Propuesta The Spanish REIT business: SOCIMI

Author: Manel Hernandez manfin2005@yahoo.com

Autor: Manel Hernandez HP Consulting Manel.hernandez@hp.com

A better way to fix banks Heres a proposal that could help solving the g toxic-asset pricing problem voluntarily without requiring the Administration to nationalize the whole industry and make (pretty much) everyone a winner.

Index

REIT concept Legislation L i l ti Who could be interested in Why HP solutions Business process: Finance + Legal advisors IT Solution Business models What is next?

Introduction: Real Estate portfolios today

Banks with excessive risk exposure on national and international RE investments, and related liabilities. High risk of default credit. Banks ith increasing bad d bt B k with i i b d debts Banks balance sheets need to be cleared out. Necessity of profitability on RE investments while diversifying their business model. b d l ECB and local EU Governments need to stabilize and reactivate the EU financial system

The origins of REIT :

When a bank faces an insolvency from a mortgage credit debtor, it can be negotiated to recover the RE asset while clearing out the credit. Finally when there is no other way it will be classified as bad debt.

When a credit is classified as bad debt banking authorities forces to provision the same amount which could generate treasury tensions on any bank. To provide an alternative solution most EU government are improving the REIT conditions, while in Spain the Central Government i setting up a new bill on creating REIT S i th C t l G t is tti ti REIT. A Real Estate Investment Trust or REIT is a tax designation for a Corporation investing in Real Estate that reduces or eliminates corporate income taxes. In return, REITs are required to distribute 90% of their income which may be taxable, into the hands of the investors The REIT structure was income, taxable investors. designed to provide a similar structure for investment in real estate as mutual funds provide for investment in stocks.

Like other corporations, REITs can be p p publicly or p y privately held. Public REITs may be listed on p y y public stock exchanges like shares of common stock in other firms. The legislation goal is to reactivate the financial markets by gaining on transparency. REITs have existed in the USA since the 1960s. They were later introduced in other countries, such as y the Netherlands, Australia, Canada, Japan, Belgium, Germany, France, sometimes in modified form.

US REIT Qualifications
In order to qualify for the advantages of being a pass-through entity for U.S. corporate income tax, a REIT must:

Be structured as corporation, trust, or association United Be managed by a board of directors or trustees States Have transferable shares or transferable certificates of interest Otherwise be taxable as a domestic corporation Not be a financial institution or an insurance company Be jointly owned by 100 persons or more Have 95 percent of its income derived from dividends, interest, and property income Pay dividends of at least 90% of the REIT's taxable income No more than 50% of the shares can be held by five or fewer individuals during the last half of each taxable year (5/50 rule) At least 75% of total investment assets must be in real estate Derive at least 75% of gross income from rents or mortgage interest No more than 20% of its assets may consist of stocks in taxable REIT subsidiaries.

Spain REIT Qualifications

In order to qualify for the advantages of being a p pass-through entity for Spain corporate income tax, a g y p p , REIT must:

Minimum capital: 15m Union 18% taxable corporate profits Maximum financial leverage: 70% Be structured as corporation, trust, or association Be managed by a board of directors or trustees Have transferable common shares Otherwise be taxable as a domestic corporation No financial institution or insurance company Be jointly owned by 5 persons or more Have 85 percent of its income derived from dividends, interest, and property income Pay dividends of at least 90% of the REIT's taxable income At least 85% of total investment assets must be in real estate Tax advantages can be applied two years before meeting qualifications through a single declaration. REITs are known in Spain as SOCIMI.

European

REIT investment figures in the World

REIT = Real Estate Investment Trust
From F Australia 1971 Ley 8668/1993 Fundos de Investimento Imobilirio Number of REIT N b f stocks market value and date dd t AUS 100.000 M (2008) Specialization S i li ti No data by sector t

70

Brazil B il United Kingdom

No data N d t

No data N d t

Finance Act 2006. (Efectiva en 2007) 2007 Germany REIT- Aktiengesellschaft SIIC - Socit dinvestiment Immobiliare Cot l'article 11 de la loi de finances n 2002-1575 du 30 dcembre 2002

21

GBP 21.800 (Sept. 2009)

No data N d t Industria/oficinas Retail Sanidad Mixtos

2.400 400 400 15.000

France United States

46

31,000 (Dec 2008)

sin datos Industry Retail Residential Leisure resorts Logistics g Health Other areas mixed 92.000 100.000 57.000 11.000 14.000 28.000 13.000 206.000

1960

262

USD $539.000 (Aug 2009)

Figures in milions of the respective currency Source: HP from market data

Who may be interested in?

Financial organizations with large stocks of mortgages and RE assets. Banking managers: to concentrate their activities on their core banking by setting out of their Balance Sheet, RE investments, or their participations as shareholders of RE subsidiaries Family Offices / Investor Groups Hotel chains Health: Hospitals, Nursing homes Country regulators: To reactivate RE market and bring transparency on RE deals and on their financing.

Key ratios: This may be an interesting option because:

frees up potentially low-profit capital that has been tied up in real estate, and allows it to be reinvested in core business areas and used to increase the equity ratio. it ti Provide an accountable market mark up on RE investment through contract cash flow valuation Increase working capital l ki i l levels assets l Arises customers accountability through transparent operations regulation.

REIT Added value:

Phases RE insolvency RE debt recovering negotiation RE sales

entire flow coverage

Claims, underpayment, and their communication and activities management Legal procedures and communications across countries, auctions, portfolio monitoring. Distribution channels support. Results oriented solution. RE l lease out management. From expenses to t t F t conditions and condominium groups. Investment management. Wholesales

RE lease out
RE Investment I t t Funds

REIT Investors

Investment management. Retail / Private banking

IT REIT Solution:
Leasing / Contracts Dispute management

Modules
Gestin Proyectos Constructores Shareholders
Management (1)

Consolidated Accountancy

BI

Controlling

Investors/Taxes
Management (1)
Legal / Statutory Reporting p g

Call Center Calls

RE Maintenance Mailing / Legal g g Mailing / Notarized docs

Financial Accounting
IAS / USGAAP

Treasury

Loans

Tenant / Investor

Human Resources

GL Customers Suppliers

Assets Management

Sales Management

CRM
Sales forces / Distribution channels

Payments

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