Propuesta

The Spanish REIT business: SOCIMI

Author: Manel HernandezAuthor: Manel Hernandezmanfin2005@yahoo.com

Autor: Manel Hernandez – HP ConsultingManel.hernandez@hp.com

A better way to fix banksA better way to fix banks

Here’s a proposal that could help solving thegtoxic-asset pricing problem

voluntarily —without requiring theAdministration to nationalize theAdministration to nationalize the

whole industry—

and make (pretty much) everyone a winner.

IndexIndex• REIT concept

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

Introduction: Real Estate portfolios todayReal Estate portfolios today

• Banks with excessive risk exposure on national and international RE • Banks with excessive risk exposure on national and international RE investments, and related liabilities.

• High risk of default credit.B k ith i i b d d bt• Banks with increasing bad debts

• Banks balance sheets need to be cleared out. • Necessity of profitability on RE investments while diversifying their

b d l business model. • 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 S i th C t l G t i tti bill ti REIT Spain the Central Government is setting up a new bill on creating 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 90% of their income, which may be taxable, into the hands of the investors. The REIT structure was 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 publicly or privately held. Public REITs may be listed on public p p y p y y pstock 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 ythe Netherlands, Australia, Canada, Japan, Belgium, Germany, France, sometimes in modified form.

US REIT QualificationsUS REIT QualificationsIn 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• Be managed by a board of directors or trustees• Have transferable shares or transferable certificates of interest

United States

• 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 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 QualificationsSpain REIT QualificationsIn order to qualify for the advantages of being a pass-through entity for Spain corporate income tax, a

• Minimum capital: €15m• 18% taxable corporate profits

p g y p p ,REIT must:

EuropeanUnion

• 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 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.

REIT investment figures in the WorldREIT investment figures in the WorldREIT = Real Estate Investment Trust

F N b f REITstocks market value

d d t S i li tiby

tFrom Number of REIT and date Specialization sector

Australia 1971 70AUS 100.000 M

(2008) No dataLey 8668/1993

Fundos de Investimento ImobiliárioB il N d t N d t N d tImobiliário

United Industria/oficinas £2.400Kingdom Retail £400

Sanidad £400Mixtos £15.000

2007

Finance Act 2006. (Efectiva en 2007) 21

GBP 21.800 (Sept. 2009)

Brazil No data No data No data

REIT- Aktiengesellschaft

France

SIIC - Société d´investiment Immobiliare

Cotél'article 11 de la loi de

finances n° 2002-1575 du 30 décembre 2002 46

€31,000 (Dec 2008) sin datos

Germany

France 30 décembre 2002 46 (Dec 2008) sin datos

United Industry 92.000 States Retail 100.000

Residential 57.000 Leisure resorts 11.000

Logistics 14.000 1960 262 USD $539.000

(Aug 2009) gHealth 28.000

Other areas 13.000 mixed 206.000

Figures in milions of the respective currencySource: 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 it tiequity ratio.

• Provide an accountable market mark up on RE investment through contract cash flow valuation

ki i l l l• Increase working capital levels assets• Arises customers accountability through transparent operations regulation.

REIT Added value: entire flow coverage

RE insolvency

PhasesClaims, underpayment, and their communication and activities management

RE debt recovering negotiation

Legal procedures and communications across countries, auctions, portfolio monitoring.

RE salesDistribution channels support. Results oriented solution.

RE l t t F tRE lease out

REI t t

RE lease out management. From expenses to conditions and condominium groups.

Investment management. WholesalesInvestment

Funds

REITInvestment management. Retail / Private bankingbanking

Investors

IT REIT Solution: Modules

ShareholdersManagement (1)

GestiónProyectos

Constructores

Leasing / Contracts

ConsolidatedAccountancy BI

Investors/TaxesManagement (1)

Financial

Controlling

Legal / StatutoryReporting

Disputemanagement

REMaintenance Treasury

Mailing / Legal

Call CenterCalls

Financial AccountingIAS / USGAAP

p g

AssetsHuman GLCustomers

Loansg g

Mailing / Notarized docs

Tenant / Investor

ManagementResources CustomersSuppliers

CRMSales forces /

Sales Payments• Based on Standard software:

SAP ERP 6.0 Sales forces /Distribution channels

Management PaymentsSAP BI

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