified lodging facilities” for any person unrelated to the REIT and the TRS lessee (an “eligible independent contractor”).
UPREIT
The REIT is considered an umbrella partnership real estate investment trust (an “UPREIT”) for U.S. federal income tax purposes. An UPREIT is a structure that REITs often use to acquire real property from sellers on a tax deferred basis for U.S. federal income tax purposes because the sellers can generally accept equity interests and defer taxable gain otherwise required to be recognized by them upon the disposition of their properties.
FIRPTA exception for “regularly traded”
A Non-U.S. Holder’s sale of Units will not be subject to tax under FIRPTA as a sale of a USRPI provided that the Units are “regularly traded” on an “established securities market” and the selling Non-U.S. Holder owned, actually and constructively, 10% or less of the outstanding Units at all times during the five-year period ending on the date of disposition or such shorter period that the Units were held.
Difficulties with reliance on TSX trading
The TSX s an established securities market, but the REIT will not satisfy the “regularly traded” exception in relation to the TSX (a non-U.S. national securities exchange) as of the Offering.
U.S. Publicly Traded Exception
The REIT has received indications that at least two brokers or dealers are willing to regularly quote and make a market in the Units on the OTC Pink and/or the OTCQX. For each calendar quarter during which the Units are regularly quoted on the OTC Pink and/or the OTCQX, the Units should be treated as “regularly traded” on an established securities market in the U.S. (the “U.S. Publicly Traded Exception”) and, accordingly, gain on sales of Units by Non-U.S. Holders that own 10% or less of the outstanding Units during the applicable testing period would not be subject to U.S. federal income tax. Management believes that the Units may satisfy the U.S. Publicly Traded Exception and may satisfy the TSX Publicly Traded Exception in the future.
FIRPTA notice requirements re 5% limitation
In order for the REIT to comply with its withholding obligations under FIRPTA (and certain other regulatory requirements), the Units are subject to notice requirements and transfer restrictions. Non-U.S. persons holding Units are required to provide the REIT with such information as the REIT may request. Furthermore, any non-U.S. person that would be treated as having acquired sufficient Units to be treated as owning more than 5% of the Units is required to notify the REIT by the close of the business day prior to the date of the transfer that would cause the non-U.S. person to own more than 5% of the Units.
Transfer of excess (over 5%) units
If any non-U.S. person that would otherwise be treated as having acquired sufficient Units to be treated as owning more than 5% of the Units fails to comply with the FIRPTA notice provisions described above, the excess Units (i.e., the excess of the number of Units it would be treated as owning over an amount equal to 5% of the outstanding Units) will be sold, through the mechanism described below, with such non-U.S. person receiving the lesser of (i) its original purchase price for the excess Units, and (ii) the sale price of the excess Units (net of commissions and other expenses of sale). Non-U.S. persons holding Units are strongly advised to monitor their actual and constructive ownership of Units.
6.2% REIT limitation
The relevant sections of the Declaration of Trust generally provides that no person or entity may actually or beneficially own, or be deemed to own by virtue of the applicable constructive ownership provisions of the Code, more than 6.2% of the Units. Any purported transfer of the Units or any other event would otherwise result in any person violating such ownership limits, or if a non-U.S. person would otherwise be treated as owning more than 5% of the Units and has not complied with the notice provisions described above, then the number of Units that exceeds the applicable ownership limit (rounded up to the nearest whole Unit) will be automatically transferred to, and held by, a charitable trust for the exclusive benefit of one or more charitable beneficiaries selected by the REIT.
Publicly traded partnership rules
The Operating Agreement contains provisions intended to ensure that the OP is not considered a “publicly traded partnership”. Accordingly, management does not anticipate that the OP will be treated as a publicly traded partnership that is taxable as a corporation. However, if the OP were classified as a “publicly traded partnership”, the OP would be treated as a corporation rather than as a partnership for U.S. federal income tax purposes. In such case, the REIT would not be treated as owning its proportionate share of the assets and income of the OP for the purposes of the real estate investment trust asset and income test requirements (and, instead, would be treated as owning the stock of a corporation). This could cause the REIT to fail to qualify as a real estate investment trust. In addition, the income of the OP would become subject to U.S. federal corporate income tax.
BSR REIT
Overview
A closely-held Delaware LLC with a portfolio of apartment buildings in the southern U.S. appraised at U.S.$890M (“BSR”) is proposing to effectively go public in Canada. This would occur as follows:
- a newly-formed Ontario s. 108(2)(a) unit trust (the REIT) will complete an offering of its Units in Canada for about U.S.$135M, with a view to trading on the TSX
- the REIT will use those proceeds to fund a newly-formed Delaware “C Corp” subsidiary of the REIT (“US Holdco”) which, in turn will fund a new wholly-owned Delaware LLC subsidiary (“MergerSub”)
- MergerSub will be merged into BSR, with BSR as the survivor
- on the merger, US Holdco will be issued Class A units of BSR and the existing BSR unitholders will receive Class B exchangeable units of BSR (valued at around U.S.$270M)
Although the REIT will be deemed by the U.S. anti-inversion rules in Code s. 7874 to be a U.S. corporation, it is expected to qualify as a REIT for Code purposes. The disclosure does not discuss whether it will also qualify as a REIT for ITA purposes, but states that it is not expected to be subject to SIFT tax by virtue of not holding any non-portfolio property.
REIT
An Ontario unit trust whose Units are proposed to be listed on the TSX.
BSR
BSR Trust, LLC, which holds the Initial Portfolio through special-purpose entities as well as: a 45.67% ownership interest in Ledic Realty Company, LLC (“LEDIC”), which owns and operates affordable-rate multifamily properties; and all of the shares of Peace of Mind Insurance Company, Inc. (“POM”), BSR’s wholly owned captive insurance company. BSR has approximately 400 unitholders. Its principal unitholders are the Bailey/Hughes Holders.
Portfolio of Initial Properties
The REIT has been formed to own and operate a portfolio of multifamily real estate properties in the United States. The REIT will indirectly own a 48-property portfolio of multifamily garden-style residential properties (collectively, the “Initial Properties”), comprising 9,879 apartment units, located across five bordering states in the Sunbelt region of the U.S. The aggregate market value of the Initial Properties on a portfolio basis, as at January 1, 2018 has been appraised at approximately $890M including a portfolio premium of approximately 5%.
Bailey/Hughes Holders
Members and affiliates of the Bailey and Hughes families. Mr. Bailey serves as a Trustee of the REIT and Chief Executive Officer; and Mr. Hughes serves as a Trustee of the REIT. Mr. Hughes has served as the Chairman of LEDIC. Pursuant to the Investor Rights Agreement, the Bailey/Hughes Holders will be granted the right to nominate three Trustees subject to owning, in the aggregate, at least 30% of the then-outstanding Units.
US Holdco
A Delaware corporation (BSR REIT Holdings, Inc.) to be wholly-owned by the REIT.
MergerSub
A Delaware LLC (BSR Merger Sub, LLC) formed by US Holdco.
BSR II
A Delaware LLC (BSR Merger Sub, LLC) formed by US Holdco.
Distribution policy
The REIT initially intends to adopt a distribution policy pursuant to which the REIT will make cash distributions to Unitholders and, through BSR Operating LLC, holders of Class B Units, on each Distribution Date equal to, on an annual basis, approximately 77% of estimated AFFO.
Transaction steps
- BSR will contribute to BSR II its approximate 46% interest in LEDIC and all of the shares of POM, BSR’s wholly owned captive insurance company.
- BSR will distribute all of the equity of BSR II to the current BSR unitholders proportion to their unitholdings, so that effectively, BSR II will become a mirror “sister” of BSR holding excluded assets.
- The REIT will complete the offering of its Units and the Unit held by the initial Unitholder of the REIT will be redeemed for $10. The consolidated financial forecast assumes that the REIT will raise gross proceeds of $135M (excluding any overallotment option) pursuant to the Offering through the issuance of 13.5M REIT Units.
