S. 107.4 Spin-Offs

Overview

In order to have a greater focus on industrial and residential properties and its US portfolio, the REIT is proposing to spin-off a newly formed unit trust (Primaris REIT), containing a portfolio focused more on Canadian retail and office properties, on a tax-free basis to its unitholders. The steps will entail forming Primaris REIT with nominal capitalization but with the same number of units as those for the REIT itself, making a nominal capital distribution of cash to a depositary for the REIT unitholders, and having that cash then used to purchase the Primaris REIT units.

The REIT will then make a “qualifying disposition” described in s. 107.4 (i.e., a gift) of the office/retail portfolio (packaged in subsidiary flow-through entities) to Primaris REIT. In addition to this transfer occurring on a s. 107.4 rollover basis, there will be a pro rata transfer of ACB from the REIT units to the Primaris REIT units, so that the ACB of the latter will increase from their nominal initial amount.

This Alberta arrangement is conditional on receipt of a CRA ruling.

Shortly after completion of the arrangement, some companies associated with the Healthcare of Ontario Pension Plan will contribute eight properties to Primaris REIT in consideration for $200M in cash and units of Primaris REIT, resulting in them ending up with a 26% equity interest. Because of some pension plan restrictions, some of the units issued to them may be “Series B” non-voting units rather than regular Series A units of Primaris REIT.

The REIT

A TSX-listed Ontario unit trust. 288M REIT units and 9.5M special voting units (held by CRAL Class B Limited, an affiliate of Canadian Realty Advisors Limited (formerly H&R Property Management Ltd.) to match exchangeable LP units held by it) are outstanding.

Primaris REIT

An Ontario open-ended unit trust for which the settlor (the REIT) subscribed $10 for one unit in consideration for issuing a $10 note to the trust.

Portfolio LP Trust

H&R Portfolio LP Trust, a subsidiary Ontario unit trust of the REIT holding assets to be retained.

Primaris Master LP

An Ontario limited partnership wholly-owned by the REIT directly as the limited partner and through a wholly-owned Ontario trust serving as trustee.

PRR Trust

An Ontario unit trust (holding many of the retail/office assets slated for Primaris REIT) whose units are held by Primaris Master LP and the REIT.

Portfolio LP Trust

H&R Portfolio LP Trust, a newly-formed Ontario unit trust and a subsidiary trust of the REIT.

Portfolio LP

H&R Portfolio Limited Partnership, a newly-formed Manitoba limited partnership and a subsidiary partnership of Portfolio LP Trust.

HOOPP

HOOPP Realty Inc., Lansdowne Mall Inc. and Lansdowne Industrial Inc., affiliates of Healthcare of Ontario Pension Plan, each of which is arm’s length to the REIT;

Notice of Determination

A notice executed by the parties two business days before the Effective Date of the Plan of Arrangement locking down various particulars such as properties to be transferred, amounts of consideration and numbers of securities issued.

Plan of Arrangement

1. Any liabilities of Primaris Master LP will be assumed by the REIT as a contribution of capital to Primaris Master LP, which will be wound up as described in ITA s. 98(3), with its former general partner (a subsidiary unit trust of the REIT) being wound up on a taxable basis.
2. PRR Trust will make a cash distribution equal to any undistributed taxable income.
3. The sole trustee of PRR Trust will be replaced by another Alberta corporation owned by the REIT, and the former trustee will be wound up into the REIT.
4. The REIT will transfer retail properties to Primaris LP on a s. 97(2) rollover basis.
5. The REIT will transfer the Primaris Property (being most of the LP units of Primaris LP, the units of the trustee thereof, and receivables) to New Primaris Master LP in consideration for the assumption of liabilities, a note of New Primaris Master LP (the “New Primaris Master LP Note”) and additional limited partnership interests in New Primaris Master LP.
6. The REIT will subscribe a modest amount for Series A units of Primaris REIT equal in number to the outstanding number of REIT units, with such subscription price satisfied by the issuance by the REIT to Primaris of a note.
7. The initial Primaris REIT unit will be redeemed for a redemption price that will be satisfied by set-off against the $10 note for which it was issued.
8. Primaris REIT will adopt an option plan and incentive units plan, and the terms of the incentive units will be adjusted to provide for vesting in cash of units.
9. The REIT will make a cash distribution on its units equal to the subscription amount in 6 above for the Primaris REIT units, with such cash transferred to a depositary for the unitholders.
10. The REIT will transfer and sell the Primaris REIT units that it subscribed for in ­­6 above to its unitholders on a pro rata basis for cash consideration equal to the per unit cash distribution made in 9 above, so that the cash held by the depositary is now held for it.
11. The REIT will transfer all of the “Retail Segment Property” (including the REIT’s limited partnership interest in New Primaris Master LP and the units of its general partner, the REIT’s remaining limited partnership interest in Primaris LP, the units of PRR Trust and the shares of the Primaris portfolio management company by way of a “qualifying disposition” as defined in ITA s. 107.4(1).
12. Concurrently with the transfer immediately above, each existing REIT option will be exchanged for one new REIT option and a Primaris REIT option on the basis described in ITA s. 7(1.4).
13. Each REIT option held by a Primaris REIT employee (and each Primaris REIT option held by a REIT employee) will be exchanged on the basis described in ITA s. 7(1.4) for an equivalent value of Primaris REIT (or REIT) options, and comparable exchanges will occur regarding the incentive units.
14. The REIT will subscribe for a number of New Primaris Master LP Exchangeable Units equal to the aggregate number of Primaris REIT Units which would be required to be delivered to the holders of H&R Class B Units on the exchange of such units for REIT Units and Primaris REIT Units. The subscription price payable by the REIT for such units shall be set-off against the amount owing to the REIT by New Primaris Master LP under the note issued by it as part consideration for the drop-down in 5 above.
15. Simultaneously with the step immediately above, Primaris REIT will issue an equal number of Primaris Special Voting Units to the REIT for no additional consideration, and the REIT will enter into the Voting Agreement with the holders of HRMSLP Class B Units, so as to follow their voting directions.
16. The Primaris REIT Units, Series A shall be consolidated (likely, on a 4-for-1 basis).
17. The REIT will repay the amount owing under the subscription note referred to in 6 above through application of the funds held by the depositary for it.
18. Replacement trustees for Primaris REIT will be appointed.

