Real estate investment trusts and infrastructure ... - EY · PDF fileWhy REITs REIT structure...

Real estate investment trusts and infrastructure investment trusts

Real estate investment trusts & infrastructure investment trusts

Real estate investment trusts


Real estate investment trusts (REITs) Background

The 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 were issued on 26 September 2014.

Why REITs REIT structure

► Monetizes 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 instead of debt financing

► Promotes real estate rental market

Sponsor Set up 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

Ensure reporting and disclosures are performed for various stakeholders


REITs Framework

Real estate investment trusts

Sponsor(s) Other unit holders

Not less than 25% for three years; not less than 15% at all times. Where more than one sponsor, not less than 5% at all times by each sponsor

At least 25% of the value of REIT assets or INR2.5 billion, whichever is higher

Banks Real estate investment management company

Trustee

Leverage up to 25% without credit rating and > 25% but < 49% with credit rating and unit holders’ approval

Other investors Promoters

RE owner

Facilities manager

Shares, shareholder loans

Investment management agreement

Management of facilities on an arm’s- length basis

≥ 50%

SPV 1 LLP

≥ 50%

SPV 2

Property company or property sold by RE owner


REITs in India Final regulations

Sponsor(s) qualifications

► Minimum holding of 5% of total units of REIT with a maximum of three sponsors

► Net worth of at least INR1 billion on consolidated basis and INR200 million on individual basis

► Minimum experience of five years in real estate industry for each sponsor and, where sponsor is a developer, at least two projects of sponsor should be completed

Manager qualifications

► Minimum experience of five years in fund management, advisory services, and/or property management

► Minimum net worth (net tangible assets in case of LLP) of INR100 million

► Two or more key personnel, having more than five 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, this must be obtained for any further borrowing:

► Credit rating from a credit rating agency registered with SEBI

► Approval of unit holders


REITs in India Final regulations (contd)

Investment conditions

► Minimum investment by REIT should be INR5 billion.

► They can invest only in securities or properties or transferable development rights in India.

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

► REIT may invest in properties through a special purpose vehicle (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 two 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 three 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 include developmental assets, listed and unlisted debt, and government securities. However, not more than 10% of the value of assets shall be invested in developmental properties for not less than three years.

► Not less than 75% of the 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.

► There should be 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, there should be 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.


REITs in India Final regulations (contd)

Related party transactions (RPTs)

► They should be on an arm’s-length basis.

► They may sell or purchase properties from related party subject to valuation by two independent valuers.

► Approval must 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 and approval from majority of investors.


Comparison to US REITs US REIT activities

► US REITs have been in existence since 1960. ► REIT rules have been modernized, expanding the activities that can be conducted in a REIT over time.

► Now, self-managed REITs are customary.

► There are over 170 public US REITs, with many more private REITs. ► Equity REITs

► Office

► Retail: shopping centers, regional malls, free standing

► Residential: apartments, manufactured homes

► Industrial

► Lodging

► Health care

► Self storage

► Timber

► Other: infrastructure, diversified

► Mortgage REITs ► Home financing

► Commercial financing


Comparison to US REITs Basic US REIT rules

► Organizational and miscellaneous requirements ► Must be a corporation, trust or association

► Managed by trustees or directors

► Transferable shares

► Otherwise taxable as a domestic corporation

► Not a bank or insurance company

► Have a minimum of 100 shareholders (waived for REIT’s first taxable year; thereafter must satisfy for 335 days of 12-month year)

► Not “closely held” (waived for REIT’s first taxable year)

► Elects to be taxed as a REIT

► Calendar tax year, except for certain grandfathered REITs

► Annual REIT income tests ► 95% income test

► 75% income tests

► Quarterly REIT asset tests ► 75%/25% asset tests and 10%/5% securities diversification limitations

► 25% asset (TRS) test


Infrastructure investment trusts


Infrastructure investment trusts (InvITs) Background

The Securities and Exchange Board of India (SEBI) issued draft regulations for InvITs on 17 July 2014, which were kept open for public comments till 24 July 2014. The final regulations were issued on 26 September 2014.