- Approximately $30 million of principal amount (plus interest) owing by BSR to an affiliate of John S. Bailey will be converted into Units at the Offering Price.
- The REIT will contribute the net proceeds of the Offering to US Holdco in subscription for preferred shares and common shares of US Holdco.
- BSR II will transfer all of the shares of POM to US Holdco in consideration Units with an aggregate equivalent fair market value.
- US Holdco will contribute the proceeds received from the REIT to MergerSub.
- MergerSub will merge with and into BSR, (the “Merger”) with BSR continuing as the surviving entity (such surviving entity, “BSR Operating LLC”). BSR Operating LLC will be treated as a partnership for U.S. federal income tax purposes.
- Concurrently with the Merger, the operating agreement of BSR Operating LLC will be amended and restated so that the capital of BSR Operating LLC will be restated to consist of Class A Units and Class B Units.
- Upon the Merger, each issued and outstanding class A unit of BSR, class C unit of BSR, and common unit of BSR held by the existing unitholders will be exchanged for new Class B Units pursuant to a prescribed exchange formula taking into account the relative economic terms of the different securities of BSR; and each issued and outstanding class A unit of MergerSub held by US Holdco will be exchanged for new Class A Units.
Upon completion of the Merger, the Initial Properties will be indirectly held by the REIT, through its indirect ownership of BSR Operating LLC and POM will be indirectly held by the REIT through US Holdco.
Class B Units
Upon Closing and the related transactions, BSR Operating LLC will have outstanding (i) Class A Units, all of which will be held by US Holdco, and (ii) Class B Units, all of which will be held by the legacy BSR Holders, including the Bailey/Hughes Holders. The consolidated financial forecast treats the Class B Units of BSR Operating LLC having a value of $269.5M. The Class B Units are economically equivalent to Units and are redeemable by the holder thereof for cash or Units (on a one-for-one basis subject to customary anti-dilution adjustments). In particular, after holding Class B Units for at least 12 months, the holders of Class B Units, acting individually, have the right to cause BSR Operating LLC to redeem all or a portion of such Class B Units for a cash payment of equivalent value or Units, as determined by BSR Operating LLC and as directed by the REIT in their sole discretion. If BSR Operating LLC elects to redeem Class B Units for Units, the REIT will generally deliver (indirectly) one Unit for each Class B Unit redeemed (subject to customary anti-dilution adjustments).
REIT Units
A Unit of the REIT will be redeemable its holder for the lesser of 90% of the “Market Price” (based on the weighted average trading price of a Unit during the 10 trading days ending on the redemption date) and 100% of the “Closing Market Price” on the redemption date. To the extent a Unitholder is not entitled to receive cash upon the redemption of Units as a result of specified limitations, then the balance of the Redemption Price will generally be paid by way of a distribution in specie to such Unitholder of unsecured subordinated promissory notes of the REIT or a REIT subsidiary.
Canadian tax consequences
SIFT status
The REIT is not anticipated to not be a SIFT trust on the basis of not holding a non-portfolio property or carrying on business in Canada.
FAPI
As the REIT intends to qualify as a real estate investment trust for U.S. federal income tax purposes, the amount of U.S. federal income tax payable by US Holdco and the REIT on its operating income is not expected to be material, and it is not expected that there would be a material related FAT deduction available to apply against any FAPI in respect of US Holdco or any other controlled foreign affiliate of the REIT. The adjusted cost base to the REIT of its shares in US Holdco will be increased by the net amount of FAPI included in the income of the REIT in respect of FAPI earned directly or indirectly by US Holdco. At such time as the REIT receives a dividend of amounts that were previously included in its income as FAPI, that dividend will effectively not be taxable to the REIT and there will be a corresponding deduction in the adjusted cost base to the REIT of its shares in US Holdco. Under circumstances currently contemplated by management in respect of the Initial Properties, a portion of the income earned directly or indirectly by US Holdco (including income earned through subsidiary partnerships) will be FAPI and, accordingly, will be required to be included in computing the income of the REIT for Canadian federal income tax purposes on an accrual basis.
Foreign tax credit
The U.S. withholding tax deducted in respect of a distribution paid on a Unit in a taxation year will generally be characterized as “non-business income tax”, as defined in the Tax Act, and may be deductible as a foreign tax credit from the Holder’s Canadian federal income tax otherwise payable for that year.
U.S. tax consequences
Classification as U.S. corporation
The REIT is classified as a corporation for Code purposes and, pursuant to Code s. 7874 will be treated as a U.S. corporation (and will not have “substantial business activities” in Canada within the meaning of s. 7874) for all purposes under the Code and, as a result, it should be permitted to elect to be treated as a real estate investment trust under the Code, notwithstanding the fact that it is organized as a Canadian entity.
Classification as REIT
Mitchell, Williams, Selig, Gates & Woodyard, PLLC, U.S. counsel to the REIT, will render an opinion to the REIT to the effect that, commencing with its first taxable year ending December 31, 2018, the REIT is organized and operates in conformity with the requirements for qualification and taxation as a real estate investment trust under the Code, and that the REIT’s organization and current and proposed method of operation will enable it to continue to meet the requirements for qualification and taxation as a real estate investment trust under the Code. The REIT owns its interest in BSR Operating LLC through US Holdco, which is treated as a disregarded qualified real estate investment trust subsidiary (“QRS”). For purposes of the real estate investment trust status tests discussed below, all of the assets and income and loss of a QRS will be treated as assets and income and loss of the REIT.
UPREIT structure
The REIT is considered an umbrella partnership real estate investment trust (an “UPREIT”) for U.S. federal income tax purposes. An UPREIT is a structure that REITs often use to acquire real property from sellers on a tax deferred basis for U.S. federal income tax purposes because the sellers can generally accept equity interests and defer taxable gain otherwise required to be recognized by them upon the disposition of their properties.
Withholding tax
A Non-U.S. Holder that is a qualified resident of Canada generally is entitled to a 15% withholding rate under the Treaty if: (i) the Non-U.S. Holder is an individual and holds no more than 10% of the outstanding Units, (ii) the Units are publicly traded and the Non-U.S. Holder owns no more than 5% of the outstanding Units or (iii) the Non-U.S. Holder (other than an individual) holds no more than 10% of the outstanding Units and the REIT is diversified. For this purpose, the REIT will be treated as diversified if the gross value of no single interest in real property of the REIT exceeds 10% of the gross value of the REIT’s total interest in real property. Qualified residents of Canada that are tax-exempt entities established to provide pension, retirement or other employee benefits (including trusts governed by an RRSP, an RRIF or a DPSP) may be eligible for an exemption from U.S. federal tax withholding on dividends under Article XXI of the Treaty.
FIRPTA withholding
Distributions of proceeds attributable to gains from the sale or exchange by the REIT of U.S. real property interests (“USRPIs”) are subject to U.S. federal income and withholding taxes pursuant to FIRPTA. Under FIRPTA, such gains are considered effectively connected with a U.S. trade or business of the foreign shareholder and are taxed at the normal graduated rates applicable to U.S. Holders. Moreover, such gains may be subject to branch profits tax in the hands of a shareholder that is a foreign corporation at a rate of 30% unless reduced by an applicable income tax treaty (5% under the Treaty). However, a distribution of proceeds attributable to the sale or exchange by the REIT of U.S. real property interests will not be subject to tax under FIRPTA or the branch profits tax, and will instead be taxed in the same manner as distributions of cash generated by the REIT’s real estate operations other than the sale or exchange of properties if (i) the distribution is made with regard to a class of shares that is regularly traded on an established securities market located in the United States (as management believes is the case with respect to the Units) and (ii) the recipient Unitholder does not own more than 10% of that class of Units at any time during the 1-year period ending on the date the distribution is received.
