A Philippine Real Estate Investment Trusts (REIT) is a stock corporation established in accordance with the Philippine corporation code. The present corporation code in the Philippines is Republic Act No. 11232 (RA 11232).
For purposes of clarity, a REIT, although designated as a “trust”, does not have the same technical meaning as “trust” under existing laws but is used for the sole purpose of adopting the internationally accepted description of a company owning income-generating real estate assets in accordance with global best practices. A Philippine REIT is not a “trust” created under trust laws of the country but a corporation created in accordance with the corporation code.
What make a corporation a Real Estate Investment Trusts (REIT) is governed by the Republic Act No. 9856 (RA 9856) known as “The Real Estate Investment Trust (REIT) Act of 2009.” The law was enacted to to promote the development of the capital market, democratize wealth by broadening the participation of Filipinos in the ownership of real estate in the Philippines, use the capital market as an instrument to help finance and develop infrastructure projects.
The following are the requirements under the law for a corporation to be considered a REIT:
- A REIT must be a public company and to be considered as such, a REIT, must: (a) maintain its status as a listed company; and (b) upon and after listing, have at least one thousand (1,000) public shareholders each owning at least fifty (50) shares of any class of shares who in the aggregate own at least one – third (1/3) of the outstanding capital stock of the REIT. A recording and monitoring system that will effectively ensure that the shares of the public shareholders are traceable to their names and for their own benefit and not for the benefit of any of the non – public shareholders is prescribed.
- A REIT must have a minimum paid – up capital of Three Hundred Million (300,000,000) Philippine Pesos.
- At least seventy – five percent (75%) of the deposited property of the REIT must be invested in, or consist of, income – generating real estate.
- A REIT must appoint a fund manager that is independent from the REIT and its sponsor(s)/ promoter(s).
- A RElT must appoint a REIT property manager who shall be responsible for managing the real estate assets such as apartment buildings, office buildings, warehouses, hospital buildings” medical facilities, hotel buildings, resort facilities, manufacturing plants and other physical assets of the REIT. The REIT property manager shall be independent from the REIT and its sponsor/promoter.
- Fees received by the REIT fund manager and the RET property manager from the REIT shall not exceed one percent (1%) of the net asset value of the assets under management.
- A REIT must distribute annually at’ least ninety percent (90%) of its distributable income as dividends to its shareholders. The dividends shall be payable only from out of the unrestricted retained earnings of the REIT as provided for by the corporation code. The percentage of dividends received by the public shareholders to the total dividends distributed by the REIT from out of its distributable income must not be less than such percentage of their aggregate ownership of the total outstanding shares of the REIT. Any structure, arrangement or provision which would have the effect of diminishing or circumventing in any form this entitlement to dividends shall be void and of no force and effect.
In order to achieve the purposes and intents of the REIT law fiscal incentives are provided for by the law. The following are the incentives of a REIT:
- Taxable Net Income for a REIT means the pertinent items of gross income specified in Section 32 of the National Internal Revenue Code (Tax Code), as amended, less all allowable deductions enumerated in Section 34 of the National Internal Revenue Code of 1997, as amended, less the dividends distributed by a REIT out of its distributable income as of the end of the taxable year as: (a) dividends to owners of the common shares; and (b) dividends to owners of the preferred shares pursuant to their rights and limitations specified in the articles of incorporation of the REIT.
- A REIT shall not be subject to the minimum corporate income tax, as provided under Section 27(E) and Section 28(A)(2) of the Tax Code.
- Income payments to a REIT shall be subject to a lower creditable withholding tax of one percent (1%).
- The sale or transfer of real property to REITs, which includes the sale or transfer of any and all security interest thereto, shall be subject to fifty percent (50%) of the applicable Documentary Stamp Tax (DST) imposed under the Tax Code.
- All applicable registration and annotation fees to be paid, related or incidental to the transfer of assets or the security interest thereto, shall be fifty percent (50%) ‘of the’ applicable registration and annotation fees.
- Any initial public offering and secondary offering of investor securities shall be exempt from the tax imposed under Section 127(b) of the Tax Code.
The REIT law also provides a robust framework for the protection of REIT investors. The following are among those safeguards:
- To maintain the quality of management of the REIT and afford better protection to REIT investors, the Securities and Exchange Commission (SEC) shall prescribe or pass upon and review the qualifications and disqualifications of individuals elected or appointed as directors or officers of the REIT, REIT fund managers, REIT property managers, distributors and other REIT participants and disqualify those found unfit.
- A full valuation of a REIT’s assets must be conducted by an independent appraisal company, duly accredited by the SEC, at least once a year in accordance with the applicable rules of asset valuation and valuation methodology.
- The total borrowings and deferred payments of a REIT should not exceed, ‘thirty – five percent (35%) of its deposited property.
- Not more than fifteen percent (15%) of investible funds of the REIT may be invested in any one issuer’s securities or anyone managed fund, except with respect to government securities where the limit is twenty – five percent (25%).
- A REIT may invest not more than five percent (5%) of its investible funds in synthetic investment products such as, but not limited to, credit default swaps, credit – linked notes, collateralized debt obligations, total return swaps, credit spread options, and credit default options, and only upon special authority from the appropriate regulatory authority.
- At least one – third (1/3) of the board of directors of a REIT must be independent directors.
- In the event the REIT is delisted from the Exchange, whether voluntarily or involuntarily, for failure to comply with the provisions of the REIT law or rules of the Exchange, the tax incentives granted under the REIT law shall be ipso facto revoked and withdrawn as of the date the delisting becomes final and executory and any tax incentives that may have been availed of by the REIT thereafter shall immediately be refunded to the Government and the surcharge and penalty prescribed shall apply. If the delisting is for causes highly prejudicial to the interest of the investing public such as violation of the disclosure and related party provisions of the REIT law or insolvency of the REIT due to mismanagement or misappropriation, conversion, wastage or dissipation of its corporate assets, the responsible persons shall refund to its investors at the time of final delisting the value of their shares.
It pays to know the legal framework before we invest. Happy REIT investing!