real estate investment trusts - ey - united · pdf filepage 3 real estate investment trusts...

Real Estate Investment Trusts

REIT - Background and framework

Real Estate Investment Trusts (REITs) - Background

Securities and Exchange Board of India (SEBI) issued draft guidelines for Real Estate Investment Trusts (REITs) on 10 October 2013 which were kept open for public comments.

The final regulations have been issued on 26 September 2014

REIT Structure

► Monetisation of rent yielding assets held by the Real estate players

► Provides an exit route for promoters (subject to minimum lock-in for sponsor)

► Provides more stable Equity financing as against debt financing

► Promotes real estate rental market

Why REITs

Sponsor

Setup REIT and appoint the trustee

Hold minimum required percentage of total units of REIT

Trustee

Hold REIT assets in the name of REIT for the benefit of unit holders

Oversee activities of manager and ensure that manager undertakes reporting and disclosures as per the regulation

Ensure manager makes timely payment of dividend to unit holders

Manager

Identify and recommend investment opportunities

Manage investments

Undertake lease management

Ensuring reporting and disclosures to various stakeholders

REIT Framework

Real Estate Investment Trusts

Sponsor(s) Other Unit Holders

Not less than 25% for 3 years, not less than 15% at all times. Where more than 1 sponsor, not less than 5% at all time by each sponsor

At least 25% of the value of REIT assets or INR 250 crores whichever is higher

Banks

Real Estate Investment Management Company

Trustee

Leverage upto 25% without credit rating and > 25% but < 49% with credit rating & unit holders approval

Other Investors Promoters

RE owner

Facilities Manager

SPV 1 SPV 2

Shares, Shareholde

r Loans

Investment Management Agreement

Management of facilities on an arms length basis

Property Co / Property sold by RE owner

≥ 50%

LLP

≥ 50%

REITs in India Final Regulations

Sponsor(s) qualifications

• Minimum holding of 5% of total units of REIT with a maximum of 3 sponsors

• Net worth of at least INR 100 crores on consolidated basis and INR 20 crores on individual basis

• Minimum experience of 5 years in real estate industry for each sponsor and where sponsor is a developer, at least 2 projects of sponsor should be completed

Manager qualifications

• Minimum experience of 5 years in fund management/ advisory services/ property management

• Minimum net worth (net tangible assets in case of LLP) of INR 10 crores

• 2 or more key personnel, having more than 5 years’ experience, in Investment committee

Trustee qualifications

• Should be registered with SEBI

• Should not be an associate of sponsor/ manager

• Has such wherewithal with respect to infrastructure, personnel, etc. to the satisfaction of the Board and in accordance with circulars or guidelines as may be specified

Borrowings

• Aggregate consolidated borrowings and deferred payments of the REIT shall never exceed 49% of the value of the REIT assets

• If aggregate consolidated borrowings and deferred payments of REIT exceed 25% of the value of REIT assets, for any further borrowing following is required to be obtained

• Credit rating from a credit rating agency registered with SEBI

• Approval of unit holders

Investment Conditions

• Minimum investment by REIT - INR 500 crores

• Can only invest in securities or properties or transferable development rights in India

• Cannot invest in vacant land, agricultural land or mortgages. However, REIT may invest in mortgage backed securities. A REIT cannot invest in units of another REIT

• REIT may invest in properties through SPV with the following two conditions

• REIT shall hold controlling interest and not less than 50% of the equity shares of SPV

• SPV shall hold at least 80% of the assets directly in properties and should not invest in any other SPVs

• REIT shall hold at least 2 projects, directly or through SPV, with not more than 60% of the value of assets in one project

• Minimum 80% of value of REIT assets should be invested in completed and rent generating properties.

• Assets should be held for a period of not less than 3 years from the date of purchase of such property by the REIt or SPV.

• Remaining 20% of value of REIT assets can be invested in other specified assets which includes developmental assets, listed and unlisted debt, government securities etc. However, not more than 10% of the value of assets shall be invested in developmental properties for not less than 3 years

• Not less than 75% of revenues of the REIT other than gains arising from disposal of properties shall be from rental, leasing and letting real estate assets

• Not less than 75% of value of the REIt assets proportionately on a consolidated basis shall be rent generating

• Compulsory distribution of at least 90% of net distributable cash flows of the REIT to the unit holders on at least a half yearly basis

• Further, compulsory distribution of at least 90% of the sale proceeds from sale of assets to unit holders, if such amount is not reinvested in another property.

