Asset Purchases

Overview

As targeted on its formation three years’ previously, the Fund indirectly sold three US rental properties at a gain after having increased the rents. In order to avoid the realization of foreign accrual property income gains, and instead realize (non-FAPI) capital gains that could be integrated with capital gains treatment to the Fund unitholders, the gains were not realized within the corporate subsidiary (a US private REIT) and instead were realized on internal transfers by subsidiary LPs. In order to get the proper basis adjustments for the distribution of such capital gains, various tiers of partnerships were wound-up on a bottom-up basis as a part of the distribution of proceeds, and with the net sales proceeds ultimately distributed in redemption of the Fund units.

FIRPTA was recognized on the gains on the sales.

Fund

The Fund is an Ontario LP that was established as a “closed-end” limited term fund in June 2017 to indirectly acquire income-producing multifamily properties that could achieve significant increases in rental rates as a result of undertaking high return, light value-add capital expenditures and active asset management, with the goal of ultimately directly or indirectly disposing of its interests in the assets by the end of the term of the Fund. The time horizon for the Fund was intended to be three years, with the initial term scheduled to expire in June 2020, and with two one-year extensions available subject to approval of the Fund GP. The Class A Units and Class U Units of the Fund are currently listed on the TSX-V. Daniel Drimmer beneficially owns 30.82% of the Class C Units, representing a 6.13% voting interest in the Fund.

Fund GP

Starlight U.S. Multi-Family (No. 1) Value-Add GP, Inc., an Ontario corporation owned by the Manager and holding a 0.01% general partner interest in the Fund.

Investment LP

Starlight U.S. Multi-Family (No. 1) Value-Add Investment L.P., an Ontario LP of which the Fund is the 99.99% limited partner and a wholly-owned Ontario subsidiary of the Fund is the general partner having a 0.01% general partner interest and a carried interest.

Intermediate LP

A Delaware LP to be formed prior to the closing whose sole limited partner will be Investment LP.

Holding LP

Starlight U.S. Multi-Family (No. 1) Value-Add Holding L.P., a Delaware LP of which Investment LP is the 99.99% limited partner and the general partner is a Delaware partnership (as to which the Manager is an indirect 80% owner) having a 0.01% general partner interest plus a carry.

U.S. REIT Subsidiary

Starlight U.S. Multi-Family (No. 1) Value-Add Fund REIT Inc. a Maryland liability company that (with the exception of preferred shares held by outside investors) is wholly-owned by Holding LP and which, through subsidiary LLCs holds multi-unit rental properties in the southern U.S.

Starlight Investments Acquisition (No.6) Partnership

An LP whose limited partner is the Fund.

CP Holding LP

Coventry Pointe Multi-Family Holding LP, whose limited partner is Starlight Investments Acquisition (No.6) Partnership

CP Acquisition LP

Coventry Pointe Acquisition LP, held by CP Holding LP and U.S. REIT Subsidiary (as limited partners) and by "CP Acquisition GP LLC" (as general partner) CP Acquisition LP holds the Veranda property.

Veranda Property LLC

A Delaware LLC to be formed as a wholly-owned subsidiary of CP Acquisition LP.

Manager

Starlight Group Property Holdings Inc.

Value of Transaction

The Transaction is valued at approximately US$239,600,000 and includes gross cash consideration of approximately US$92,100,000 payable to the Fund, with the Purchaser also indirectly assuming all of the Fund’s existing debt in the amount of approximately US$147,500,000. In connection with the Transaction, unitholders will be entitled to receive a distribution per Unit in the following amounts:

The net proceeds of the Transaction, after applicable U.S. taxes are paid, will be distributed to Unitholders as part of the cancellation of all issued and outstanding Units and dissolution of the Fund. Any U.S. taxes paid from the Fund’s proceeds of disposition are generally expected to be recognized as having been paid by the Unitholders for purposes of the foreign tax credit and foreign tax deduction rules in the Tax Act.

