REITS: An Introduction And A New Context After The Implementation Of AIFMD

Author:Mr Trevor Dolan
Profession:Dillon Eustace


The Finance Act, 2013 made provision for a new Irish investment product, the Real Estate Investment Trust ("REIT") which was broadly welcomed within the investment community as it could provide investors with a means of investing in real estate through a structure that could provide both income and capital appreciation to investors, like a direct investment in a property would do, while limiting leverage through borrowings with the added benefits of diversification through exposure to a pool of investments and professional asset management.

The Irish government hopes that REITs will provide a new source of capital to the real estate market which could, in turn, reduce dependence on bank financing and because REITs are closed ended, encourage taking a longer term view leading, eventually, to stability of tenure for tenants and better quality buildings.

Investment management professionals in all asset classes, including real estate, are coming to grips with the implications of the European alternative investment funds industry‟s big bang‟, on 22 July, 2013, when EU Directive 2011/61/EU on Alternative Investment Fund Managers ("AIFMD") is expected to come into force across the EU. One of these implications is that although REITs were not originally designed as a regulated investment product, REITs which are designed for wide distribution will be subject to AIFMD. The EU commission has said, in its guidance on AIFMD:

"The question whether or not a listed real estate investment company is excluded from the scope of the AIFMD depends on whether or not it falls under the definition of an 'AIF' in Article 4(1)(a). Real estate companies cannot be excluded as such a priori, each situation needs to be valued on its own merits, based on substance, not on form."

The purpose if this note is to (i) examine what a REIT is; (ii) look at how REITS can fall to be caught in the AIFMD net; and (iii) compare and contrast REITS and Ireland‟s other real estate fund offering, the real estate qualifying investor alternative investment fund ("QIAIF").

What is a REIT?

A REIT is an Irish company incorporated under Irish company law which meets a number of conditions set out in the Finance Act, 2013 relating to (i) the company itself, (ii) its business (property rental) (iii) its investments, and (iv) its investors.

The REIT itself

The REIT must:

(i) reside, for tax purposes, in Ireland (and not resident elsewhere);

(ii) be incorporated in accordance with Irish company law;

(iii) list its shares on the main market of a recognised stock exchange in a member state of the EU;

(iv) not be a close company (a company controlled by a small number of people) though there are certain exceptions from this requirement where the REIT is under the control of qualifying investors, which includes certain collective investment undertakings.

The Business of the REIT

The REIT must:

(i) derive 75% of its aggregate income from carrying on a property rental business;

(ii) have a minimum rental income to financing costs ratio of 1.25:1; and

(iii) distribute at least 85% of its property income for each accounting period (provided it has sufficient distributable reserves).

Investments of the REIT

The REIT must:

(i) conduct a property rental business consisting of at least three properties,

(ii) invest no more than 40% of the total market value of its properties in a single property;

(iii) not borrow more than 50% of the total market value of its properties.

Investors in the REIT

As above, the REIT must not be a closely held company (a company with 5 or fewer participators as set out in Chapter 1 of Part 13 of the Taxes Consolidation Act, 1997, as amended, (TCA) unless they are "qualifying investors" i.e. Irish authorised funds, Irish insurance companies, Irish tax exempt pension schemes or the National Asset Management Agency of Ireland).

Taxation of the REIT

A REIT must be a company incorporated under Irish company law which makes an election to be taxed under the provisions of the REIT tax regime. Provided the REIT meets the various conditions of the legislation, the REIT will not be liable to corporation tax on income and capital gains arising from its property rental business.

Nevertheless, a REIT will be obliged to operate Dividend Withholding Tax ("DWT") (i.e. 20% withholding tax) in the normal manner as set out in Chapter 8A of Part 6 of the TCA subject to certain amendments as outlined below.

Taxation of Investors

Irish resident individual investors will be subject to income tax, PRSI and USC in respect of dividends received from a REIT. Irish resident corporate investors will be liable to corporation tax at their appropriate rate. Irish resident investors will be liable to capital gains tax in respect of gains on disposal of...

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