Related Party Transactions

•Should be on an arms-length basis

•May sell/ purchase properties from related party subject to valuation by two independent valuers

•Approval to be obtained from unit holders if value of RPT or funds borrowed from related party exceeds 10%

•Stringent conditions have been imposed including detailed disclosures, valuation requirements, approval from majority of investors etc.

REITs in India Final Regulations

REITs – Tax provisions

Tax provisions announced in Budget 2014

Specific tax regime proposed for listed REITs – to be effective from 1 October 2014

Sponsor

Capital gains at the time of exchange of shares in SPV with units of business trust to be deferred. Such capital gains proposed to be taxable only at the time of disposal of units by sponsor

* Period of holding of such units - period of holding of shares of SPV to be included

* Cost of acquisition of such units – cost of shares in specified SPV

Future sale of units by sponsor – Capital gains tax as well as STT (if sold on exchange) to levied [section 111A/10(38)]

SPV

No tax concession proposed at SPV level

Distribution of dividend to trust - subject to DDT

Interest paid to trust – allowed as deduction. No taxes to be withheld

REIT

Income of trust

- Dividend and interest received by trust from SPV – Exempt

- Capital gains on disposal of assets - taxable in the hands of REITs (effective tax rate of 20% for long term capital gains with indexation benefit and maximum marginal rate for short term capital gains)

- Any other income – taxable at maximum marginal rate

Interest component of income distributed by trust to the unit holders would attract withholding tax @ 5%/ 10% for non-resident and resident unit holders respectively. Tax may be deducted at higher rate of 20% in absence of PAN. Dividend & capital gains component of income distributed by REITs to the unit holders will be exempt in the hands of the unit holders

REITs to file return of income

Unit-holder

Interest income received by non-resident unit holders taxable at 5% concessional rate & at applicable rates for resident holders

Capital gains on sale of listed units of REITs on the exchange to attract levy of security transaction tax at par with that of listed equity shares. Long term capital gains (where units held for more than 36 months) would be exempt and short term capital gains would be taxable @ 15%. Where sale of units is off the exchange LTCG taxable at 20% and STCG @ applicable rates

MAT applicable on interest income and capital gains on sale of REIT units

Key asks

► Foreign direct investment up to 100% under the automatic route and foreign portfolio investment should be allowed in REIT

► Deferral of capital gains on transfer should be extended to transfer of assets or interest in a firm

► Minimum alternate tax (MAT) at the time of transfer of sponsor to REIT

► Exemption from dividend distribution tax paid by SPV to the REIT

► Period of holding of units of a REIT

► Taxability of capital gains on sale of units of the REIT by sponsor

► Allocation of expenses of REIT

EY’s comprehensive solutions for REITs

Our comprehensive services during your lifecycle

Services Have you decided to implement a REIT

Are you a REIT

Assurance

► Assist the management in preparation of financial statements and financial numbers as required in the offer document for REITS, which will principally include preparation of summary financial information for last three years

► Setting up of accounting policy and reporting framework

► Enable the process of consolidation in case of multiple SPV

► Assistance in setting up of quarterly close process for the REIT

FIDS

► Developing and implementing Code of conduct, Anti–fraud policy, Whistle blower mechanism, Anti bribery and corruption policies, Communication and training

► Conducting background check of third parties

► Assist the management in evaluation of the following:

► Related party transactions ► Evaluation of internal control ► Adequacy of financial reporting and

disclosures on an on-going basis. Post Listing - Audit of REIT accounts by the auditor not less than twice every year

FIDS

► Fraud risk assessment quickly identifies key fraud risks in the company by way of risk assessment workshop and then to test key risk which are rated critical by the company.

Conducting investigations into various allegations by: ► Forensic analytics of data dumps ► Review of transactions and underlying

documents/records ► Gathering market intelligence on prevalent

practices



Are you a REIT

Advisory

Process

1. Governance Structure and Organization Design

2. Develop JDs, KRA and compensation structure

3. Define SOPS for set up and operations phase

4. Establish KYC norms, evaluation for distributors and brokers

5. Develop MIS Framework

6. Establish Risk Management Systems

7. Project Management for “Set Up”

Technology

1. IT strategy development

2. Network, e-Sec architecture development

3. Implementation support

4. Sales & Redemption, Treasury, mid / back office, CRM systems evaluation

Process

1. Enterprise wide Risk Management

2. Internal Audits / Process Reviews/ Revenue Assurance Reviews

3. MIS including fund utilization MIS

4. Environmental audits

5. Energy audits

Technology

1. IT security / e-Sec review

2. Information Security Audit and Training

3. Business Continuity Planning and Disaster Recovery Planning



Are you a REIT

Advisory

Commercial Due Diligence:

► Benchmarking with similar developments to determine lease potential of the asset

► Market assessments to validate the rentals that an asset can command

► Estimation of rent escalations

► Preparation of newsletters to provide periodic updates on the performance of the REIT to be circulated to investors

Tax

► Assistance in registration of REIT with SEBI

► Review of listing documents from a tax & regulatory perspective

► Assistance in structuring the migration of assets/ SPVs currently held by the Sponsor, to the REIT

► Structuring investments by the investor into the REITs

► Evaluating the current structure and assisting in restructuring the same to ingrain efficiencies

► Structuring the investments by REIT into SPVs from a tax perspective

► Structuring the acquisitions by REIT into SPVs from a tax perspective

► Review of related party transactions and future tax structure

► Assisting with the statutory compliances to be undertaken

► Undertaking domestic transfer pricing analysis in respect of related party transactions



Are you a REIT

TAS

► Evaluation of REIT as a fund raising option

► Attaining right size of REITable assets ► In case of a non REITable asset, the

owner can:

► Divest assets to a potential sponsor

► Merge the asset portfolio with other asset owners

► EY can assist in deal sourcing for sponsors in terms of identifying merger and acquisition possibilities and providing buy / sell side M&A advisory services

TAS Valuation: REIT Assets’ valuation from EY

Buy-side M&A Advisory Sell-side M&A Advisory TAS Valuation: REIT Assets’ valuation from EY

EY’s Assurance Solutions

Our service delivery approach

Financial Accounting & Advisory Services

► Assist the management with carve out of existing assets from the main company which will principally include the following:

► Assistance in preparation of opening balance sheet of the Company.

► Setting up of accounting policy and reporting framework

► Enable the process of consolidation in case of multiple SPV

► Assistance in setting up of quarterly close process for the REIT

► Assist the management in preparation of financial statements and financial numbers as required in the offer document, which will principally include the following:

► Assistance in preparation of operating cash flows for last three years

► Assistance in preparation of summary financial information for last three years

► Assistance in drafting of MD&A (for the financial portion) in relation to the offer document.

► Assistance in drafting responses to the regulator comment letter

► Liasioning with independent accountants, as applicable

For Sponsor (At the time of set up)


Financial Accounting & Advisory Services

► At the time of set-up: Assist the management in preparation of financial statements and financial numbers as required in the offer document for REITS, which will principally include preparation of summary financial information for last three years

► Post Listing: Assist the management in evaluation of the following:

► Related party transactions

► Evaluation of internal control

► Adequacy of financial reporting and disclosures on an on-going basis.

For Manager

► Post Listing - Audit of REIT accounts by the auditor not less than twice every year

Assurance

Post- listing of REIT

Development of anti-fraud program

An Anti-fraud program demonstrates that management is setting the proper “tone at the top” by developing and implementing:-

Code of conduct

Anti–fraud policy

Whistle blower mechanism

Anti bribery and corruption policies

Communication and training

Setting up REIT

Our service delivery approach FIDS

Fraud risk assessment

Fraud risk assessment quickly identifies key fraud risks in the company by way of risk assessment workshop and then to test key risk which are rated critical by the company.

Background check

Conducting background check of third parties to obtain:

Background, reputation and ethical track record of third parties

Regulatory and litigation history

Associations or relationships of potential concern etc.

Fraud investigations

Conducting investigations into various allegations by:

Forensic analytics of data dumps

Review of transactions and underlying documents/records

Gathering market intelligence on prevalent practices

EY’s Advisory solutions

REIT Lifecycle

We believe trustees; investors and stakeholders require objective control over monitoring of assets under management, robust processes and controls for

ensuring steady revenue inflow and at the same time ensuring compliance with SEBI and various other statutory requirements. Our focus therefore would be

around all aspects of governance and compliance, with specific emphasis on activities that enhance and optimize controls around revenue

Our service delivery approach – Risk Advisory

Set up to Listing Operations

Ou

r S

olu

tio

ns

Governance Structure

and Organization

Design

IT strategy

development

Develop JDs, KRA

and compensation

structure

Sales & Redemption,

Treasury, mid / back

office, CRM systems

evaluation

Define SOPS for set

up and operations

phase

Network, e-Sec

architecture

development

Implementation

support

Develop MIS

Framework

Enterprise wide Risk

Management

Establish Risk

Management

Systems

Internal Audits /

Process Reviews/

Revenue Assurance

Reviews

Establish KYC norms,

evaluation for

distributors and

brokers

MIS including fund

utilization MIS

Project Management for “Set Up”

