A Real Estate Investment Trust (“REIT”) is a stock corporation established principally for the purpose of owning income-generating real estate assets. For purposes of clarity, a REIT, although designated as a “trust”, does not have the same technical meaning as “trust” under existing laws and regulations but is used for the sole purpose of adopting the internationally accepted description of the company in accordance with global best practices.
REITs are governed by Republic Act No. 9856, also known as the “Real Estate Investment Trust (REIT) Act of 2009.” R.A. 9856 lapsed into law on 17 December 2009. A decade later, or on 20 January 2020, the Securities and Exchange Commission (SEC) issued the implementing rules and regulations (IRR) through Memorandum Circular No. 1, series of 2020. The IRR is referred to as “The Implementing Rules and Regulations of Republic Act No. 9856, otherwise known as the Real Estate Investment Trust (REIT) Act of 2009” or, in short, the “REIT Rules”.
INVESTMENT IN THE REIT
Investment in a REIT is through purchase of the REIT’s shares of stock. Real estate investment is no longer illiquid, as the investing public can buy or sell REIT shares through an Exchange. A REIT may provide in its Articles of Incorporation different classes of shares of stock enumerating therein their respective features. The shares of stock of the REIT shall be registered with the SEC in accordance with the Securities Regulation Code (SRC) and listed in accordance with the rules of the Exchange.
No shares of stock of the REIT shall be offered for subscription/ sale to Public Shareholders except in accordance with a SEC-approved REIT Plan, which is in lieu of the prospectus required in other public companies. The REIT Plan contains, among others, the investment policy and strategy, dividend policy, nature and risks of making property investments, information and functions of the Fund Manager and Property Manager, and disclosure on how the proceeds of the public offering and any other funds raised in connection with the public offering will be utilized with timetable.
Investors expect a higher return on investment because a REIT is required by law to distribute, annually, a total of at least 90% of its Distributable Income as dividends to its shareholders. A REIT may declare either cash, property or stock dividends. In addition to the requirements of the Revised Corporation Code, the declaration of stock dividends must be approved by at least a majority of the entire membership of the board of directors, including the unanimous vote of all Independent Directors of the REIT and subject to the approval of the SEC.
REAL ESTATE INVESTMENT TRUST
The REIT shall comply with certain requirements, including the following:
- a. Minimum Public Ownership. A REIT must be a public company. It must have at least 1,000 Public Shareholders, each owning at least 50 shares of any class of shares, and who, in aggregate, own at least 1/3 of the outstanding capital stock of the REIT.
- b. Capitalization. A REIT shall have a minimum paid-up capital of Three Hundred Million Pesos at the time of incorporation. The paid-up capital can either be in cash and/or property.
- c. Independent Directors. At least 1/3 or at least 2, whichever is higher, of the board of directors of a REIT shall be independent directors.
- d. Reinvestment in the Philippines. The policies behind the REIT regulations include the development of the capital market and Filipino participation in the real estate industry, democratization of wealth by broadening the participation of Filipinos in the ownership of real estate in the Philippines, and the use of the capital market as an instrument to help finance and develop infrastructure projects in the Philippines. To carry out these policies, the law requires REITs to reinvest in the Philippines.
ALLOWABLE INVESTMENTS OF THE REIT
Only specific investments, enumerated in the law and the REIT Rules, may be undertaken by the REIT. These investments include:
1. A REIT may invest in real estate located in the Philippines, whether freehold or leasehold. At least 75% of the Deposited Property of the REIT shall be invested in, or consist of, income generating real estate. A REIT that owns land located in the Philippines must comply with foreign ownership limitations imposed under Philippine law.
2. A REIT may invest in income generating real estate located outside of the Philippines, provided that such investment does not exceed 40% of its Deposited Property and only upon special authority from the SEC.
3. Real estate-related assets, wherever the issuers, assets, or securities are incorporated, located, issued, or traded.
4. Bonds and evidence of indebtedness of the Republic of the Philippines, as well as SEC-registered corporate bonds of at least “A” rating.
5. Synthetic Investment Products, provided that, among others: (i) Synthetic Investment Products shall not constitute more than 5% of the Investible Funds of the REIT; (ii) the REIT shall avail of such Synthetic Investment Products solely for the purpose of hedging risk exposures of the existing investments of the REIT; (iii) the Synthetic Investment Products shall be issued by authorized banks or non-bank financial institutions in accordance with the rules and regulations of the BSP and/or the SEC; and (iv) the use of Synthetic Investment Products shall be disclosed in the REIT Plan and under special authority from the SEC.