The HOOPP Contribution

It is expected that eight properties (the “HOOPP Properties”) will be indirectly sold to Primaris REIT for consideration valued at $800.84 million and consisting of a non-interest bearing promissory note for $200.21 million and some combination (at the election of HOOPP) of Primaris REIT Series A (voting) units and Primaris REIT Series B (non-voting) units, such that REIT Unitholders and HOOPP are expected to own an approximate 74% and 26% interest in Primaris REIT, respectively. Such promissory note will be repaid by Primaris REIT by way of drawdown on Primaris REIT’s new credit facility within three Business Days of the completion of the Arrangement. The REIT will contribute twenty-seven properties with an appraised value of approximately $2.4 billion and HOOPP will contribute eight properties with an appraised value of approximately $0.8 billion.

Canadian tax considerations

It is assumed that both the REIT and Primaris REIT will qualify as REITs.

Completion of the arrangement is conditional on receiving a CRA ruling that step 11 is a qualifying disposition as described in s. 107.4.

A resident holder will not realize any taxable income or gain as a result of the qualifying disposition. Immediately after the qualifying disposition, the ACB of a resident holder’s REIT units will be decreased by an amount equal to the “REIT Transfer Percentage” (being the percentage reduction in the FMV of a REIT unit as a result of the qualifying disposition) and the nominal ACB of the resident holder’s Primaris REIT units will be increased by the same amount.

No gain or loss will be realized on the consolidation.

It is proposed that the unitholders of the REIT will receive mostly cash from Starlight and KingSett funds for their REIT units. However, the purchasing funds will not end up with all the assets of the REIT. The two purchasers will acquire a portion of the assets after they have been suitably packaged into partnerships, with the REIT intending to push out the resulting capital gains (presumably with an eye on avoiding issues under s. 132(5.3)) using the capital gains refund mechanism.

Furthermore, some of the real estate will have first been packaged into a “High Yield Fund,” that is intended to qualify as a REIT and that effectively will be distributed to those unitholders who are interested in receiving units of that fund in lieu of full cash proceeds for their units. This will be accomplished by the REIT settling the new unit trust (the High Yield Fund) with $1,000 in cash, distributing $1,000 of cash to the REIT unitholders, selling its units of the High Yield Fund to the REIT unitholders for $1,000 in cash, and then effecting a s. 107.4 transfer of a holding LP for the real estate in question from it to the High Yield Fund. Those unitholders who have elected to receive only cash then will have their High Yield Fund units redeemed for $7.06875 per unit, in addition to having their REIT units redeemed for $29.18125 per unit. Those who want to retain the High Yield Fund units will not have those units redeemed, so that they only receive cash for their REIT units – and in effect receive their High Yield Fund units on a tax-deferred basis.

The High Yield Fund will need cash to accomplish the above. It is expected to complete the Offering, of up to $430,000,000 of units concurrently with the completion of the (Alberta) Arrangement.

Full Pt. XIII.2 tax will be withheld from the redemption proceeds paid to non-resident unitholders.

See full summary under Mergers & Acquisitions - REIT/Income Fund/LP Acquisitions - LP Acquisitions of Trusts.