Opinion No. 15-01 Re: Whether real estate is considered "income-generating real estate" under the Real Estate Investment Trust Act of 2009

Republic of the Philippines

Department of Finance

SEC Building, EDSA, Greenhills, Mandaluyong City Securities and Exchange Commission

OFFICE OF THE GENERAL COUNSEL

22 April 2015

SEC-OGC Opinion No. 15-01 Whetherrealestatemortgage is consideredincome-generatingreal estate" under the Real Estate Investment Trust Act of 2009

LIVIA ALICIA R. RAMOS Executive Vice President NATIONAL HOME MORTGAGE FINANCE CORPORATION Filomena Building, 104 Amorsolo Street Legaspi Village,Makati City

Madam:

invest in real estate mortgages under a Real Estate Investment Trust (REIT), pursuant to Republic Act No.9856,otherwise known as the Real Estate Investment Trust Act whether or not the National Home Mortgage Finance Corporation (NHMFC) may This refers to your letter dated May 20, 2014 concerning questions as to

of 2009 (REIT Act)

owned and controlled corporation organized under Presidential Decree No. 1267, is to private home financing institutions. To this end, NMHFC has undertaken several develop and provide a secondary market for home mortgages granted by public and/or As narrated in your letter, the primary purpose of NMHFC, a government

a REIT. programs, one of which is the issuance of Bahay Bonds. It is now considering other options to develop the secondary market for home mortgages, one of which is through

Your queries are as follows:

(1)Whether or not a REIT can invest in real estate mortgages under the REIT Act;

for a specific period of time and which generate interest income fall under the definition of "income generating real estate" under Section 3 (m) of the REIT Act and (2) Does a real estate mortgage that is amortized

WM

("IRR) of the REIT Act; Rule 3 (r) of the Implementing Rules and Regulations

real estate mortgages? ; and with respect to investments of its deposited property in (3) What are the limitations imposed on a REIT

of its deposited property in real estate mortgages that generate income? 4Can a REIT invest one hundred percent (100%

forms - equity trusts, mortgage trusts, and hybrid trusts, which comprise a combination of equity and mortgage trusts. Equity trusts purchase commercial real in real property. Mortgage trusts may be divided into short-term mortgage trusts, which generally limit their investments to construction and land-development loans; estate, such as apartment buildings and shopping centers, and derive their income primarily from rents. Mortgage trusts invest their assets in loans secured by mortgages and long-term mortgage trusts, which invest on completed projects with 20-30 year maturity periods. Long-term mortgage and equity trusts frequently seek to acquire some form of equity interest that will enable the investors to participate in the growth value of the project and acquire at least partial protection against inflation. In relation to your first two queries, a REIT generally may be of three basic

with the Corporation Code of the Philippines, and the rules and regulations promulgated by the Securities & Exchange Commission principally for the purpose of The REIT Act defines a REIT as a stock corporation established in accordance

owning income - generating real estate assets. From the definition of the REIT

here in the Philippines. Specifically, Section 3 (m) of the REIT Act provides what may be considered as "income-generating real estate", thus: Act, the law primarily recognizes equity trusts as the mode for establishing a REIT

"(m) "Income-generating Real Estate" means real property which is held for the purpose of generating a regular Commission. The Commission may promulgate rules to REIT." (Emphasis and underscoring supplied) stream of income such as rentals, toll fees, user's fees and the like, as may be further defined and identified by the include real rights over real property, provided they generate interest or other regular payments to the

the ownership and financing of large-scale real estate projects at affordable rates of deliberations on the matter. In his Explanatory Note to Senate Bill No. 63, Senator Edgardo J. Angara declared: "The main purpose of real estate investment trusts is to provide small and large investors alike with the opportunity to participate directly in In order to determine the intent of the law, we resort to the legislative

Macondray & Co. vs. Eustaquio, 64 Phil. 446 (1937) and Daza vs. Villaroman, 69 Phil 12 (1939). 2 Section 3 (cc), REIT Act. 3 SEC Opinion dated May 21, 1992, addressed to Mr. O. P. Victorino, citing Martin, Statutory Construction, citing I 15b Am Jur Legal Forms 2d, pg. 6-7. U