TitanStar
Overview
Under a CBCA Plan of Arrangement, the Company will transfer its assets other than its interest in a non-rental Nevada property (the Deer Springs property held through Deer Springs LP, a Nevada LP) to a newly-formed unit trust (TitanStar REIT), and then will transfer its interests in Deer Springs LP to a new B.C. holding company (Deer Springs Holdings). Its units of TitanStar REIT and its shares of Deer Springs Holdings will then be distributed to its shareholders under a s. 86 reorg. Deer Springs Holdings will not be listed and will have the same board and management as TitanStar REIT. "TitanStar REIT units are expected to provide an enhanced ability for TitanStar REIT to access the Candian equity capital markets, given that most publicly traded real estate entities in Canada are REIT structures or high yielding corporate structures."
The Company
Is listed on the TSXV and holds interests in U.S. retail shopping centres and the Deer Springs property through Nevada or Delaware LPs (with interests therein ranging from approximately 38% to 51%) held by it directly (in the case of that portion of an interest in Deer Springs LP which is held through a holding Nevada LP) or through Canadian or BC holding companies (principally, TSP DSC and TSP LP Holdings).
Preliminary Steps (1 to 3), Plan of Arrangement (steps 4 to 9) and post-Arrangement Steps (steps 10 to 12)
- TitanStar REIT was settled with the Company as its beneficiary as a B.C. unit trust.
- the Company has entered into purchase agreements for further U.S. asset acquisitions to be funded out of the equity raised in 3 below and with debt financing from Barclays Bank plc.
- an offering of subscription receipts pursuant to a short form prospectus (to raise between $20M and $45M) will be completed pursuant to which Preferred Shares of the Company will be issued on the basis of one preferred Share for each subscription receipt.
- the Company will transfer to Deer Springs Holdings its beneficial interest in the Deer Springs Property (comprised of its interests in Deer Springs LP and in a Nevada holding LP) in exchange for, among other things, Deer Springs Holdings Shares and Deer Springs Holdings Options;
- the Company Common Shares held by dissenting shareholders will be repurchased by the Company and cancelled;
- the Company will transfer all of its assets and liabilities to TitanStar REIT, excepting its shares in Deer Springs Holdings. In consideration, TitanStar REIT will agree to assume all of the Company's liabilities including its Debentures, and will issue TitanStar REIT Units to the Company.
- each outstanding TitanStar Option will be exchanged for a TitanStar REIT Option to acquire a TitanStar REIT Unit and a Deer Springs Holdings Option to acquire a Deer Springs Holdings Share;
- all of the Outstanding Shares of the Company (both Preferred Shares and common shares) will be purchased by the Company from the Company Outstanding Shareholders for cancellation, in exchange for the transfer by the Company per each Outstanding Share of: (a) one TitanStar REIT Unit; and (b) one Deer Springs Holdings Share per outstanding common share. Simultaneously with the cancellation of the Outstanding Shares, TitanStar REIT will subscribe for one common share for nominal consideration;
- the TitanStar REIT Units will be consolidated on a basis of one "new" TitanStar REIT Unit for the lesser of that number of "old" TitanStar REIT Units that is: (a) allowable under TSXV policies; and (b) $4 divided by the market price of the Common Shares as determined in accordance with Section 1.11(1) of Multilateral Instrument 62-104 TakeOver Bids and Issuer Bids), and the exercise price of each TitanStar REIT Option will be adjusted accordingly.
- The Company, TSP DSC and TSP LP Holdings will amalgamate to form TitanStar Amalco;
- TitanStar REIT will transfer its interest in three Nevada LPs (TSPLP I, TSP LP II and Blue Springs LP) to TitanStar Amalco; and
- TitanStar Amalco will transfer its interest in those LPs to TitanStar US.
Resulting structure
TitanStar REIT will have equity and debt interests in TitanStar Amalco, debt interests in TitanStar US and hold two GP corporations. Non-resident ownership of TitanStar REIT will be limited to 49%. The TitanStar REIT units will be redeemable for the lesser of their closing market price and 95% of the 10-day average immediately following the redemption date.
Securities considerations
The TitanStar REIT units and Deer Springs Holdings shares will be received in reliance on the s. 3(a)(10) rule. Shareholder approval is required by a 2/3 majority.
Canadian tax consequences
Asset transfers. The various transfers to TitanStar REIT and Deer Springs Holdings will result in capital gain. However, this is anticipated to be offset by available capital losses. Subsequent transfers of the various limited partnership interests by TitanStar REIT to TitanStar Amalco and from TitanStar Amalco to TitanStar US will not result in a capital gain.
SIFT rules
Following the Arrangement, TitanStar REIT's property will be its shares of TitanStar Amalco, TitanStar GP and Blue Springs GP, which will be portfolio investment entities.
FAPI
TitanStar US is a "foreign affiliate" and a CFA of TitanStar Amalco. It is expected that income earned by TitanStar US will be foreign accrual property income.
S. 86 exchange
The fair market value of the distributed Deer Spring Holdings shares is not expected to exceed the paid-up capital of the Company common shares, so that no deemed dividend should arise on the exchange of the Company common shares for TitanStar REIT units and Deer Spring Holdings shares. S. 86 will apply to such exchange so that a holder of the Company common shares will be considered to have disposed of its shares for the greater of their adjusted cost base and the fair market value of the Deer Spring Holdings shares and TitanStar REIT units received on the exchange.
Dissenters
Disposition will give rise to a deemed dividend to the extent that the amount received (excluding any interest award) exceeds the paid-up capital of the common shares.
Deer Springs Holdings
Deer Springs Holdings is expected to comply on a continuous basis with the ownership and dispersal of share requirements described in Reg. 4800, and to elect to be a "public corporation" in its first return.
WPT

Overview
Through an indirectly owned Delaware LP (the "Partnership"), the REIT (an Ontario unit trust) will acquire a portfolio of 37 warehouse and distribution industrial rental properties in the U.S., appraised at between $460.8M and $468.9 million. The properties will be acquired from a Minnesota-headquartered LLC ("Welsh"), which will hold exchangeable units in the Partnership (i.e, an "UPREIT" structure), and will be the asset and property manager. Although the REIT will be a U.S. corporation under the U.S. anti-inversion rule, this will be addressed by it being a U.S. REIT under the Code. For Canadian purposes, it will avoid the SIFT rules by not holding non-portfolio property.
Structure
A direct Delaware LLC subsidiary of the REIT ("US Holdco") will hold all the Class A units of the Partnership, which will be general partner units.
Following closing, Welsh will hold an approximate 52.1% effective interest in the REIT units (48.6% after over-allotment) by virtue of holding all of the Class B exchangeable units of the Partnership (being 10.9M units).
Unitholders/Redemptions
In order to assist in qualifying as a U.S. REIT, the declaration of trust will prohibit any person from actually or constructively owing more than 9.8% of the REIT units, subject to any exemptions granted by the board. There will be a unitholder rights plan. Unit redemptions in excess of $50,000 per month (with the redemption price calculated at the lesser of closing market price and 90% of VWAP) are satisfied with notes of the REIT.
Management
Almanac Realty Investors, LLC, formerly Rothschild Realty Manager, LLC holds a $183M note of Welsh, which is convertible into 81% of the Welsh equity. The CEO of the REIT is the CEO of Welsh.
Debt
Debt level targeted at below 55% of consolidated gross book value ($236.2M at closing) (p. 80).
Distributions
Monthly, of $0.0583 representing 90% of AFFO. The tax-deferred percentage for 2013 was estimated in the prelim. to be 75%. It is estimated for 2013 that 69% of the monthly distributions will be paid out of the REIT's current or accumulated earnings and profits and, accordingly, will be subject to US withholding tax. Distributions will be paid in US dollars, with FX hedging of the REIT's US-dollar revenues.
Implementation of Structure
The following transactions will occur upon closing of the offering:
- the REIT will use the net proceeds of the offering to subscribe for preferred and common shares of US Holdco, which will subscribe for Class A units of the Partnership
- Welsh will transfer its equity of the property LLCs or LPs to the Partnership in consideration for cash of $68.4 million and 10.9M Class B units
Canadian tax consequences
SIFT tax. Management does not anticipate that the REIT will hold any non-portfolio property or carry on a Canadian business, so that it should not be considered to be a SIFT trust.
