Regulations Update: Real Estate Investment Trust Act

The Securities and Exchange Commission (SEC) published on May 26, 2010 the Implementing Rules and Regulations of the Real Estate Investment Trust Act of 2009 or the REIT Rules. The Real Estate Investment Trust Act of 2009 was passed by Congress in September 2009 and lapsed into law on December 17, 2009 without the signature of the President.

The stated purposes of the REIT Act are to promote the development of the capital market, broaden 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, and protect the investing public. These purposes are supposed to be achieved through the regulatory framework and the tax incentives provided for in the law.

Under the REIT Act, a real estate investment trust, or REIT, is not a trust but a stock corporation established principally for the purpose of owning income-generating real estate assets. It must have a minimum paid-up capital of at least P300 million and must be listed, with at least 1,000 public shareholders holding at least 50 shares each and who in the aggregate own at least one-third of the outstanding capital stock of the REIT. It is required to distribute annually at least 90% of its distributable income as dividends to its shareholders.

Among the incentives given to REITs are: exemption from the minimum corporate income tax; taxation of its income based on taxable net income, defined as gross income less all allowable deductions and less the dividends distributed to its stockholders as of the end of the taxable year; and fifty percent reduction in the documentary stamp tax and registration fees due on the transfer or sale of real property to REITs.

Pursuant to the REIT Rules, no shares of stock of the REIT shall be offered to the public except in accordance with the REIT Plan registered with and approved by the SEC. The REIT Plan, which takes the place of a prospectus, must contain the investment policy of the REIT, the risks involved in the investment, the character of the real estate owned or intended to be acquired, the financing plan, and information about the fund manager, the property manager, the principal stockholders and officers of the REIT, among others.

The REIT Rules also clarify what are the allowable investments of the REIT. For instance, the investment of the REIT in income-generating real estate located in the Philippines shall not be less than 35% of the assets of the REIT. The REIT may also invest in real estate outside the Philippines but it should not exceed 40% of the assets of the REIT and only upon special authority from the SEC. Overall, at least 75% of the assets of the REIT should be invested in income-generating real estate.

The qualifications, duties and responsibilities of the fund manager, property manager and independent property valuer [sic] are also specified in the REIT Rules.

While the objectives of the law are indeed lofty, it remains to be seen whether these objectives can be achieved considering the stringent requirements on public ownership for the REIT to qualify for incentives.