A better way to fix banks Here’s a proposal that could help solving the g toxic-asset pricing problem voluntarily —without requiring the Administration to nationalize the whole industry— and make (pretty much) everyone a winner.
Index• REIT concept• Legislation L i l ti• Who could be interested in• Why HP solutions• Business process: Finance + Legal advisors• IT Solution• Business models• What is next?
Introduction:Real Estate portfolios today• Banks with excessive risk exposure on national and international RE investments, and related liabilities.• High risk of default credit.• Banks ith increasing bad d bt B k with i i b d debts• Banks balance sheets need to be cleared out.• Necessity of profitability on RE investments while diversifying their business model. b d l• 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 Spain the Central Government i setting up a new bill on creating REIT S i th C t l G t is tti ti 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 income, taxable investors. 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 p p publicly or p y privately held. Public REITs may be listed on p y y public stock 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 y the Netherlands, Australia, Canada, Japan, Belgium, Germany, France, sometimes in modified form.
US REIT QualificationsIn order to qualify for the advantages of being a pass-throughentity for U.S. corporate income tax, a REIT must:• Be structured as corporation, trust, or association United• Be managed by a board of directors or trustees• Have transferable shares or transferable certificates of interest 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• Pay dividends of at least 90% of the REITs 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 Qualifications In order to qualify for the advantages of being a p pass-through entity for Spain corporate income tax, a g y p p , REIT must: European• Minimum capital: €15m Union• 18% taxable corporate profits• 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• Pay dividends of at least 90% of the REITs 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 World REIT = Real Estate Investment Trust stocks market value by From F Number of REIT N b f and date dd t Specialization S i li ti sector t AUS 100.000 MAustralia 1971 70 (2008) No data Ley 8668/1993 Fundos de InvestimentoBrazilB il Imobiliário No data N d t No data N d t No data N d tUnited Industria/oficinas £2.400Kingdom Retail £400 Finance Act 2006. GBP 21.800 Sanidad £400 (Efectiva en 2007) 21 (Sept. 2009) Mixtos £15.000 2007Germany REIT- Aktiengesellschaft SIIC - Société d´investiment Immobiliare Coté larticle 11 de la loi de finances n° 2002-1575 du €31,000France 30 décembre 2002 46 (Dec 2008) sin datosUnited Industry 92.000States Retail 100.000 Residential 57.000 USD $539.000 Leisure resorts 11.000 1960 262 (Aug 2009) Logistics g 14.000 Health 28.000 Other areas 13.000 mixed 206.000Figures 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 equity ratio. it ti• Provide an accountable market mark up on RE investment through contract cash flow valuation• Increase working capital l ki i l levels assets l• Arises customers accountability through transparent operations regulation.
REIT Added value: entire flow coverage Phases Claims, underpayment, and their RE insolvency communication and activities management RE debt recovering Legal procedures and communications across negotiation countries, auctions, portfolio monitoring. Distribution channels support. Results oriented RE sales solution. RE l lease out management. From expenses to t t F t RE lease out conditions and condominium groups. RE Investment management. Wholesales Investment I t t Funds Investment management. Retail / Private REIT banking Investors
IT REIT Solution: Modules Gestión Leasing / Shareholders Consolidated Proyectos BI Contracts Management (1) Accountancy Constructores Dispute management Investors/Taxes Controlling Management (1) Legal / Statutory Reporting p g Financial Call Center RE Accounting Treasury Calls Maintenance IAS / USGAAP Mailing / Legal g g Mailing / Loans Notarized docsTenant / Investor GL Human Assets Customers Resources Management Suppliers • Based on Standard software: Sales CRM Sales forces / Payments SAP ERP 6.0 Management Distribution channels SAP BI • 50 supported languages