Why InvITs InvIT structure

► Aiding in financing/refinancing of infrastructure projects

► Unlocking tied-up capital of developers

► Lowering domestic financial institutions’ loan exposure

► Attracting foreign capital

Sponsor Set up InvIT and appoint the trustee

Hold minimum required percentage of total units of InvIT

Trustee Hold InvIT assets in the name of InvIT for the benefit of unit holders

Ensure investment manager makes timely payment of dividend to unit holders

Investment manager

Make investment decisions in relation to underlying assets

Ensure assets have proper legal title and contracts entered are legal, valid and binding

Project manager

Undertake operations and management of InvIT assets

For projects under construction, ensure progress of developments, approval status and such other aspects


InvITs Framework

► Sponsor sets up InvIT, with three sponsors maximum.

► Cumulative projects size is at least INR5 billion. ► Issue size is at least INR2.5 billion. ► InvIT to invest in projects either directly or

through SPVs (at least 50% holding at SPV level).

► Investment in units of InvITs is allowed by resident as well as nonresident investors.

► Minimum distribution equals 90% of distributable cash flow of InvITs/SPVs.

► Minimum lock-in period for sponsors is three years from the date of listing.

► Investors to have right to remove the manager, trustee, request delisting, etc.

► Related-party transactions to be on arm’s-length basis – related investors not permitted to vote.

InvIT Trustee

Sponsor

Investment manager

Listing is mandatory

Not more than 3

SPV-1 SPV-2 SPV-3

Asset mgmt.

fee

Assets Assets Assets

Assets

Project manager

to hold investments on behalf of trust

≥ 50% ≥ 50% O&M contracts

PM to be appointed for each infrastructure project

Institutional investors


InvITs in India Final regulations

Sponsor(s) qualifications

► Net worth of at least INR1 billion in case of body corporate or a company or net intangible assets of INR1 billion in case of a limited liability partnership (LLP)

► Minimum experience of at least five years and has completed at least two projects

Investment manager qualifications

► Net worth of at least INR100 million in case of body corporate or a company or net intangible assets of INR100 million in case of an LLP

► Minimum experience of five years in fund management, advisory services and/or development in infrastructure sector

► Two or more key personnel, having more than five years’ experience in fund management, advisory services and/or development in infrastructure sector

► One or more employee who has at least five years’ experience in relevant sub-sector in which InvIT proposes to invest

► Not less than half of its directors/members should be independent, and they should not be directors/members of another InvIT

► An office in India from where operations pertaining to InvIT is proposed to be conducted

Trustee qualifications

► Registered with SEBI and is not an associate of sponsor/investment manager

► Sufficient resources with respect to infrastructure, personnel, etc., as specified by the board


InvITs in India Final regulations (contd)

Borrowings

► Aggregate consolidated borrowings and deferred payments of the InvIT net of cash and cash equivalents shall never exceed 49% of the value of the InvIT assets.

► If aggregate consolidated borrowings and deferred payments of InvIT net of cash and cash equivalents exceed 25% of the value of InvIT assets, this must be obtained for any further borrowing:

► Credit rating from a credit rating agency registered with SEBI

► Approval of unit holders

Related-party transactions

► They should be on an arm’s-length basis.

► In case of publicly traded InvIT with respect to related-party transactions entered into after initial offer, approval from unit holders is required if:

► Total value of such transactions relating to sale/purchase of assets or investments into securities exceeds 5% of value of InvIT

► Value of funds borrowed from related parties exceeds 5% of total consolidated borrowings

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


InvITs in India – final regulations Permissible assets

Either:

► Completed and revenue generating

► Pre-COD project

► Received all requisite approvals

PPP

Non-PPP

Infrastructure projects

Infrastructure sector

Any project in infrastructure sector

Please refer to Appendix B

Infrastructure is defined by the Ministry of Finance as per notification dated 7 October 2013. Please refer to Appendix A

► Not achieved COD

► Achieved completion of at least 50% of the construction as certified by independent engineer or expended not less than 50% of the total capital cost.

► Please refer to Appendix B

► Achieved commercial operations date (COD) as defined under the relevant project agreement

► Received all requisite approvals

► Generating revenue from operations for a period of not less than one year

Please refer to Appendix B


Different categories of InvITs Comparison

Parameter Privately placed InvITs Public InvITs Investment >10% in projects under construction Investment >80% in revenue generating projects

Raising of funds ► Listing is mandatory.

► Funds to be raised by private placement from institutional investors and body corporates.