THE FUND MANAGER
A REIT shall appoint a Fund Manager who shall be independent of the REIT, its promoter/s or sponsor/s. The functions of the Fund Manager include the implementation of the investment strategies of the REIT by: (i) determining the allocation of the Deposited Property to the allowable investment outlets in accordance with the REIT Plan and the investment strategy of the REIT; and (ii) selecting income-generating real estate in accordance with the investment strategy of the REIT. The Fund Manager must also oversee and coordinate the following activities: property acquisition; leasing; operational and financial reporting (including operating budgets); appraisals; audits; market review; accounting and reporting procedures, as well as refinancing and asset disposition plans.
To ensure independence of the Fund Manager, majority of the members of the board of the REIT Fund manager must be independent directors, at least 1 of whom must have a working knowledge of the real estate industry, fund management, corporate finance, or other relevant finance-related functions. The directors (including the independent directors) of the REIT and its Sponsors/Promoters cannot jointly occupy more than 49% of the board of directors of the REIT Fund Manager.
A REIT Fund Manager, duly licensed as such, can be a: (i) registered domestic corporation; (ii) trust entity with an existing BSP license; or (iii) foreign corporation duly licensed to do business in the Philippines. The Fund Manager must have, among others:
- 1. At least 3-year track record in the area of fund management, corporate finance, other relevant finance-related functions, property management in the real estate industry or in the development of real estate industry.
- 2. A minimum paid-up capital of Php 50,000,000, which capitalization shall remain unimpaired at any given time.
- 3. A chief executive officer (CEO) or any equivalent officer, or trust officer must have experience in financial management as well as experience in the real estate industry for at least 3 years.
- 4. Comply with the Fit and Proper Rule.
The Fund Manager shall not effect or cause to be effected any transaction based on material non-public or price sensitive information, or where prohibited from dealing by statutory restrictions on insider trading. The Fund Manager shall establish, maintain and implement written policies and procedures to prevent the misuse of material non-public or price sensitive information relating to the REIT by persons having access to such information. The Fund Manager shall ensure that persons having access to such information are aware of such restrictions.
THE PROPERTY MANAGER
A REIT shall appoint a Property Manager who shall be independent of the REIT, its promoter/s or sponsor/s. The Property Manager shall be responsible for managing all aspects of the real estate owned by the REIT
THE PROPERTY VALUER
A REIT shall appoint an accredited independent Property Valuer to prepare a full valuation of a REIT’s assets at least once a year. The Valuation Report, including the standards of asset valuation and valuation methodology shall be disclosed in the Annual Report of the REIT.
The valuation must be independent of and unaffected by the appraiser’s business or commercial relationship with other persons. There are strict and steep requirements for a Property Valuer.
- 1. The appraisal company must be SEC-registered.
- 2. The certifying officer of the appraisal company shall be a licensed professional appraiser, and an officer/member of good standing of any registered association of appraisal companies.
- 3. At the time of application, the company shall have a minimum experience of 5 years in the appraisal business.
- 4. It shall have rendered professional services for at least 1 commercial bank and 2 public companies.
- 5. The appraisal company or any of its directors/officers shall have no adverse judgment on any administrative, civil or criminal case involving its appraisal business.
- 6. It shall be solvent and in sound financial condition.
- 7. The directors and Principal Officers of the Property Valuer shall comply with the Fit and Proper Rule.
No valuer shall value the same REIT for more than 3 consecutive years. Subject to a curing period of 3 years, the REIT may, however, re-engage the services of said property valuer.
FIT AND PROPER RULE
Regulatory agencies are tasked to maintain the quality of management of the REIT and afford better protection to REIT investors. Towards this end, the SEC or the concerned regulatory agency shall prescribe or pass upon and review the qualifications of individuals elected or appointed as:
- 1. directors or officers of the REIT
- 2. REIT fund managers,
- 3. REIT property managers
- 4. distributors
- 5. other REIT participants
The appropriate regulatory agency may disqualify, suspend or remove any director or officer who commits or omits an act which renders him unfit for the position. In determining whether an individual is fit and proper to hold the position, regard shall be given to his integrity, experience, education, training and competence. The grounds for disqualifications are:
- 1. Any person convicted of any crime involving any security or financial product;
- 2. Any person convicted of an offense involving fraud or embezzlement, theft, estafa or other fraudulent acts or transactions;
- 3. Any person who, by reason of any misconduct, is enjoined by order, judgment, or decree by any court, quasi-judicial body or administrative agency of competent jurisdiction from acting as a director, officer, employee, consultant, or agent occupying any fiduciary position;
- 4. Any person found by the appropriate regulatory agency to have violated, or aided, abetted, counseled, commanded, induced, or procured the violation of this Act, the Revised Corporation Code, the General Banking Law, the Insurance Code, the Securities Regulation Code, or any related laws and any rules, regulations or orders thereunder;
- 5. Any person judicially declared to be insolvent, or incapacitated to contract; and
- 6. Any person found guilty by a foreign court, regulatory authority or government agency of the acts or violations similar to any of the acts or misconduct enumerated in the foregoing paragraphs.