Posted on 11:57 PM, April 20, 2010 [ BusinessWorld Online ]
DRAFT RULES to implement the Real Estate Investment Trust (REIT) law were issued by the Securities and Exchange Commission (SEC) on Monday amid plans by top property developers to raise cash through the investment vehicle.
"The implementing rules of Republic Act 9856 of 2009 shall make way for the full implementation of the REIT Act, which seeks to promote the development of the capital market and democratize wealth by broadening the participation of Filipinos in the ownership of real estate in the Philippines," the SEC said in a statement yesterday.
The regulator said it was open to comments on the draft rules until April 26.
The REIT bill lapsed into law last December, amid objections by the Finance department that it would lead to billions in foregone tax revenue.
SM Prime Holdings, Inc., the country’s largest mall operator, in February said it was looking to raise $300 million through a REIT. Last week, property giant Ayala Land, Inc. also said it wanted to raise $300 million through a REIT.
A REIT, as defined in the rules, is a stock corporation "owning income-generating real estate assets". It must be listed on the stock exchange and have at least 1,000 shareholders, each with at least 50 shares of any class and who, in the aggregate, must own a third of the REIT’s outstanding shares.
A REIT should have a minimum capitalization of P300 million. It must dispense 90% of its distributable income -- defined as net income adjusted for unrealized gains or losses -- as dividends each year.
The draft rules also list the kind of investments a REIT can make: "A REIT may invest in real estate located in the Philippines, whether freehold or leasehold. At least seventy-five (75%) of the deposited property of the REIT shall be invested in, or consist of, income-generating real estate."
"Deposited property" refers to the total value of a REIT’s assets and investible funds.
Other allowed investments include:
* real estate-related assets;
* debt papers issued by the government, whether denominated in peso or foreign currencies;
* debt papers issued by other governments or by multilateral organizations such as the Asian Development Bank;
* corporate bonds;
* stocks of non-property firms listed on the local stock exchange or foreign exchanges; and
* cash and cash equivalents.
A REIT must appoint a fund manager, who must be independent of the REIT, whose duties principally entail execution of the REIT’s investment strategy.
This strategy, according to the draft rules, must be good for three years -- but has to be submitted by the REIT to the fund manager annually -- and must cover "intended purchases and divestments of real and other properties."
The draft rules also lays out the REITs’ tax treatment: "A REIT shall be subject to income tax ... on its taxable net income ... provided that in no case shall a REIT be subject to a minimum corporate income tax."
"Taxable net income" is defined as gross income minus deductions allowed by the Tax Code and the dividends distributed.
The sale or transfer of real properties to the REIT shall be levied only half the applicable documentary stamp tax (DST) as well as registration and annotation fees.
Initial and secondary public offerings of securities will be exempted from the IPO tax while the sale or exchange of securities will be exempted from the DST.
Earnings from the sale of any real property, or rental earnings from the property, will be subject to value-added tax (VAT). A REIT’s sale or transfer of securities will not be subject to VAT since it is not considered a dealer.
The tax perks will be withdrawn in the event the REIT is delisted from the stock exchange.
"Any tax incentive that has been availed of by the REIT thereafter shall be refunded to the government within 90 days from the date of delisting," the rules state.
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