FAPI
. A portion of the income earned by US Holdco (and CFAs of the Partnership, or certain subsidiary partnerships thereof) will be foreign accrual property income, and included in the income of the REIT.
FTCs
The tax disclosure is not directed to investors who hold more than 5% of the REIT units for Code purposes. The U.S. withholding tax deducted in respect of a distribution paid on a Unit in a taxation year will generally be characterized as "non-business income tax," and may be deducted as a foreign tax credit where the holder has sufficient non-business income from U.S. sources. Alternatively, such non-business income tax (including any amount not deductible as a foreign tax credit) generally may be deducted by the Holder in computing the Holder's income. A Holder's ability to apply U.S. withholding taxes in the foregoing manner may be affected where the Holder does not have sufficient taxes otherwise payable under Part I of the Tax Act, or sufficient U.S. source income in the taxation year the U.S. withholding taxes are paid, or where the Holder has other U.S. sources of income or losses, or has paid other U.S. taxes. Per 2014 AIF:
The proceeds receivable on a disposition of a Unit may not qualify as U.S. source income for purposes of the Tax Act (including for Canadian foreign tax credit purposes), and beneficiaries of certain Unitholders that are trusts 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.
U.S. tax consequences
REIT status. The REIT is treated as a U.S. corporation for all Code purposes under Code s. 7874 and, accordingly, is permitted to elect to be treated as a real estate investment trust. The REIT will elect real estate investment trust status beginning with its taxable year ending December 31, 2013. Management intends to make timely distributions sufficient to satisfy the annual distribution requirements.
Ordinary distributions to non-US holders
Distributions that are neither attributable to gains from the sales or exchanges by the REIT of U.S. real property interests ("USRPIs"), nor designated as capital gains dividends, will be treated as dividends of ordinary income to the extent they are made out of the REIT's current or accumulated earnings and profits, so that qualifying non-US holders generally are entitled to a 15% withholding rate on such distributions under the Treaty. Such qualifying non-US holders are holders holding no more than 5% of the outstanding units if the units are publicly traded, individuals holding no more than 10% of the outstanding units, and those holding no more than 10% of the outstanding units and the REIT is diversified (based on no single property exceeding 10% of the gross value of the real property). RRSPs, RRIFs and DPSPs may be eligible for exemption. Distributions received by a TFSA, RESP or RDSP will be treated for the above purposes as received by the beneficiary or annuitant.
Distributions in excess of the REIT's current and accumulated earnings and profits will reduce the adjusted tax basis of the non-resident holder's units. Because management expects that the REIT units will be considered to be regularly traded on an established securities market, it does not expect to be required to withhold on such excess distributions made to non-US holders owning 5% or fewer of the outstanding units during the applicable testing period.
FIRPTA re distributions
A distributions of proceeds attributable to the sale or exchange by the REIT of USRPIs will not be subject to FIRPTA tax or branch profits tax and instead will be treated as an ordinary distribution if (as anticipated -see below) the REIT units qualify as regularly traded on an established securities market located in the U.S. and the recipient unitholder does not own more than 5% of the units at any time during the preceding one year. A non-US unitholder who fails to give notice of becoming the owner or constructive owner of more than 5% of the units, will have the excess (over 5%) units sold, with the lesser of the original purchase price for the excess units and the net sales proceeds being remitted to it.
FIRPTA re unit dispositions
Although the REIT is expected to be a U.S. real property holding corporation ("USRPHC"), the REIT units will not be treated as an interest in a USRPHC to a disposing unitholder who does not own or constructively own more than 5% of the units at any time in the five years preceding the disposition (or such shorter period as the units were held), if the units qualify as "regularly traded on an established securities market." As the REIT has received indications that at least two brokers or dealers are willing to regularly quote and make a market in the REIT units on the pink sheets and/or the OTCQX, the units should qualify as "regularly traded" on an established securities maket in the U.S. A more rigorous test would apply if reliance were placed on the TSX as the relevant securities market for these purposes.
Inovalis

Overview
The REIT, which is an Ontario unit trust, is offering 10.5M units for $105M. It will acquire four leasehold interests in French and German office properties, which are currently managed by a privately owned investment management company with a Parisian head office ("Inovalis"). The aggregate acquisition cost of these leaseholds plus aggregate option exercise prices to acquire the related properties will be less than the properties' appraised value of €165 million (including €144 million for the French properties).
Structure
A Luxembourg subsidiary s.à r.l. of the REIT ("Luxco") will hold equity, and interest-bearing debt, of a wholly-owned German SPV of Luxco (also a s.à r.l.), which will hold the Hanover, Germany property. Luxco will hold interest-bearing notes of French SPVs holding the three Parisian properties and will hold the equity of the French SPVs through a French holding company ("OPCI"). Luxco will be capitalized with $5 million of non-interest bearing notes ("NIB Notes"), $5 million of 15-year notes bearing interest at 7.8% ("Luxco Notes") and common shares. Inovalis will hold exchangeable securities of Luxco (comprising NIB Notes, Luxco Notes and common shares) representing the equivalent of an approximate 10% ownership interest in the REIT, and will hold the equivalent number of special voting units of the REIT.
Redemption notes
The maturity date and interest rate on redemption notes issued by the REIT on any large unit redemptions will have a maturity date and interest rate to be determined by the Trustees at the time of issuance – or, alternatively, securities of REIT subsidiaries may be delivered in the Trustees' discretion.
Distributions
91% of distributions for 2013 (at an estimated monthly rate, following the initial distribution for most of the balance of 2013 of $0.6875 per unit) are estimated to be tax-deferred. Such distributions are estimated to approximate 93% of AFFO. Under an FX hedging arrangement, an arm's length counterparty will agree to exchange euros for Canadian dollars on a monthly basis at an agreed exchange rate. The DRIP will use 3% bonus distributions.
Management
The annual asset management fee of Inovalis, and 50% of its acquisition fees, will be paid entirely in exchangeable securities of Luxco. Upon the earlier of the REIT achieving a market capitalization of $750 million and the 5th anniversary, management will be internalized.
Canadian tax consequences
SIFT tax. The REIT will not be subject to SIFT tax on the basis of not holding any non-portfolio property. As it will not hold any taxable Canadian property, it is not subject to non-resident ownership restrictions.
FAPI
It is expected that the income of the REIT's subsidiaries will be foreign accrual property income. However, it is expected that the REIT's distributions will be sufficient for it not to be subject to Part I tax.
French tax consequences
Provided OPCI and the French SPVs comply with their distribution obligations (to inter alia distribute 85% of their distributable income), they are exempt from French corporate income tax. A French withholding tax of 5% will be levied on dividends paid by OPCI to Luxco (p. 61). There will be no withholding tax on the interest paid by the French SPVs to Luxco. As financial lease agreements are not considered to be real estate assets and no elections have been made to purchase real estate assets, the 3% tax assessed on directly or indirectly held real estate will not be applicable.
German tax consequences
Corporate income tax. The German SPV is a Luxembourg s.à r.l. that is managed in Luxembourg and, therefore, should not be resident in Germany for German tax purposes. However, it nonetheless will be subject to German corporate income tax rate at a rate of 15.825%. The German SPV is acquiring real estate under a head lease by prepaying the rent under the head lease, and earning rents from the sublessees. The rental payments received by it from the sublessees will be included in computing its income for German corporate income tax purposes; however, it will be able to take deductions based on amortization of the headlease prepayment. Deductions of interest should not be limited under the German interest barrier provided that the net interest expense of the German SPV is below €3 million p.a., and the financing arrangements comply with the arm's length principle.
Wthholding/trade tax
Dividends paid by the German SPV to Luxco should be exempt under the participation exemption. The German SPV should not be subject to municipal trade tax given that the mere subleasing of the property would not create a German permanent establishment.
RETT
The assumption of the headlease and the subleases, and the acquisition of the property option should not trigger German real estate transfer tax. However, RETT will be triggered (currently at a 4.5% rate) when the option is exercised.