► There are no lock-in restrictions for investments by nonresidents.

► Foreign Investment shall be subject to guidelines specified by Reserve Bank of India (RBI).

► Listing is mandatory.

► There are no lock-in restrictions for investments by nonresidents.

► Foreign investment shall be subject to guidelines specified by RBI.

Listing conditions:

► Minimum public float: 25% of total outstanding units of InvIT and units being offered by way of offer document

Minimum investment by an investor

INR10 million INR1 million

Investment restrictions – asset type

► Cumulative project size ≥ INR5 billion

► Initial offer size ≥ INR2.5 billion

► Can invest in projects under construction ► To invest maximum of 10% in construction-eligible infrastructure projects

Investment conditions

No investment conditions prescribed ► 80% or more should be in completed and revenue-generating projects

► Balance of 20% or less can be invested in other specified investments


Different categories of InvITs Comparison (contd)

Parameter Privately placed InvITs Public InvITs Investment >10% in projects under construction Investment >80% in revenue generating projects

Leverage limits ► Maximum borrowings and deferred payments net of cash and cash equivalents — less than 49% of the value of the InvIT assets

Price of units of InvIT

Through book building or any other process in accordance with the guidelines issued by the board

Number of investors ► 5 to 1,000 ► At least 20

Holding of each investor shall not be more than 25% of the units of the InvIT


Tax provisions for REITs and InvITs


Tax provisions announced in Budget 2014 Specific tax regime proposed for listed REITs/InvITs – 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 securities transaction tax (STT) (if sold on exchange) to levied [section 111A/10(38)]

Potential Minimum Alternate Tax for Sponsor on exchange of shares with units in the business trust

SPV No tax concession proposed at SPV level

Distribution of dividend to trust — subject to dividend distribution tax (DDT)

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

Business Trust

Income of trust

► Dividend and interest received by trust from SPV — exempt

► Capital gains on disposal of assets — taxable in the hands of business trust (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 at 5%/10% for nonresident and resident unit holders, respectively. Tax may be deducted at higher rate of 20% in absence of a personal account number (PAN). Dividend and capital gains component of income distributed by business trust to the unit holders will be exempt in the hands of the unit holders.

Business trust to file return of income.

Unit-holder Interest income received by nonresident unit holders taxable at 5% concessional rate and at applicable rates for resident holders.

Capital gains on sale of listed units of business trust 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 at 15%. Where sale of units is off the exchange, LTCG taxable at 20% and STCG at applicable rates.

Minimum alternate tax (MAT) applicable on interest income and capital gains on sale of units of trust.


Q&A


Appendix A Final regulations — list of infrastructure sub-sectors

Infrastructure (as per notification dated 7 October 2013 of Ministry of Finance) Transport ► Roads and bridges

► Ports1

► Inland waterways ► Airport ► Railway track, tunnels, viaducts, bridges2 ► Urban public transport (except rolling stock in case of urban road transport)

Energy ► Electricity generation ► Electricity transmission ► Electricity distribution ► Oil pipelines ► Oil/gas/liquefied natural gas (LNG) storage facility3

► Gas pipelines4

Water sanitation ► Solid waste management ► Water supply pipelines ► Water treatment plants ► Sewage collection, treatment and disposal system ► Irrigation (dams, channels, embankments, etc.) ► Stormwater drainage system ► Slurry pipelines

1 Includes capital dredging

2 Includes support terminal 3 Includes strategic storage of crude oil 4 Includes city gas distribution network


Appendix B Final regulations — list of infrastructure sub-sectors

Infrastructure (as per notification dated 7 October 2013 of Ministry of Finance) Communication ► Telecommunication (fixed network)5

► Telecommunication towers ► Telecommunication and telecom services

Social and commercial infrastructure

► Education institutions (capital stock) ► Hospitals (capital stock)6

► Three-star or higher category classified hotels located outside cities with population of more than one million ► Common infrastructure for industrial parks, SEZ, tourism facilities and agriculture markets ► Fertilizer (capital investment) ► Post-harvest storage infrastructure for agriculture and horticultural produce, including cold storage ► Terminal markets ► Soil-testing laboratories ► Cold chain7

► Hotels with project cost8 of more than INR2 billion each in any place in India and of any star rating ► Convention centers with project cost8 of more than INR3 billion each