IT security / e-Sec

review

Information Security

Audit and Training

Business Continuity

Planning and Disaster

Recovery Planning

Environmental audits Energy audits

Process

Technology

Trustee

Sponsor

Manager and

Registrar

Legend

Stakeholder

EY’s Tax solutions

Our service delivery approach Tax Services

► Tax efficient re-structuring to minimize sponsor’s tax cost for consolidation of assets under a REIT structure ► Whether to hold assets directly by REIT; or ► Whether to hold assets through shares in SPVs

► Assistance in registration of REIT with SEBI ► Review of listing documents from a tax & regulatory perspective ► Assistance in structuring the migration of assets/ SPVs currently held by the Sponsor, to the

REIT ► Structuring investments by the investor into the REITs ► Evaluating the current structure and assisting in restructuring the same to ingrain efficiencies

At the time of set-up

► Structuring the compensation arrangement between Manager and REIT ► Structuring the investments/ acquisitions by REIT into SPVs from a tax perspective ► Assistance in regular compliances to be undertaken by REIT (e.g. filing of tax returns etc.) ► Review of related party transactions and future tax structure ► Undertaking domestic transfer pricing analysis in respect of related party transactions

Post set-up

EY’s TAS solutions


► Valuation

► Lead Advisory

► Buy side for acquiring assets

► Debt syndication

► Financial due diligence

Transaction Advisory Services (TAS)

Valuation Solutions

under REIT

4.

Real Estate Assets acquired,

sold or leased

5.

Issuance of new REIT units

6.

Fairness Opinion for property

leased to related parties

1. Annual valuation

Reporting to investors

2.

Half yearly valuation for submission to

exchanges

3.

Valuation in case of material

development

NAV declaration every 6 months or lesser intervals

TAS: Valuation services

EY can provide valuation services to REITs for investor reporting purposes Annual valuation

Reporting to investors

EY can provide valuation services for REITs for half-yearly NAV declarations to exchanges per the REIT guidelines

Half yearly valuation for submission to exchanges

In case there is a material development in the REIT, EY can provide valuation services for the development

Valuation in case of material development

When real estate assets are acquired, sold or leased, EY can provide valuation services to ascertain the fair value for the transaction

Real Estate Assets acquired, sold or leased

When new REIT units are to be issued, EY can provide valuation services to ascertain the amount at which the new units could be issued

Issuance of new REIT units

In case properties are leased to related parties, EY can provide fairness opinion on the transaction

Fairness Opinion for property leased to

related parties

Lead Advisory: Services to the Sponsor

Evaluate REIT option vis-à-vis alternate funding options

The evaluation will involve:

Market scenario assessment

Outlining alternate options such as:

Monetization of leased assets

Lease rental discounting (LRD)

Indicative transaction valuation and hence amount of funds that can be raised under each option

Leveraging capability- on the asset as per the REIT guidelines

Evaluation of REIT as a fund raising

option

M&A advisory to achieve an optimum REITable portfolio

In case of a non REITable asset, the owner can:

Divest assets to a potential sponsor

Merge the asset portfolio with other asset owners

Hence, EY can assist in deal sourcing for sponsors in terms of identifying merger and acquisition possibilities and providing buy / sell side M&A advisory services

Attaining right size of REITable

assets

Lead Advisory: Services to the Manager

Target Selection: Identify potential targets / assets

Targeting Approach: EY to make initial approaches to identified targets with a view to opening a dialogue in connection with a possible acquisition

Execution: Advising and assisting in negotiations with the target

Advising on negotiation of the price and commercial terms and conditions with the target

Project managing the acquisition process to completion

Buy-side M&A Advisory

Identification of Buyers: Identify potential purchasers

Deal Collateral: Preparation of deal collateral like information memorandum, teaser, business plan, etc.

Bid Process Management: Manage a tightly run competitive private bid process

Negotiations: Advise and assist in negotiations with potential purchasers

Sell-side M&A Advisory

TAS – Financial Due Diligence

Assist in preparation of business plans for the assets to be covered

Valuation of the portfolio

Validation of key assumptions for the projections to be presented in the offer document

Assist in identifying potential assets for acquisitions

Financial and tax DD on the asset evaluated for acquisition.

EY credentials

EY accolades - REITs

2012 Russell 3000

EY sub-subsector: REITS% of market capitalization audited

DT17.1%

EY50.9%

KPMG15.9%

Other5.6%

PwC10.6%

Russell Investment Group, 22 June 2012

Auditors as of January 2013

FTSE/NAREIT Index

% of REIT market cap audited

DT20.88%

EY47.40%

KPMG18.07%

Other4.44%

PwC9.21%

NAREIT, SNL, Company Filings 30 September 2012

Auditors as of 31 December 2012

► EY’s multidisciplinary business combines the skills of audit, tax, advisory and valuation professionals who specialize in serving REIT clients.