Milestone Apartments

Overview
Offering of 20 million REIT units ($200 million). Through an indirectly owned Delaware LP (the "Partnership"), the REIT will acquire a portfolio of 52 multi-family residential rental properties in the U.S, appraised at $1.2B. Prior to the offering, ownership and profit interests in the Partnership were held by a partnership ("Milesouth"), which was affiliated with Invesco Ltd., and by an affiliated LLC ("MST Investors"). Milesouth and MST Investors will hold exchangeable Class B units of the Partnership.
Structure
A direct Delaware LLC subsidiary of the REIT ("US Holdco") will hold all the Class A units of the Partnership, and control the general partner of the Partnership. The Partnership will hold the 52 properties through subsidiary partnerships.
Following closing, Milesouth/ MST Investors will hold 14M REIT units and 8.923M Partnership units (being Class B exchangeable units).
Unitholders
In order to assist in qualifying as a U.S. REIT, the declaration of trust will prohibit any person from actually or constructively owning more than 9.8% of the REIT units, subject to any exemptions granted by the board. There also is an expropriation provision re over 5% blocks discussed re FIRPTA below. There will be a unitholder rights plan.
Management
The CEO is Managing Partner of Milestone. A member of the Milestone group is the asset manager. After 10 years at the latest, asset management will be internalized without termination fees unless the independent trustees determine otherwise. The property manager is an LLC owned by the Partnership.
Debt
Debt level targeted at below 55% of consolidated gross book value ($646M at closing).
Distributions
Monthly, at a rate (after the first montly distribution) of $0.05417 per unit, representing 90% of AFFO. As distributions will be paid in Canadian dollars, the REIT will hedge its first two years of dollar distributions from U.S. Holdco.
Implementation of Structure
The following transactions will occur upon closing of the offering:
- the REIT will acquire units of the Partnership in exchange for 14M units of the REIT
- the REIT will contribute the net proceeds of the offering and its Partnership units to US Holdco in subscription for preferred and common shares
- US Holdco will use the proceeds received from the REIT to purchase Partnership units from Milesouth for $180.6M, and acquire for nominal consideration the membership interest in the general partner of the partnership which is a general partner of the Partnership
- at the same time, the LPA for the Partnership will be amended so that the partnership interests of US Holdco and Milesouth/MST Investors will be Class A, and Class B exchangeable, units respectively
Canadian tax consequences
SIFT tax. Management does not anticipate that the REIT will hold any non-portfolio property, so that it should not be considered to be a SIFT trust.
FAPI
A portion of the income earned by US Holdco (and CFAs of the Partnership, or certain subsidiary partnerships thereof) will be foreign accrual property income, and included in the income of the REIT.
FTCs
The tax disclosure is not directed to investors who hold more than 5% of the REIT units for Code purposes. The U.S. withholding tax deducted in respect of a distribution paid on a REIT unit in a taxation year will generally be characterized as "non-business income tax," and may be deducted as a foreign tax credit where the resident holder has sufficient non-business income from U.S. sources. Alternatively, such non-business income tax (including any amount not deductible as a foreign tax credit) generally may be deducted by the holder in computing the holder's income. A resident holder's ability to apply U.S. withholding taxes in the foregoing manner may be affected where the holder does not have sufficient taxes otherwise payable under Part I of the Tax Act, or sufficient U.S. source income in the taxation year the U.S. withholding taxes are paid, or where the holder has other U.S. sources of income or losses, or has paid other U.S. taxes.
U.S. tax consequences
REIT/U.S. corporation status. The REIT is treated as a U.S. corporation for all Code purposes under Code s. 7874 and, accordingly, is permitted to elect to be treated as a real estate investment trust. The REIT will elect real estate investment trust status beginning with its taxable year ending December 31, 2013. Management intends to make timely distributions sufficient to satisfy the annual distribution requirements.
Ordinary distributions to non-US holders
Distributions that are neither attributable to gains from the sale or exchange by the REIT of U.S. real property interests ("USRPIs"), nor designated as capital gains dividends, will be treated as dividends of ordinary income to the extent they are made out of the REIT's current or accumulated earnings and profits, so that qualified residents of Canada generally are entitled to a 15% withholding rate on such distributions under the Treaty. RRSPs, RRIFs and DPSPs may be eligible for exemption. Distributions received by a TFSA, RESP or RDSP will be treated for the above purposes as received by the beneficiary or annuitant.
Management anticipates that there will be distributions in excess of the REIT's current and accumulated earnings and profits. These will reduce the adjusted tax basis of the non-resident holder's units. Because management expects that the REIT units will be considered to be regularly traded on an established securities market (see below), it does not expect to be required to withhold on such excess distributions made to non-US holders owning 5% or fewer of the outstanding units during the applicable testing period.
FIRPTA re distributions
A distributions of proceeds attributable to the sale or exchange by the REIT of USRPIs will not be subject to FIRPTA tax or branch profits tax and instead will be treated as an ordinary distribution if (as anticipated -see below) the REIT units qualify as regularly traded on an established securities market located in the U.S. and the recipient unitholder does not own more than 5% of the units at any time during the preceding one year. A non-US unitholder who fails to give notice of becoming the owner or constructive owner of more than 5% of the units, will have the excess (over 5%) units sold, with the lesser of the original purchase price for the excess units and the net sales proceeds being remitted to it.
FIRPTA re unit dispositions
Although the REIT is expected to be a U.S. real property holding corporation ("USRPHC"), the REIT units will not be treated as an interest in a USRPHC to a disposing unitholder who does not own or constructively own more than 5% of the units at any time in the five years preceding the disposition (or such shorter period as the units were held), if the units qualify as "regularly traded on an established securities market" - and the purchaser would not be requried to withhold, if the units are considered "regularly traded on an established securities market" regardless whether the selling unitholder held more than 5% of the outstanding units during the applicable testing period. As the REIT has received indications that at least two brokers or dealers are willing to regularly quote and make a market in the REIT units on the pink sheets and/or the OTCQX, the units should qualify as "regularly traded" on an established securities market in the U.S. A more rigorous test would apply if reliance were placed on the TSX as the relevant securities market for these purposes.
Agellan

Overview of structure
The REIT will invest directly or indirectly in a mix of Canadian and US industrial and commercial (plus one retail) rental properties, having a gross purchase price of $421.1M. Its Ontario and Quebec properties (representing 41% and 2% respectively of NOI) will be held by it directly. Its US properties will be held in a Delaware subsidiary LP of a US corporate subsidiary (Agellan US) which, in turn, will be held by a Canadian corporate subsidiary of the REIT (Agellan Canada). Agellan Capital Partners Inc. ("AGPI") will be the asset manager (and was previously the asset manager for 22 of the 23 properties).
Offering
13.4M REIT units for gross proceeds of $134.6M.
Structuring
On the day of closing of the offering or the day after:
- The REIT will acquire interests in the Canadian properties in consideration for the issuance of 9.226M REIT units ("Units") to and for the assumption of mortgages
- The REIT will acquire additional interests in the Canadian properties with $3.571M of the proceeds of the offering and also in consideration for the issuance of 0.148M additional Units and the assumption of mortgage debt; $68.55M of the issue proceeds also will be used to redeem the 9.226M Units referred to above
- The REIT will lend U.S.$30M and U.S.$33.5M on an interest-bearing basis to Agellan Canada and Agellan US, respectively
- The REIT will use the remaining net proceeds of the offering, and the proceeds of Units issued to the US LP to subscribe for common shares of Agellan Canada
- Agellan Canada will apply such proceeds to subscribe for common shares of Agellan US
- Agellan US, in turn, will subscribe for Class A units of the US LP
- The US LP will use such proceeds to subscribe for 2.642M Units
- The US LP will use such Units and U.S.$63.81M of the balance of the proceeds to acquire the US properties (and also will assume mortgage on such acquisition)
The partnership agreement for the US LP contemplates that in future US asset acquisitions it may issue Class B units which are economically identical to (REIT) Units and are exchangeable into Units.