5 Includes optic fiber/cable networks that provide broadband/internet 6 Includes medical colleges, paramedical training institutes and diagnostics centers 7 Includes cold-room facility for farm-level pre-cooling, for preservation or storage of agriculture and allied produce, marine products, and meat 8 Applicable with prospective effect from the date of notification and available for eligible prospects for three years from the date of notification; eligible costs exclude

cost of land and lease charges but include interest during construction ◄


Appendix B Definitions

Associate

► Any person who controls, directly or indirectly

► In case of a company or a body corporate, any person who is designated as promoter of the company/body corporate and any other company/body corporate with the same promoter

► In case of an individual, any relative of the individual

► In case of a company or a body corporate or an LLP, its group companies

► Companies/LLPs under the same management

► In case of an InvIT, related parties to the InvIT

► Any company or LLP or body corporate in which the person or its director/partner holds, either individually or collectively, more than 15% of its paid-up equity share capital or partnership interest, as the case may be

Eligible infrastructure project

An infrastructure project that, before it is acquired by or transferred to the InvIT, satisfies the following conditions:

► For PPP projects, either:

► The infrastructure project is completed and revenue generating.

► The infrastructure project is a pre-COD project.

► In non-PPP projects:

► The infrastructure project has received all the requisite approvals and certifications for commencing construction of the project.

Infrastructure All infrastructure sub-sectors as defined by vide notification of Ministry of Finance dated 7 October 2013, including any amendments/additions made thereof

Infrastructure project

Any project in the infrastructure sector ◄


Appendix B Definitions (contd)

Special-purpose vehicle

Any company or LLP:

► In which the InvIT holds or proposes to hold controlling interest and not less than 50% of the equity share capital or interest

► That holds not less than 90% of its assets directly in infrastructure projects and does not invest in other special-purpose vehicles

► That is not be engaged in any other activity other than activities pertaining to and incidental to the underlying infrastructure projects

Completed and revenue-generating project

An infrastructure project that, before it is acquired by or transferred to the InvIT, satisfies the following conditions:

► The infrastructure project has achieved the commercial operation date as defined under the relevant project agreement, including the concession agreement, power purchase agreement or any other agreement of a similar nature entered into in relation to the operation of a project or any agreement entered into with the lenders.

► The infrastructure project has received all requisite approvals and certifications for commencing operations.

► The infrastructure project has been generating revenue from operations for a period of not less than one year.

Sponsor Company or LLP or body corporate who sets up the InvIT and assigned as such at the time of application made to the board. In the case of public-private partnership (PPP) projects, it shall mean the infrastructure developer or a special-purpose vehicle holding concession agreement.

◄


Appendix B Definitions (contd)

Pre-COD project

An infrastructure project that:

► Has not achieved commercial operation date as defined under the relevant project agreements, including the concession agreement, power purchase agreement or any other agreement of a similar nature entered into in relation to the operation of a project or any agreement entered into with the lenders

► Has:

► Achieved completion of at least 50% of the construction of the infrastructure project as certified by an independent engineer of such on that project

► Expended not less than 50% of the total capital cost set forth in the financial package of the relevant project agreement

Under construction project

Infrastructure project, whether PPP or non-PPP, which has not achieved the commercial operation date as defined under the relevant project agreements, including the concession agreement, power purchase agreement or any other agreement of a similar nature entered into in relation to the operation of a project or any agreement entered into with the lenders

Net worth

Net worth in relation to a company or a body corporate shall have the meaning assigned to it in or under sub-section (57) of section 2 of the Companies Act of 2013:

“The aggregate value of the paid-up share capital and all reserves created out of the profits and securities premium account, after deducting the aggregate value of the accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as per the audited balance sheet, but does not include reserves created out of revaluation of assets, write-back of depreciation and Amalgamation”

◄


Questions?

Please feel free to contact either of our partners with questions about the material covered during the webcast. Gaurav Karnik Partner, Tax & Regulatory Services Ernst & Young LLP (India) (p): +91 124 464 4000 (e):[email protected] Cristina Arumi Partner, National Tax Real Estate and Partnerships Ernst & Young LLP (US) (p): +1 202 327 7120 (e): [email protected]


Thank you for your participation!

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Real estate investment trusts and infrastructure ... - EY · PDF fileWhy REITs REIT structure...

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