Periodic distributions

Under the Acquisition Agreement, Unitholders of the Fund are permitted to receive monthly Permitted Fund Distributions in an amount not to exceed (i) C$0.05000 per Unit in respect of each of the Class A Units, Class C Units, Class D Units and Class F Units, and (ii) US$0.05000 per Unit in respect of each of the Class E Units and Class U Units, in each case consistent with past practice. Assuming the Closing occurs in early January 2020, the Fund GP Board currently intends that its previously announced monthly distribution, in respect of November 2019 and payable on December 16, 2019, will be the Fund’s final regular monthly distribution.

Pre-closing transaction steps

Prior to Closing:

• CP Acquisition LP will transfer the Veranda Property to Veranda Property LLC in consideration for the assumption by Veranda Property LLC of the Veranda Property liabilities and additional membership interests in Veranda Property LLC; and
• Investment LP also will transfer the Holding LP Interest to Intermediate LP in consideration for additional limited partnership interests in Intermediate LP;

Closing steps

1. Intermediate LP will transfer to the Purchaser the limited partner interest in Holding LP Interest (the “Holding LP Interest”) for cash consideration equal to the Fund value minus the less the CP sale proceeds described below and the carried interest entitlement of the GP of Holding LP;
2. CP Holding LP will transfer 50% of the membership interest in CP Acquisition GP LLC to the U.S. REIT Subsidiary for cash consideration of U.S.$39K; and
3. CP Holding LP will transfer the limited partner interest in CP Acquisition LP (the “CP Acquisition LP Interest”) to the U.S. REIT Subsidiary for cash consideration of U.S.$7.8M; and simultaneously, the Purchaser will cause CP Acquisition GP LLC to distribute its GP interest in CP Acquisition LP to the U.S. REIT Subsidiary such that all of the partnership interests in CP Acquisition LP will be held by the U.S. REIT Subsidiary and the LP will thus be terminated;
4. The Fund will cause the applicable Fund Entities to distribute the proceeds from the sale, net of applicable U.S. taxes, to the Fund, which it will use along with any other available cash after applicable U.S. taxes, for an estimated total of US$81.8M to pay a distribution to all of the Unitholders, cancel all issued and outstanding Units and dissolve the Fund and its remaining subsidiaries.

REIT opinion

The Purchaser is not required to complete the Transaction unless the Fund has delivered to the Purchaser an opinion of Clark Hill PLC regarding the U.S. REIT Subsidiary’s organization and operation in conformity with the requirements for qualification and taxation as a real estate investment trust pursuant to ss.856 and 857 of the Code throughout the period up to the Closing.

Canadian tax considerations

Veranda transfer

Any recapture of depreciation or capital gain realized by CP Acquisition LP in respect of the transfer by CP Acquisition LP of the transfer of the Veranda property to Veranda LLC will be allocated to CP Holding LP, the U.S. REIT Subsidiary and CP Acquisition GP LLC in accordance with the partnership agreement governing CP Acquisition LP.

The U.S. REIT Subsidiary is a “controlled foreign affiliate” (“CFA”) of Holding LP. Accordingly, to the extent that the U.S. REIT Subsidiary earns “foreign accrual property income” (“FAPI”), the amount of such FAPI allocable to the Holding LP must be included in computing the income of the Holding LP for the fiscal period of the Holding LP in which the taxation year of the CFA ends. Dividends received by Holding LP from the U.S. REIT Subsidiary will be included in computing its income; however, a deduction generally will be available to the extent that Holding LP has included such amount in its income as FAPI. Any allocation of recapture income or capital gain by CP Acquisition LP to the U.S. REIT Subsidiary as a consequence of the Veranda property transfer is not expected to result in any material amount of FAPI being recognized by Holding LP.