Vendor interests/ Special Rights
The Vendors in respect of the Units they retain are referred to as the "CarVal Retained Interest Holders" (respecting 18.9% of the REIT units if the over-allotment option is exercised) and the "ACPI Retained Interest Holders" (0.4%). They will be contractually obliged to retain such Units for 18 months and to pledge them to secure certain of their obligations as vendors. The CarVal Retained Interest Holders are entities managed by CarVal Investors, LLC. They have a "Piggyback Registration Right" (respecting future REIT offerings) and a "Demand Registration Right" 9re qualifying their Units for distributions).
There is a Unitholders' Rights Plan.
Distributions
Monthly of $0.06458 representing approximating 90% of AFFO. A DRIP with 3% bonus distributions.
Canadian tax consequences
REIT. The REIT is anticipated to qualify as a REIT under both the current and proposed REIT-qualification rules.
Agellan Canada
Agellan Canada will deduct the interest on the note owing by it to the REIT. It is expected that income earned by Agellan US including income allocated to it by the US LP will be foreign accrual property income (fapi). Dividends paid by Agellan US to Agellan Canada out of its fapi generally will not result in further income inclusions. The adjusted cost base of the shares of Agellan US will be reduced to the extent they are paid out of pre-acquisition surplus.
Non-investor US tax consequences
Anti-inversion rules. The REIT will be a foreign corporation. The anti-inversion rules in Code s. 7874 are not expected to apply as the REIT will have substantial business activities in Canada and because the number of Units issued in connection with the US property acquisitions is not expected to exceed 60% of the total Units issued in connection with all the property acquisitions.
Internal leverage
The REIT should be eligible for Treaty benefits as long as its Units are primarily and regularly traded on a Canadian stock exchange (the TSX). The interest-bearing note owing by Agellan US to the REIT will be treated as debt and the interest thereon on that basis will be exempt from withholding.
Agellan US's debt-to-equity ratio is expected to exceed 1.5 to 1 and it is expected that s. 163(j) initially will apply to limit its interest deductions.
Northwest Healthcare

Offering
Of units of the REIT, which is TSXV-listed, at $2.00 per unit for gross proceeds of $25M ($28.75M if over-allotment).
Current structure
Asset manager interest. As a result of the preliminary transactions described below for conversion to an international REIT (see 5 October 2012 Circular of the REIT then named GT Canada Medical Properties REIT), NorthWest Value Partner Inc. ("NWVP'), which is the asset manager of the REIT, is the largest unitholder of Northwest Healthcare Properties REIT ("NWHP REIT") and is owned by Paul Lana, the CEO of the REIT , holds 26.5M, or 88%, of the units of the REIT and 55.9M exchangeable Class B units of the REIT's subsidiary LP ("NWI LP"), so that after giving effect to the exchange of the Class B units, NFWVP holds 96% of the REIT units.
SLA on New Zealand REIT
The REIT holds an indirect 20% interest in the Vital Trust, an NSX-listed trust invested in health-care properties in Australia and New Zealand. NWI LP has transferred such units to a Canadian financial institution under a securities lending agreement under which the counterparty pays amounts equal to the returns on the lent units and also exercises voting rights in accordance with the instructions of NWI LP.
Brazil. Through an LLC and two-tiers of Brazilian subsidiaries of NWI LP (with an individual holding one share in each), it holds a Brazilian children's hospital which it acquired under a sale lease-back arrangement, with a portion of the rents receivable having been securitized.
Germany
A German limited partnership (KG) holding a Berlin medical office building portfolio is held through a tiered structure of two Gibralter corporations on top of a S.à r.l. on top of a GmbH, with a management company of Paul Lana holding a 10% interest in the top Gibralter company.
Preliminary transactions for conversion to international REIT
On December 24, 2010 a former capital pool company was converted into the REIT, which by May 2012, held 12 Canadian medical office buildings. NWVP acquired 82% of the REIT units pursuant to a take-over bid circular on June 11, 2012, at $1.87 per unit. In November 2012, all of the REIT's buildings were sold to a subsidiary LP of NWHL REIT for cash of $9.2M and a $30M promissory note. On November 16, 2012, the REIT acquired the international portfolio described above from NWVP and announced an increase to its annual distributions from $0.064 per unit to $0.16 per unit (95% of AFFO).
Put/Call Agreement
On November 16, 2012, the REIT and NorthWest Operating Trust ("NW Trust" - a trust of which Paul Lana is the sole trustee and a beneficiary) entered into a put/call agreement under which the REIT could acquire up to approimately 28% of the outstanding units of NWHP REIT pursuant to a put right of NW Trust or a call right of the REIT.
FX hedging
Management intends to implement FX hedging of the REIT's Canadian dollar distributions on a one-year rolling basis.
Canadian tax consequences
The REIT expects to qualify as a REIT provided the October 24, 2012 proposals are enacted. Furthermore, it will not be subject to the SIFT rules if it does not hold any non-portfolio property.
It is expected that income earned by some of the foreign subsidiaries will be fapi and, therefore, would be included in computing the income of NWI LP. No assurance is given that the foreign tax credit generator proposals (draft s. 91(4.1) et seq.) will not apply to NWI LP to deny deductions for foreign accrual tax.
Granite

Structure
Granite REIT, a TSX and NYSE listed Canadian mutual fund trust governed by Ontario law, will be the 99.999% limited partner of a Quebec LP ("Granite LP") which, in turn, will hold: Canadian real estate through a subsidiary Ontario LP; US real estate through a Delaware subsidiary LP ("US Holdco LP") which, in turn, will hold a US private REIT ("Granite America"); hypothecs owing by Granite America; the equity of European and Mexican real estate subsidiaries through Granite; and hypothecs (owing by the European subsidiaries) through a Quebec subsidiary LP ("Fin LP") in which Granite LP will be an 80% limited partner (with Granite, directly and through a GP, holding the other 20%). Granite GP, the general partner of Granite LP, will not be a subsidiary of Granite REIT. Instead, all its common shares will be held by the Granite REIT unitholders on a "stapled basis," so that what will trade on the TSX and NYSE will be stapled units consisting of one Granite REIT unit and one common share of Granite GP.
Setup of structure
The conversion occurs under a Quebec Plan of Arrangment (Granite having continued in June 2012 to Quebec):
- Granite transfers, to a wholly-owned Quebec LP ("Fin LP"), loans owing to it by various European subsidiaries;
- Granite contributes its Canadian and U.S. assets, which are held through subsidiary partnerships ("Canadian Realty LP" and "US Holdingo LP"), and its LP interest in Fin LP, to another subsidiary Quebec LP ("Granite LP"), of which a B.C. subsidiary of Granite (Granite GP) will be the general partner holding a 0.001% GP interest
- Granite transfers its LP units of Granite LP to Granite REIT (which had been settled by it previously) in consideration for the issuance of additional units, and the assumption of debenture debt
- employee stock options on Granite commons shares are exchanged for options on Granite REIT units and Granite GP common shares
- Granite purchases for cancellation all its outstanding common shares in consideration for:
- the issuance of Class X common shares of Granite (which are convertible common shares that subdivide or consolidate pro tanto with REIT units) in a number (the "Residual Number") that correspond to the relative value of the equity in the (principally European) subsidiaries which will be retained by Granite compared to the total consolidated equity value of Granite REIT once all the Granite assets are tucked underneath it, multiplied by the number of previously outstanding Granite common shares
- the immediate delivery, in the case of each of the 200 largest shareholders, of 25 Granite REIT units and 25 Granite GP non-voting common shares
- the obligation to make a deferred delivery of Granite REIT units and Granite GP non-voting common shares which are equal in number to the total number of outstanding Granite common shares minus the number of Class X shares which are issued as described above and minus the number of units and shares that are delivered to the 200 largest shareholders (which, therefore, reduce the number of Granite REIT units and Granite GP non-voting common shares which they otherwise would receive on a deferred basis)
- Granite REIT issues Granite REIT units (and delivers Granite GP non-voting shares) to the Class X shareholders in consideration for the right to require their Class X shares to be contributed to Granite LP (with the Class X shares subsequently being converted in the hands of Granite LP into common shares)
- Granite LP transfers all of its voting LP units of Fin LP (representing approximately a 20% partnership interest therein) to Granite in consideration for Granite common shares
- the Granite GP (voting) common share held by Granite is cancelled and the non-voting common shares of Granite GP (held by the public) are converted into (voting) common shares
- the European loans owing to Fin LP and the Granite America loan owing to Granite LP become hypothecs (i.e., loans secured by way of movable hypothec) through a pledge by the debtor of units or promissory notes of real estate subsidiaries of the debtor
- all the Granite GP common shares and all the Granite REIT units (other than 25 units held by the GP of Fin LP) commence to trade on a stapled basis, with each stapled unit consisting of one such share and one such unit
Distributions
Initially, $0.175 per month per stapled unit (all on the REIT unit component of stapled unit) with return-of -capital percentage for 2013 estimated at 20% to 30%.
