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The Spanish REIT business: SOCIMI
            Author: Manel Hernandez
            manfin2005@yahoo.com

                                      Autor: Manel Hernandez – HP Consulting
                                      Manel.hernandez@hp.com
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 Qualifications
In 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
                                                                                    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 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 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 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 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 M
Australia                                               1971                   70                 (2008)             No data
                                                    Ley 8668/1993

                                                Fundos de Investimento
Brazil
B   il                                               Imobiliário             No data
                                                                             N d t              No data
                                                                                                N d t                No data
                                                                                                                     N d t
United                                                                                                           Industria/oficinas    £2.400
Kingdom                                                                                                               Retail             £400
                                                  Finance Act 2006.                           GBP 21.800             Sanidad             £400
                                                  (Efectiva en 2007)           21             (Sept. 2009)            Mixtos          £15.000
                                                         2007
Germany                                     REIT- Aktiengesellschaft
                                                    SIIC - Société
                                            d´investiment Immobiliare
                                                         Coté
                                              l'article 11 de la loi de
                                            finances n° 2002-1575 du                            €31,000
France                                           30 décembre 2002              46              (Dec 2008)            sin datos
United                                                                                                               Industry          92.000
States                                                                                                                 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            206.000
Figures in milions of the respective currency
Source: 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 docs

Tenant / 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

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SOCIMI REIT IT Solution

  • 1. Propuesta The Spanish REIT business: SOCIMI Author: Manel Hernandez manfin2005@yahoo.com Autor: Manel Hernandez – HP Consulting Manel.hernandez@hp.com
  • 2. 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.
  • 3. 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?
  • 4. 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
  • 5. 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.
  • 6. US REIT Qualifications In 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 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 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.
  • 7. 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 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.
  • 8. 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 M Australia 1971 70 (2008) No data Ley 8668/1993 Fundos de Investimento Brazil B il Imobiliário No data N d t No data N d t No data N d t United Industria/oficinas £2.400 Kingdom Retail £400 Finance Act 2006. GBP 21.800 Sanidad £400 (Efectiva en 2007) 21 (Sept. 2009) Mixtos £15.000 2007 Germany REIT- Aktiengesellschaft SIIC - Société d´investiment Immobiliare Coté l'article 11 de la loi de finances n° 2002-1575 du €31,000 France 30 décembre 2002 46 (Dec 2008) sin datos United Industry 92.000 States 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 206.000 Figures in milions of the respective currency Source: HP from market data
  • 9. 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.
  • 10. 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
  • 11. 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 docs Tenant / 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