Similarly, Veranda LLC will be a CFA of CP Acquisition LP, until CP Acquisition LP ceases to exist. Accordingly, any FAPI of Veranda LLC allocable to CP Acquisition LP must be included in computing the income of CP Acquisition LP for the fiscal period of CP Acquisition LP in which the taxation year of Veranda LLC ends.

Holding LP interest transfer

Any capital gain (or capital loss) realized by Investment LP in respect of the transfer of the LP interest in Holding LP by Investment LP to Intermediate LP will be allocated to the Fund and the general partner of Investment LP.

Distribution of refinancing proceeds

Because the purchase price to be paid by the Purchaser for the transfer to it of the Holding LP interest pursuant will be reduced by any refinancing proceeds distributed by Holding LP prior to closing, the reduction in the adjusted cost base of Investment LP’s partnership interest in Holding LP as a consequence of such distribution is not expected to change the capital gain realized respecting such disposition of the Holding LP interest.

Sales of Holding LP and CP Acquisition GP LLC interests

Intermediate LP and CP Holding LP will respectively realize a capital gain or loss on the sale of the Holding LP interest to the Purchaser, and on the sale of an interest in CP Acquisition GP LLC to the U.S. REIT Subsidiary (which will be owned by the Purchaser at the time of such sale).

Winding-up of CP Acquisition LP

As a result of the termination of CP Acquisition LP occurring as a result of the acquisition of the remaining interests in CP Acquisition LP by the U.S. REIT Subsidiary, the fiscal period of CP Acquisition LP will be deemed to end and CP Holding LP’s adjusted cost base in the CP Acquisition LP Interest at the time of sale will reflect CP Holding LP’s share of any income (including capital gains) or loss realized by CP Acquisition LP in that fiscal period prior to the sale sequence of the Veranda Transfer as described above. Any such capital gain realized by Intermediate LP or CP Holding LP will be allocated to its members.

Bottom-up dissolutions

Following the above sale transactions by them, Intermediate LP and CP Holding LP (collectively the “Lower Tier Subsidiary Partnerships”) will be dissolved, with the net sale proceeds of such sales distributed to Investment LP (in the case of Intermediate LP) and Starlight Investments Acquisition (No.6) Partnership (in the case of CP Holding LP) (collectively, the “Upper Tier Subsidiary Partnerships”), and where applicable to their respective general partners. In turn, it is expected that each Upper Tier Subsidiary Partnership will dissolve and distribute the proceeds received from the dissolution of the applicable Lower Tier Subsidiary Partnership to the Fund and its respective general partner. The fiscal period of each Lower Tier Subsidiary Partnership and each Upper Tier Subsidiary Partnership will be deemed to end prior to the time at which such partnership ceases to exist as a consequence of such dissolutions.

Dispositions by partners on dissolutions

The partners of each such dissolving Partnership (including the Upper Tier Subsidiary Partnerships, in the case of the dissolution of the Lower Tier Subsidiary Partnerships, and the Fund, in the case of the dissolution of the Upper Tier Subsidiary Partnerships) will be considered to dispose of their interests in the dissolving Partnership for proceeds of disposition equal to the amount of cash plus the fair market value of any other property distributed to them by the dissolving Partnership on the dissolution. Each of the Upper Tier Subsidiary Partnerships and the Fund will realize a capital gain (or capital loss) to the extent that such proceeds, net of reasonable costs of disposition, exceed (or are less than) its adjusted cost base of its interest in the applicable dissolving Partnership, taking into account any adjustments in respect of income (including capital gains) or loss allocated to it by the dissolving partnership for its fiscal period that is deemed to end as a consequence of the dissolution as described above.

Foreign tax credits

In general, a Holder will only be entitled to claim a foreign tax credit in respect of U.S. taxes paid by the Fund and the Subsidiary Partnerships in respect of the Transaction to the extent it has borne the economic burden of such taxes. For these purposes, U.S. taxes paid by a Subsidiary Partnership should generally be considered to have been borne by a particular Holder to the extent of the Holder’s share of such tax as determined in accordance with the Limited Partnership Agreement.