Management
The Granite REIT trustees and the Granite GP directors initially will be the same seven individuals. Senior management will be employed by Granite LP.
Canadian tax treatment
Reason for stapled structure. "It was determined to be desirable to utilize a 'stapled unit' structure so as to to not have an acquisition of control of Granite for Canadian income tax purposes and thereby preserve significant capital loss carry-forwards."
Mutual fund trust status
The declaration of trust has the standard 49% non-resident ownership limitations, which it is anticipated will be met. In addition, it is anticipated that Granite REIT's only undertaking will be investing in subsidiaries (i.e., Granite LP) whose units or shares are not taxable Canadian property.
REIT status
Management anticipates that Granite REIT will satisfy the four REIT tests in 2013; and has no reason to anticipate that it will not continue to satisfy those tests thereafter. Respecting the non-portfolio property test: Granite REIT's units of Granite LP, and Granite LP's units of Canadian Realty LP will be qualified REIT property; Granite LP's shares of Granite and units of Fin LP will be securities of portfolio investment entities; and the Granite America hypothecs held by Granite LP and the European hypothecs held by Fin LP will be securities of entities that are not subject entities. Respecting the 75% revenue test, "a movable hypothec on units, shares or debts of a Subsidiary which qualify as (deemed) 'real or immovable property' can bear interest that qualifies as interest on a hypothec on 'real or immovable property'."
Consequences of reorganization to Granite
Although a taxable capital gain of around $160 million will be realized on the units of Canadian Realty LP, this taxable capital gain can be sheltered with net capital losses of around $340 million, assuming these losses were not (or will not be) lost due to an acquisition of control of Granite by a group of persons. Respecting a $6 million taxable capital gain to be realized on shares of Granite America, this gain could be eliminated through a s. 111(4)(e) designation.
US Holdco LP
Management anticipates that in 2013, the level of activity in Granite America will be such as to not give rise to foreign accrual property income ("fapi") to U.S. Holdco LP and, in any event, the level of dividends (based on the US REIT requirement for Granite America to distribute all its taxable income for Code purposes) paid to US Holdco LP is anticipated to exceed any potential fapi if such activity test is not satisfied. However, in these circumstances there could be fapi arising on asset dispositions, including asset dispositions which qualified for "like kind" exchange treatment under the Code.
Granite
Similar fapi issue may arise for Granite in respect of its European subsidiaries. Management's anticipation that Granite LP and Granite REIT will satisfy the 75% revenue test under the REIT rules for 2013 assumes that (following an election to cease to be a public corporation), most distributions by Granite will be paid-up capital distributions rather than dividends.
Reorganization consequences to resident Granite shareholders
Their exchange of Granite common shares for Granite common shares plus the receipt or right to receive (to-be-) stapled units will be under a s. 86 reorganization, giving rise to capital gain only if the fair market value of such stapled units exceeds the adjusted cost base of their common shares. A deemed dividend is unlikely given the paid-up capital per common share of around $45. However, the subsequent exchange of Class X shares will not occur on a rollover basis.
Non-resident unitholders
It is unclear whether qualifying U.S. residents (who otherwise would benefit under Article XXII of the Canada-US Convention from the 0% withholding tax rate applicable to distributions made out of income arising outside Canada, and a 15% rate applicable to income arising in Canada) would have that benefit denied under the anti-hybrid rule in Art. IV, para, 7(b). Return-of-capital distributions are not expected to be subject to Part XIII.2 tax given the relative propertion of Canadian real property.
U.S. tax treatment
Anti-stapling rule. The anti-stapling provisions of Code s. 269B should not apply adversely (so that Granite GP common shares should not be treated as stapled to Granite America, which in turn could potentially result in Granite America not qualifying as a U.S. REIT).
Granite REIT as partnership
Granite REIT will elect to be a partnership for Code purposes. As it will be a publicly traded partnership, its status as a partnership for Code purposes will dpend on 90% or more of its gross income for every taxable year consisting of qualifying income including dividends and interest. Canadian Realty LP will elect to be a corporation for Code purposes.
Debt
The hypothec debt owing by Granite America to Granite LP shold be treated as debt, with Granite America deducting the interest thereon, and with the interest thereon generally not giving rise to withholding tax to Granite REIT unitholders, based on the portfolio interest exemption.
Reorganization
The receipt of stapled units for Granite common shares will be taxable to US shareholders under the rules generally applicable to the distribution of property by a corporaton to its shareholders. Accordingly, US shareholders will be rqeuired to include the fair market value of the stapled units received in gross income to the extent of the current and accumulated earnings and profits of Granite (including any gain recognized by Granite on its disposition of the stapled units - which will be treated as a taxable distribution of property by it, resulting in the recognition of gain on Granite's interest in Granite America, but with such gain being offset by available losses). The excess of the fair market value of the distributed stapled units over current and accumulated earnings and profits will be treated, first, as a non-taxable return of capital to the extent of the US unitholoders' basis in their Granite comon shares, and then as a taxable exchange of Granite common shares for stapled units.
The contribution of Class X shares of Granite (viewed as being the remaining common shares of Granite) to Granite LP at the direction of Granite REIT will be deemed to be a transfer of those shares to Granite REIT in a non-taxable contirbution to a partnership for Code purposes, so that no gain or loss will be recognized on the contribution by a US shareholder.
Although the basis of the stapled units received by the US shareholders in two tranches will be separately computed because a partner in a partnership generally has a single basis in its partnership interest, each unitholder will have a combined basis in its Granite REIT units. (The fair market value of, and basis allocated to, Granite GP units is expected not to be material.)
PFIC rules
Granite believes that it and its subsidiaries and, following the Arrangement, the subsidiaries of Granite REIT, should not be classifed as PFICs.
On-going taxation of US unitholders
As a partnership, Granite REIT's income will be allocated to its partners, and US unitholders will be provided with K-1s.
On-going taxation of non-US unitholders
The applicable rates under the Canada-US Treaty of withholding on the share of a non-U.S. unitholder who qualifies for Treaty benefits should be 0% for RRSPs, pension plans and tax-exempt organizations and 15% for individuals who so qualify. Corporate unitholders including most mutual fund trusts should be subject to a 30% rate.
FIRPTA
Granite REIT does not intend to dispose of its shares of Granite America (which are US real property interests), has no plans for Granite America to make distributions in excess of the sum of Granite REIT's earnings and profits and Granite REIT's adjusted basis in its shares of Granite America, and intends to avoid Granite America making distributions which are attributable to FIRPTA gains - for example, it may dispose of property in like-kind exchanges.
Non-US unitholders who otherwise do not have US tax reporting or filing obligations will not have such obligations as a result of a sale of their Granite REIT units provided that they were considered to own 5% or less of the Granite REIT units that were listed for trading at the time of sale and at all times in the preceding five years, and Granite REIT met the regularly traded requirement for the quarter in which the sale occurred - and the transferee would on the same basis not be required to withhold and remit 10% of the sale proceeds. Granite REIT expects the Granite REIT units to satisfy the regularly traded standards.
