Professional Interpretation

Since 2017, the traditional financing channels enterprises used to rely on are narrowed, therefore, new financing mode becomes a breakthrough for real estate industry. Recently, exploring of new mode of real estate financing is on progress, along with the launching of assets-backed-securitization projects by major enterprises. Among all financing mode, the semi-REITs draw more and more attention from real estate enterprises. Beijing Docvit law firm will analyze the transaction structure of semi-REITs in the hope of designing the better financing arrangement.

I.  Introduction of REITs and categories.

REITs (real estate investment trusts) is a trust. Such trust collects investors’ capital by issuing shares or beneficial certificates, then entrust said capitals to professional real estate investment institution to invest, manage and operate. Investment profits would be returned back to investors.

In China, the REITs mode is borrowed from the U.S while it is further combined into structurize mode, therefore the definition of REITs is expanded. Said mode is called semi-REITs.

Currently, the common practice of semi-REITs is to establish the basic assets by stock real estate which is able to generate stable cash flow, then set up an assets-backed-security special plan. Private equity funds, as the vehicle holding equity of Project Company, is the center of design and restructure of semi-REITs mode. Private equity fund is used to achieve the control of underlying asset by establishing equity + debts structure.

According to the ownership of assets, semi-REITs could be further categorized as “ownership-transfer semi-REITs ” and “mortgage semi-REITs ”. In mortgage semi-REITs, the basic asset is creditor’s rights over the mortgage loan, the ownership of real property is not transferred. Ownership-transfer semi-REITs is self-explanatory, that the ownership of real estate does transfer.

II.  Transaction structure and procedure of ownership- transfer semi- REITs .

The major two modes of semi-REITs structure are equity semi-REITs and semi- REITs debt. Equity semi-REITs allow the real estate being removed from the balance sheet and confirm the income. Debt semi-REITs allow the assets holder to reserve the control by disguising debts in shares. Also the real estate will be removed from balance sheet, but asset holder could enjoy the preferential right over profits.

A. The transaction structure of transfer ownership semi- REITs

Transfer ownership semi-REITs combines capital of investors with different risk preference, invest them on the high quality real estate by grafting trust plan or contractual funds. The basic transaction structure is as below:

The purpose of semi- REITs transaction is to transfer the target real property from original assets holder to SPV under semi- REITs mode. Since there is not specific rules on tax in said mode, we should pay attention on below aspects in the REITs mode.

First, to avoid the land VAT and contract tax, the common practice is to transfer the ownership of shares instead of the real property to SPV.

Second, to avoid double tax, while SPV buys the shares from the Target Company and loan to issuer, the target property also be provided as a mortgage for this loan.

Third, this transaction mode also prepares a vehicle for following exit by public raised REITs. Usually, a private equity fund will be built between Project Company and real property in order to be listed as an independent entity. The other advantage of this arrangement is the professional real property investment institution could be introduced to manage and operate.

B. The transaction procedure of transfer ownership semi- REITs

The transaction procedure of semi- REITs is four steps.

1. Restructure the ownership of real property

a. The real property holder sets up a project company by contributing the target real property

b. The initiating institution or its affiliate party set up a SPV in order to acquire the project company

c. Initiating institution set up a private equity investment fund and register it

d. SPV acquires the project company from the property holder

e. Private equity acquire the SPV from the initiating institution or its affiliate.

f. Private equity, the bank and the SPV sign a loan contract, private equity loans to SPV.

2. Set up a trust on property rights.

a. The initiating institution sets up a trust plan with trust property of shares of private equity funds and its collateral rights, and sign the issuance document

b. Being approved by people’s bank, the trust plan is issued, the initiating institution gets the income.

3. Collect rent, pay back the rent, and pay dividend to shareholder.

The rent of real estate is the main source to repay the loan, and pay the dividend to shareholders.

4. The private equity distributes the profit, or the property trust distribute the trust interests.

a. The investment profits generated by private equity would be distributes to the property right trust and become the trust property.

b. The property right trust would distribute the trust interest generated by trust property to beneficiary