The Securities and Exchange Commission (“SEC”) has issued Memorandum Circular No. 1, Series of 2020, otherwise known as the “Revised Implementing Rules and Regulations of Republic Act No. 9856, Otherwise Known as the Real Estate Investment Trust (REIT) Act of 2009” (hereafter referred to as the “REIT Rules”), which took effect on 23 January 2020, following the completion of its publication in the Philippine Daily Inquirer and the Philippine Star. With the issuance of the REIT Rules, small investors now have a secure opportunity to participate in the growth of the real estate sector through REITs, while large investors can maximize their returns by investing in this new asset class.
Some of the salient changes introduced by the REIT Rules include:
- Requirements for Organization, Registration and Listing of REITs
The REIT Rules lowered the minimum public ownership from 40% in the first year of listing with the Philippine Stock Exchange up to 67% within three years, to at least 1,000 public shareholders each owning at least 50 shares of any class of shares, and which, in aggregate, own at least 1/3 of the outstanding capital stock of the REIT. Compliance with the same shall be duly certified by the transfer agent upon listing, as of record date, for any dividend declaration or any corporate action requiring shareholder approval. [Rule 4, Section 5.1 (a)]
The REIT Rules removed the prohibition on the use of a part of the paid-up capital to pay prior debts or encumbrances of its real property assets. [Rule 4, Section 5.1 (b)]
One of the most important changes under the REIT Rules is the indispensable requirement for the REIT to submit a Reinvestment Plan which must include an undertaking by any Sponsor/Promoter, defined under the rules as any person who, acting alone or in conjunction with others, directly or indirectly, contributes cash or property in establishing a REIT, to reinvest: (a) any proceeds realized by the Sponsor/Promoter from the sale of REIT shares or other securities issued in exchange for income-generating real estate transferred to the REIT; and (b) any money raised by the Sponsor/Promoter from the sale of any of its income-generating real estate to the REIT, in any real estate, including any redevelopment thereof, and/or infrastructure projects in the Philippines. This reinvestment shall be made within 1 year from the date of receipt of proceeds or money by the Sponsor/Promoter. [Rule 4, Section 5.1 (e)]
- Allowable Investments of the REIT
The REIT Rules added more safeguards against fraud and abuse by Related Parties. Any contract or amendment thereto, between the REIT and Related Parties, including contracts involving the acquisition or lease of assets and contracts for services, shall now require the following, among others:
a. Approval by the Related Party Transaction Committee which is constituted with the sole task of reviewing related party transactions. Majority of its members must be independent directors who shall vote unanimously in approving such related party transactions; [Rule 5, Section 9 (d)]and
b. Compliance with SEC Memorandum Circular No. 10, series of 2019 on the Rules on Material Related Party Transactions for Publicly-Listed Companies, or such other relevant regulations. [Rule 5, Section 9 (e)]
- Reportorial and Disclosure Requirements
An additional disclosure requirement for REITs under the REIT Rules is compliance with any other disclosures as may be required by the SEC or the relevant Exchange including, where applicable, compliance by the Sponsor/Promoter with its Reinvestment Plan. [Rule 5, Section 12 (x)]
- Qualification Requirements of REIT Fund and Property Managers
To further encourage the formation of REITs in the country, the REIT Rules enhanced the minimum qualification and organization requirements of fund managers and property managers to ensure their independence.
For both Fund and Property Managers, the majority of the members of their respective Boards of Directors must be independent directors, with at least one (1) director of the Fund Manager and at least two (2) directors of the Property Manager having a working knowledge of the real estate industry. [Rule 6, Section 1.2 and Rule 7, Section 1.1, respectively] The REIT Rules also prohibit the directors of the REIT and its Sponsors/Promoters from occupying more than 49% of the board of directors of the Fund Manager and the Property Manager. [Rule 6, Section 1.2 and Rule 7, Section 1.2, respectively]
Notably, the REIT Rules now exempt the Fund Manager that is a Bangko Sentral ng Pilipinas-registered trust entity from the requirement of a separate license for a REIT Fund Manager from the SEC, provided: that the REIT has sufficiently established with the SEC that its appointed Fund Manager has complied with all the requirements under the REIT Act and the REIT Rules. [Rule 6, Section 2 (a)(i)]
The minimum paid-up capital requirement for a REIT Fund Manager has also been reduced from PhP100,000,000.00 to PhP50,000,000.00. However, additional paid-up capital may be prescribed by the SEC, in consideration of the nature, scale, and complexity of the Fund Manager’s operations. [Rule 6, Section 2 (c)]
The REIT Rules further laid down the relevant factors in the assessment of the activities of the Fund Manager to determine whether or not its office in the Philippines has a meaningful role in its business activities. [Rule 6, Section 2.3] The REIT Rules also provide scenarios where the Fund Manager is deemed to have complied with the track record requirement of its officers. [Rule 6, Section 2.4]
- Taxation of REITs
Finally, the REIT Rules deleted the IRR provisions enumerating the taxes to be imposed on REITs. In lieu of which, the REIT Rules made the taxation of REITs subject to the relevant regulations promulgated or to be promulgated by the Bureau of Internal Revenue. [Rule 10, Section 1]