Timbercreek

Structure
The Fund subscription proceeds described below are used by the Fund to subscribe for a general partner interest in a subsidiary general partnership (Holding GP) with the other general partner (Holding GP) being an Ontario corporation owned by the Manager. The Fund General Partner also is owned by the Manager. The Fund may also subscribe for interest-bearing notes of Holding GP.
A Delaware limited partnership (US Holding LP) raises money on a private placement of LP units with US investors (to close concurrently with the public offering and the Canadian private placement referred to below). Holding GP and US Holding LP invest jointly in another Delaware LP (Operating LP). US Holding LP has received a commitment from the Operator (see below) to subscribe for US$5M of US Holding LP units.
4-year program
Operating LP will acquire apartment buildings in the south-eastern U.S. over the following two years (i.e., this is a blind pool offering). The Fund has a term of four years (subject to a single one-year extension at the discretion of the general partner.) The Fund will "seek to exit an investment promptly upon completion of the renovation and repositioning program in order to maximize returns for investors" (p. 41).
Unit offerings
The prospectus will qualify an offering by the Fund of Class A and B units, each for $10 per units, for aggregate proceeds of between $25M and $75M. Distributions on the Class A units bear a trailer fee (referred to as the Service Fee) of 0.5% p.a. The units will not be listed.
Canadian private placement financing
The Manager (described below), which has made an equity commitment of $2.5M of which a minimum of $1M will be invested at closing, and certain other investors subscribe for Class C units of the Fund at the same price on a private placement basis. The Manager also subscribes for equity in the general partner corp's.
Debt financing
The Fund will target a 65% loan to value ration on a consolidated basis (non-recourse mortgages only).
Distributions
Targeted quarterly disributions of 95% of (net) free cash flow from operations (expected to generate a yield of 4% to 5%) plus 100% of net proceeds of property sales. Manager has a carry (paid as a fee) of 25% of the pre-tax annual return in US dollars in excess of 8% p.a. (cumulative), plus a further 10% of any excess over 14%. Taxable income is allocated among the three unit classes as at the end of each month in proportion to distributions paid.
Management
The Manager, which employs 90 professionals in its Toronto head office, will delegate property management to the Operator, a third-party Florida-based LLC.
Canadian taxation
The SIFT taxation rules are not expected to apply as there will be no Canadian business. The Fund expects substantially all gains from property dispositions to be on income account. Foreign income taxes paid by the partnerships (including US federal income taxation of Holding GP as a result of electing to be a corporation for purposes of the Code) will be allocated to the Fund partners. The August 27, 2010 foreign tax credit generator proposals, respecting where a holder's share under US tax law of partnership income which is subject to US tax is less than its share under the Canadian Act, are not expected to apply.
"[I]f the Fund is allocated losses from Operating LP (indirectly through Holding GP) that are limited by the 'at-risk' rules, such losses may not be available to the Fund and, therefore, allocable to Holders...." (see 31 May 2012 T.I. 2012-0436521E5).
Fund units are not RRSP-eligible (no listing).
US taxation
Holding GP will elect to be classified as a corporation for Code purposes. As a foreign corporation that derives effectively-connected income from a partnership engaged in a US trade or business (i.e., Operating LP), it will be subject to 35% withholding under Code s. 1446 on distributions made to it by Operating LP, and will be required to file a federal return reporting its allocable share of Operating LP income on distributions made by it. As a foreign corporation owning a US real property interest, Holding GP will be subject to corporate tax on gains arsing on sales of the Operating LP properties. If withholding is made on gains distributions by Operating LP under Code s. 1446, no withholding will be required under Code s. 1445 on gains from the dispositions of the properties. The s. 1446 withholding will be allowed as a credit against US tax shown on Holding GP's federal income tax return.
The Fund will elect to be classified as a partnership for purposes of the Code. However, it does not expect to have any effectively-connected income. Interest on any note owing by Holding GP to the Fund should not be subject to US withholding tax provided that the Fund unitholders are able to establish that such interest is exempt under the Canada-US Convention or under the portfolio interest exemption. Deductibiity of interest on these notes (which are intended to be respected as debt and to be allocable to Holding GP's interest in Operating LP) may be limited inter alia by the earnings strippings rules in Code s. 163(j).
Healthlease

Overview of structure
A TSX-listed REIT (HealthLease REIT) will hold a portfolio of seniors care facilities in the case of the western Canadian homes and (in the case of its US properties) through an Indiana LP which will be held by a US corporation ("HealthLease US") whose shares will be held by a Canadian subsidiary of HealthLease REIT ("HealthLease Canada") and whose interest-bearing notes will be held directly by the REIT. Distributions are anticipated to be 93% of AFFO. The homes in the US will be operated by a third-party US operator. An LLC of the vendors of the US properties to the REIT will hold exchangeable Class B units of the Indiana LP along with special voting units of the REIT. Units are redeemable for the lesser of the closing market price and 90% of preceding 10-day VWAP, with monthly redemptions in excess of $50,000 satisfied with notes of the REIT.
Canadian tax
Management anticipates that HealthLease REIT will qualify as a REIT for Canadian income tax purposes. The income earned by HealthLease US from the US properties is anticipated to be foreign accrual property income, which will be included in the income of HealthLease Canada subject to a deduction for foreign accrual tax but will not be subject to further inclusion as income to HealthLease Canada when distributed as dividends to it. The REIT intends to be majority-owned by Canadian residents.
US taxation
HealthLease REIT will receive an opinion that the anti-inversion rules in s. 7874 should not apply to it. It should be eligible for benefits under the Canada-US Convention provided that its units are primarily and regularly traded on the TSX. Interest on the notes of HealthLease US held by the REIT (which should be characterized as debt rather than equity based on certain interest rate and debt feasibility studies) should be exempt from US withholding tax under the Convention. HealthLease REIT's debt-to-equity ratio will initially be under 1.5 to 1 and, accordingly, it is expected that s. 163(j) will not initially disallow the deduction of interest on these notes.
Pure Multi-Family

An Ontario LP ("REIT LP") that will trade on the TSX Venture Exchange invests in a Maryland corporation (holding US apartment buildings) that qualifies as a US private REIT. Management is not entitled to fees (other than expense reimbursement); but the Managing GP holds Class B units of REIT LP that stay fixed at a 5% interest, notwithstanding subsequent Class A unit issuances to the public, until the market cap reaches $300 million (or there is a successful takeover). No (cross-border) internal debt.
Canadian taxation
The US REIT has six full-time employees. Avoidance of FAPI to REIT LP is desirable because at least some of the distributions paid by the US REIT to REIT LP will be in the form of redemption proceeds for a fraction of an "ROC Share" which will be deemed under draft s. 90(2) to give rise to dividends, which presumably will come out of exempt or pre-acquisition surplus. (These redemption proceeds also are treated as distributions of taxable income for purposes of satisfying the US-REIT tests.)
No SIFT partnership tax as REIT LP does not hold any non-portfolio property. More detailed discussion of Canadian foreign tax credit and s. 98.1 rules than typical. No discussion of "zeroing" of at-risk amount under s. 96(2.3) to subsequent purchasers (to whom the disclosure is not directed).
US taxation
REIT LP does not elect to be a corporation for US purposes and its income from the US REIT is qualifying income, so that it is a partnership for Code purposes. As the shares of the US REIT (looking through REIT LP) are targeted to regularly trade on the TSX Venture Exchange (which includes a test that the 100 largest unitholders hold less than 50% of the units), non-US persons holding less than 5% of REIT LP are not subject to FIRPTA tax and related reporting requirements on sales of their units. The US REIT is not generally subject to corporate income tax, but the non-US unitholders are subject to US withholding tax on their shares of dividends from the US REIT; and as neither REIT LP nor the US REIT should be treated as hybrid entities (each is a partnership or corporation, respectively, in each jurisdiction) qualifying Canadian residents should be eligible for Treaty-reduced rates of withholding (0% for RRSPs and 15% for individuals including TFSAs, provided they hold less than 10%). The US estate tax treatment of the units of REIT LP is unclear.