Feds' new, easier REIT rules a welcome change, says KPMG

Changes to federal legislation relating to real estate investment trusts, currently making their way through Parliament, should ease property and revenue restrictions that govern REITs and may offer REIT status to trusts that do not qualify under old rules, according to a recent report from KPMG .
Ottawa’s new rules for REITs, the results of years' worth of lobbying by the real estate industry, are a boon for yield-hungry investors, according to Lorne Shillinger, national leader of KPMG’s Real Estate Taxation practice. “In an environment when you can get 1% on your investments, the REITs are a nice alternative.”
World beaters rewarded
The biggest win among the proposed rule changes according to the consulting firm is a provision that will make it simpler for Canadian REITs to buy foreign property. “You can structure a Canadian REIT, held by Canadian investors, investing globally,” Shillinger said.
The KPMG executive said the changes will likely not affect Canadian REITs that have been set up to invest solely in foreign markets such as Dundee International REIT with its Europe-focused strategy, but rather REITs that hold a mix of domestic and foreign assets.
Safe harbours dredged
Ottawa’s new rules will provide REITs with “a reasonable safe harbour for unintended issues resulting from the ownership of “bad” property and are allowed to conduct a degree of business activity that was not possible under the old rules,” KPMG noted.
The feds have also eased the real property test for REITs. Previously, a REIT was not permitted to hold any non-portfolio property at any time during the year, other than qualified REIT property. The new rules amend the property test so that a REIT is now allowed to hold up to 10% of its non-portfolio property in assets that are not qualified REIT properties.
Previously, a REIT was not permitted to hold any non-portfolio property at any time during the year, other than qualified REIT property. The new rules amend the property test so that a REIT is now allowed to hold up to 10% of its non-portfolio property in assets that are not qualified REIT property.
Non-portfolio property is a basket that, according to KPMG, includes:
* Securities of an entity that represent more than 10% of the equity value of the entity or more than 50% of the equity value of the security holder
* Canadian real, immovable or resource property, if it, along with all of the entity’s Canadian real, immovable or resource property, represents more than 50% of the entity’s equity value
* Property used in carrying on a business in Canada.
Lobbying pays off
Industry players are happy that “the guts of the regime” that previously existed to govern REITs remains and that the changes made were those pushed by those working in commercial real estate.
“The government really did listen,” said Shillinger. “I was part of the lobbying effort and this was the fourth or fifth series of changes that has come.”
Many changes were to fix unintended glitches that were revealed after prior tweaks were put in place.
“There is a sense of gratitude that the government really did take input and listened.”
Shillinger credits REALpac for leading the industry’s lobbying for changes to REIT rules.
“REALpac went out a number of times and met with senior finance officials.”
Industry wants more
The recent changes do not signal that the industry has given up its efforts to further ease rules governing REITs.
The final frontier: hotels and seniors housing, said Shillinger. “The U.S. has sets of rules that allows hotels and seniors housing to be operated in a REIT environment, and certainly our client base would like the same thing up here.”
The U.S. system rests upon a taxable REIT subsidiary and the industry hopes a similar practice will be embraced in Canada. Ottawa is well aware of the request “and they haven’t said no yet.”
Flaherty likes REITs
Federal Finance Minister Jim Flaherty, who generated plenty of heat when he shut down income trusts a number of years ago, appears a lot more comfortable with the proliferation of REITs.
He said last week that he’s not concerned about a new generation of REITs spawned by retailers such as Canadian Tire Corp. and Loblaw Cos. Ltd.
“We have seen an uptick in commercial real estate certainly in recent times, so in that sense, it doesn’t surprise me,” Flaherty told the National Post. “As long as people play within the rules, we won’t need to intervene.”
Flaherty’s 2006 shutdown of companies converting to high-yield income-trust securities did not include REITs.
“We did not eliminate REITs back in 2006 because they were not considered to be passive investment vehicles,” Flaherty said. “They actually invest and reinvest in shopping malls and office buildings and various other things, so it’s not just a money flow-through to passive investors.”
Hudson’s Bay Co. is another major retailer considering spinning off its real estate holdings into a REIT.
REITs raised $760 million from six Canadian IPOs this year, including Milestone Apartments REIT and Agellan Commercial REIT, making up 74% of the $1.03 billion raised from initial offerings this year in the country, according to Bloomberg data.
Canadian REITs raised almost $500 million in seven IPOs last year, more than any other industry in Canada, the data show.
The Standard & Poor’s/TSX Capped REIT Index soared 165 per cent from a five-year low on March 9, 2009 through May 10. The benchmark S&P/TSX Composite index rose 66 per cent over the same period.



Paul is a writer, editor and media trainer based in Toronto with over 25 years of experience as a business reporter. He has written for Canada’s major news services on…

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Paul is a writer, editor and media trainer based in Toronto with over 25 years of experience as a business reporter. He has written for Canada’s major news services on…

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