► EY works with more REITs than any other Big Four provider. Based on NAREIT’s June 2012 list, EY audits 63 of the 172 public REITs.

► Our REIT service teams understand the industry and have extensive knowledge regarding the issues facing REITs.

EY accolades - REITs

NAREIT’s Top REITS

Big 4 auditor # of

companies

auditors

% of companies

audited Markets Capitalization

(000) audited % of market

capitalization audited

EY 24 48.0% 25,44,12,100 50.4%

Delloitte 9 18.0% 10,83,34,800 21.5%

KPMG 11 22.0% 9,71,78,400 19.3%

PwC 5 10.0% 3,76,65,800 7.5%

Other 1 2.0% 69,82,100 1.4%

Total 50 100.0% 50,45,73,200 100.0%

Source: The Ames Research Group. June 2013

Select publicly-held Global REIT clients

Alexandria Real Estate Equities, Inc.

American Assets Trust, Inc.

American Campus Communities, Inc.

American Capital Agency Corp.

American Capital Mortgage Investment Corp.

Annaly Capital Management, Inc.

Apartment Investment and Management Company

Arbor Realty Trust, Inc.

Ares Commercial Real Estate Corporation

Ashford Hospitality Trust, Inc.

AvalonBay Communities, Inc.

BRE Properties, Inc.

Capital Trust, Inc.

Capstead Mortgage Corporation

Cedar Realty Trust, Inc.

Chesapeake Lodging Trust

Chimera Investment Corporation

Colony Financial, Inc.

CommonWealth REIT

CreXus Investment Corp.

DCT Industrial Trust Inc.

Douglas Emmett, Inc.

DuPont Fabros Technology, Inc.

Equity LifeStyle Properties, Inc.

Equity One, Inc.

Equity Residential

Extra Space Storage Inc.

Franklin Street Properties Corporation

Government Properties Income Trust

Hatteras Financial Corp.

Health Care REIT, Inc.

Hospitality Properties Trust

Hudson Pacific Properties, Inc.

Kite Realty Group Trust

Liberty Property Trust

LTC Properties, Inc.

Mid-America Apartment Communities, Inc.

National Retail Properties, Inc.

Newcastle Investment Corp.

Omega Healthcare Investors, Inc.

One Liberty Properties, Inc.

Parkway Properties, Inc.

Piedmont Office Realty Trust, Inc.

Plum Creek Timber Company, Inc.

PS Business Parks, Inc.

Public Storage

Rayonier Inc.

Retail Opportunity Investments Corp.

Ryman Hospitality Properties, Inc.

Saul Centers, Inc.

Senior Housing Properties Trust

Silver Bay Realty Trust Corp.

Simon Property Group, Inc.

SL Green Realty Corp.

Sovran Self Storage, Inc.

Spirit Realty Capital, Inc.

Sunstone Hotel Investors, Inc.

Terreno Realty Corporation

Two Harbors Investment Corp.

UDR, Inc.

Ventas, Inc.

Washington Real Estate Investment Trust

Credentials

This announcement appears as a matter of record only.

Empire State Realty Trust

a New York-based REIT – raised nearly $1 billion. EY served as the company's audit and tax provider for the offering, which ranks as the second largest REIT IPO in US history


Nomura Real Estate Holdings

a Tokyo-based REIT – Largest ever REIT IPO in Japan, with assets of $2.2 billion


a Munich-based REIT: EY served as the company's audit provider

Fair Value REIT-AG


a Indianapolis-based REIT: EY served as the company's audit provider

Simon Property Group Inc.


a Chicago-based REIT: EY served as the company's audit provider

Equity Residential


a New York-based REIT: EY served as the company's audit provider

Annaly Capital Management Inc.


a San Francisco-based REIT: EY served as the company's audit provider

BRE Properties Inc.


a New York-based REIT: EY served as the company's audit provider

SL Green Realty Corp.

Credentials

This announcement appears as a matter of record only. Indiabulls Properties Investment Trust

a Singapore-based business trust – EY served as the company's audit provider

This announcement appears as a matter of record only. Religare Health Trust

audit services

This announcement appears as a matter of record only. A Business Trust (Singapore based)

Tax Advisory services

This announcement appears as a matter of record only. Large Infrastructure company

audit services

Thank you

real estate investment trusts - ey - united · pdf filepage 3 real estate investment trusts...

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