Profits for many

A number of business opportunities have opened recently with the passage into law of Republic Act 9856, known as the Real Estate Investment Trust (REIT) Act of 2009, and the issuance by the Securities and Exchange Commission, pursuant to Section 22, of the implementing rules and regulations. The tax authorities have yet to issue their IRR, which in any case cannot go beyond what is in the statute, and so it is not amiss this early to point out how various sectors can profit from the new regime.

The law provides the framework for the organization and operation of what is known globally as a “real estate investment trust.” The Philippine version is really a stock corporation and not a real trust in the technical sense. Candidly, the law admits that “trust” is used in naming the device “for the sole purpose of adopting the internationally accepted description of the company in accordance with global best practices.” In any case, it is recognized universally as a vehicle principally for the purpose of enabling investors to indirectly own income-generating real estate assets without being directly real owners in the ordinary sense of the term.

In addition to the usual array of professionals that a corporation needs to properly pursue its primary and secondary purposes, a REIT is required by the law to have a complement of service providers needed to achieve its purpose.

First and foremost is the fund manager. A Real Estate Investment Trust begins by soliciting and collecting funds from the public and is thus required to have someone who can be relied upon to manage properly the monies thus collected. The fund manager is “responsible for the allocation of the deposited property to the allowable investment outlets and selection of income-generating real estate. It shall execute investment strategies for the REIT and oversee and coordinate” its investment activities.

These activities include property acquisition, property management, leasing, operational and financial reporting (including operating budgets) appraisals, audits, market review, accounting and reporting procedures, as well as refinancing and asset disposition plans.

Necessarily, a fund manager must be one, whether domestic or foreign, that is “engaged in the business of fund management with proven track record and duly licensed to do business in the Philippines by the appropriate regulatory agency.” The natural candidates for this role are the so-called “trust entities.” A trust entity is, under Section 83.5 of the General Banking Law, one authorized to, among other activities, “accept and execute any trust for the holding, management, and administration of any estate, real or personal, and the rents, issues and profits thereof.”

Banks and investment houses duly licensed by the Bangko Sentral ought to have no difficulty acting as a REIT’s fund manager. The degree of diligence required of a Fund Manager is that “skill, care, prudence and diligence necessary under the circumstances then prevailing that a prudent man, acting in the same capacity and familiar with such matters, would exercise in the conduct of an enterprise of a like character and similar aims.” That is the same rule imposed on trust entities by the General Banking Law.

Just as essential as the fund manager is the real property manager. His role is to “be responsible for managing the real estate assets such as apartment buildings, office buildings, warehouses, hospital buildings, medical facilities, hotel buildings, resort facilities, manufacturing plants, and other physical assets of the REIT.”

The scope of work of a real property manager is daunting but it is unlikely that any single outfit will be expected to perform all of the enumerated tasks for any one REIT. As the industry gets familiar with the REIT, it is not unlikely that specialization will set in; various REITs will likely be formed according to the classes of real assets held, thus limiting to a manageable scope the duties of the engaged real property manager of any one particular REIT.

Since the REIT investor is not directly related to the assets of the REIT, he needs some assurance on the values underlying his REIT shares. That assurance of the value is provided by the property valuer. His function is “to prepare a full valuation of a REIT’s assets at least once a year in accordance with the applicable rules of asset valuation and valuation methodology prescribed by the SEC.”

His job is to make the valuation of “all the real estate of the REIT, on the basis of a full valuation with physical inspection in respect of the site of the real estate and an inspection of the building(s) and facilities erected thereon once a year and in any event for the purposes of issuance of new Investor Securities. The property valuer shall also produce a valuation report on real estate to be acquired or sold by the REIT or where new shares are offered by the REIT or in any other circumstances required by the SEC.”

Fund manager, property manager and property valuer each play crucial roles for the benefit and protection of the REIT investors. In such a fiduciary capacity, it is inevitable that they all be required to be independent from the REIT and its sponsors and promoters. Independence means compliance with the independence, corporate governance (including fit and proper rule) and other requirements prescribed by law and the IRR and the SEC. I leave for another occasion the manner in which they are required to observe that independence.

Suffice it to conclude this piece with the mention the fourth category of persons recruited to ensure that the REIT does its job. That is the “adviser,” which includes “a lawyer, accountant, auditor, financial or business consultant, or any other person rendering professional advisory services to the REIT.”

The adviser’s loyalty is to the entity itself (as distinguished from its investors); he must see to it that the REIT conducts itself in a manner “consistent with the declared policy of the State to promote the development of the capital market, democratize wealth by broadening the participation of Filipinos in the ownership of real estate in the Philippines, use the capital market as an instrument to help finance and develop infrastructure projects and protect the investing public” as a whole. –Gerry Geronimo, Manila Standard Today

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