Proposed amendments to REIT IRR
Credit to Author: EUNEY MARIE MATA-PEREZ| Date: Wed, 26 Jun 2019 16:21:10 +0000
In last week’s article, we mentioned that it has been almost 10 years since the passage of (RA 9856), or “An Act Providing the Legal Framework for Real Estate Investment Trust and for Other Purposes” (REIT Act). However, up to this date, no REIT has been established in our country.
We mentioned that there have been issues in establishing a REIT, which discouraged real property owners from establishing it. However, after 10 years, many things have changed. It has been the view of many that the market is ready for a REIT launch. Also, it has been confirmed by the Train 1 Law (RA 10963) that the transfer of real property to a REIT is exempt from the value-added tax (VAT).
The other issues are the qualifications of the other players of a REIT.
The main players of a REIT are the Sponsor or Promoter (the owner of the real assets) and the Investors (the unit owners or stockholders of the REIT). In addition, however, the REIT Act requires the designation of a Fund Manager and a Property Manager.
The fund manager is responsible for the allocation of the deposited property to the allowable investment outlets and selection of income-generating real estate, and in executing the investment strategies for the REIT. A property manager, on the other hand, refers to a professional administrator of real properties who is engaged by the REIT to provide property management services, lease management services, marketing services, project management services, including rent collection, tenant services, care of the physical plant, security, leasing, marketing of the property to outside prospects, and other similar services pertaining to the property under administration.
Both the property manager and the fund manager are required to be independent from the REIT and its sponsors or promoters and maintain good corporate governance in its operations. The REIT Act prescribes, among others, that the fund manager must employ a resident chief executive officer and at least two full-time professional employees who have a track record and experience in financial management and real estate industry. The REIT Act provides that the property manager, on the other hand, shall possess such qualifications as the Securities and Exchange Commission (SEC) shall prescribe.
Last week, the SEC published draft rules (Proposed Amendments) amending the Implementing Rules and Regulations of the REIT Act which was approved by the SEC on May 13, 2010.
The proposed amendments provide for additional requirements to ensure independence of the property manager from the REIT. The additional requirements are as follows: 1) majority of the members of the board of the property manager must be independent directors with working knowledge of the real estate industry; and 2) the directors, including the independent directors, of the REIT and its sponsors/promoters cannot occupy more than 49 percent of the board of directors of the property manager. It further reiterated the requirement that the property manager must comply with the following minimum qualifications:
• It shall possess sufficient human, organizational and technical resources for the proper performance of its duties, including two responsible officers each of whom shall have at least five years track record in property portfolio management, and at least one of the responsible officers shall be available at all times to supervise the business of the property manager, including asset and property management;
• It shall maintain satisfactory internal controls and written compliance procedures; and
• It shall have sufficient financial resources at its disposal to enable it to conduct its business effectively and meet its liabilities.
Furthermore, a new section was added which provides that there should be a Related Party Transactions Committee which shall review related party transactions of the REIT.
The proposed amendments also require that the number of independent directors of the REIT must comply with other laws or regulations, such as but not limited to the Securities Regulation Code (SRC) and Revised Code of Corporate Governance (RCCG). The qualifications and disqualifications of directors of the property manager must also comply with the provisions of the RCCG and the fit and proper rule prescribed in the IRR.
It is apparent that the proposed amendments seek to make compliance on qualifications of the REIT fund manager and property manager easier, by prescribing the experience or track record to be possessed by its officers (since no company may have the proven track record yet on REIT property and fund management in our country). It also clarified to reinforce independence of the REIT from its fund manager and property manager. All of these proposed requirements, which seem to be reasonable, should help promote the REIT and ensure its investors of the independence of the REIT and the proper management of its assets.
Euney Marie J. Mata-Perez is a CPA-Lawyer and the Managing Partner of Mata-Perez, Tamayo & Francisco (MTF Counsel). She is a corporate, M&A and tax lawyer. She is the President of the Asia-Oceana Tax Consultants’ Association. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. If you have any question or comment regarding this article, you may email the author at info@mtfcounsel.com or visit MTF Counsel’s website at www.mtfcounsel.com.
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