A Holder’s ability to apply U.S. 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 in which the U.S. taxes are paid, or where the Holder has other U.S. source income or losses, has paid other U.S. taxes or, in certain circumstances, has not filed a U.S. federal income tax return where required for the relevant taxation year. Although the foreign tax credit provisions are designed to avoid double taxation, the maximum credit is limited.

US tax considerations

No FIRPTA implications to dispositions of interests in Canadian partnerships

The Fund primarily own interests in Canadian partnerships that have elected to be treated as corporations for U.S. federal income tax purposes (e.g. the Investment LP). The interests in such Canadian partnerships (that are treated as corporations for U.S. federal income tax purposes) should not be treated as USRPIs because these Canadian partnerships should not be treated as U.S. corporations as they were not created or organized under the laws of the U.S. Since Non-U.S. Unitholders would not be directly or indirectly disposing of any USRPIs pursuant to the Transaction, any gain realized by such Non-U.S. Unitholders should not be subject to U.S. federal income tax.

Disposition of USRPIs by deemed US corporations

The Investment LP and Starlight Investments Acquisition (No.6) Partnership are treated as corporations for U.S. federal income tax purposes. As a result of the transaction, each such partnership will be considered to dispose of a USRPI. Any gain realized from such a disposition will be treated as if it were effectively connected with a U.S. trade or business and each partnership will be subject to U.S. corporate tax on any recognized gain.

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.

Overview

The REIT has agreed (in the "Acquisition") to acquire, through three subsidiary Ontario LPs (the "New Partnerships"), 29 residential properties (the "Acquisition Properties") comprising 2,824 suites, located in Ontario and Alberta, from entities controlled by Daniel Drimmer (the "Vendors") for a purchase price of $286M million, to be satisfied by (i) approximately $12.9 million in cash, (ii) the assumption of approximately $65.6 million aggregate principal amount of existing mortgage debt, (iii) approximately $127.5 million aggregate principal amount of new mortgage debt, and (iv) the issuance to the Vendors of 8,890,466 Class B LP Units of the New Partnerships (each such unit to be issued at a price of $9.00) and accompanying Special Voting Units of the REIT. The implied capitalization rate for the Acquisition Properties is 5.40%. The REIT is intended to qualify as a REIT for Canadian income tax purposes.

Drimmer

The REIT manager is owned by Drimmer who also is the REIT's CEO and Chairman. The effective interest of Drimmer in the REIT currently is 18.9% (including a 15% indirect interest in the form of exchangeable Class B LP units of existing subsidiary LPs and matching Special Voting Units) and will increase to 41.2%.

New Partnerships/Class B LP Units

The REIT has agreed to acquire control of the New Partnerships by subscribing for Class A LP Units of the New Partnerships and causing "True North General Partner" (also the general partner for existing subsidiary LPs of the REIT) to acquire the general partnership interest of each of the New Partnerships and thereby indirectly acquire the Acquisition Properties. The Class B LP Units are exchangeable on a one-for-one basis for REIT units pursuant to an Exchange Agreement. Each Class B LP Unit is accompanied by a Special Voting Unit of the REIT.

TN5 LPA

References the "Exchange Agreement" among Starlight Investments Ltd. (including affiliates thereof), the REIT, the General Partner and others, which will be assumed by the Partnership pursuant to the Assumption Agreement, regarding the Exchange Rights attaching to the Class B LP Units (being the right granted under the Exchange Agreement to the holder of Class B LP Units to cause the REIT to exchange each Class B LP Unit for one REIT Unit).

Instalment Notes

Certain of the Vendors have agreed to make monthly instalment payments to the REIT [i.e., the New Partnerships?] under Instalment Notes in order for the REIT to achieve an effective interest rate of 2.5% on the assumed mortgages.