3

investment, without the disadvantages of illiguidity, high transaction and management costs, as compared to traditional private real estate ownership. "

formed for the sole purpose of investing in income-producing real estate assets. Income producing properties include apartment buildings, office buildings He stated further: "A 'real estate investment trust' is a stock corporation

warehouses, medical facilities, hospitals, mixed industrial/office buildings and other commercial and residential properties. In other jurisdictions, the real estate

building resorts, hotels, shopping centers, outlets as well as develop other In introducing the bill, he sought to provide a ... legal framework ... designed to provide a similar structure for investments in the real estate industry in the same investment trust regime has also been used to help develop the tourism industry by infrastructure projects like highways, railroads, prisons, and other similar projects." manner that mutual funds provide for investment in stocks and securities." (Underscoring in original.)

jurisdictions, it appears not to have been the primary intention under the REIT Act, as tangible real properties "generating a regular stream of income" producing preference under the law was for equity trust transactions, particularly investments on consistent income arising from the said real estate investment in the form of rentals, fees, tolls and the like. Thus, while a mortgage trust may be a proper subject of a REIT in other

tangible real properties. This can be ascertained from a reading of the following: a. the information required for the REIT Plan (Prospectus) under Sec. 1.3 Rule 4 of the IRR b. allowable investments of the REIT under Sec. 1 Rule 5 where it can only invest in assets or the securities are incorporated, located, issued or traded (Sec. 1.2) issued by listed local or foreign non-property corporations, registered collective investment schemes, rated mutual funds, and cash/ cash equivalent items, and c. Moreover, Section 1.1 (a),Rule 5 of the IRR would indicate that the real estate is generating real estate under the REIT Act and its IRR, the same must consist of real estate (Sec.1.1), Real estate-related assets, regardless of where the issuers, the government securities, other reputable corporate bonds or commercial papers, shares enumeration of the sources of income in Rule 3 (r) of the IRR (rentals, toll and parking fees, storage fees, etc.), which usually refer to income or rentals arising from the lease of lands, buildings, machineries, instruments, structures and the like. either freehold or leasehold in nature, which likewise refers to tangible immovables. Moreover, for real estate to be considered as an investment in "income-

regular stream of income such as, but not limited to, rentals, toll fees, user's fees, ticket sales, parking fees and such investment does not exceed forty percent (40%) of its Deposited Property and only upon special authority http://www.senate.gov.ph/lisdata/41193533!.pdf. "SECTION 1. Allowable Investments. A REIT may only invest in: "1.1 Real estate. (a) A REIT may invest in real estate located in the Philippines, whether freehold or leasehold At least seventy - five percent (75%) of the Deposited Property of the REIT shall be invested in, or consist of, income generating real estate. Deposited Property that should be invested in Income - generating Real Estate located in the Philippines shall in no case be less than 35% of the Deposited Property "(b) A REIT may invest in income generating real estate located outside of the Philippines; Provided, that storage fees." (Emphasis and underscoring supplied) "Rule 5 Explanatory Noteof Senator Edgardo J. Angara on Senate Bill No. 63 found at "(r) "Income-generating Real Estate" means real property which is held for the purpose of generating a -- Allowable Investments of the REIT

4

Philippines. These factors are indicative of, and consistent with, the physical and More importantly, the IRR further prescribes requirements based on a real estate's tangible nature of the real properties contemplated in Section 1.1, Rule 5 of the IRR. physical location, that is, whether the real estate is located inside or outside of the

present REIT Act. Thus, it is opined that a REIT cannot invest in real estate mortgages under the

are considered real properties under the Civil Code, may be considered income- generating real estate" " provided they generate interest or other regular payments to the REIT, such would depend on a determination by the Commission. At present, the Commission deems it prudent to exclude it from the current rules. While the REIT Act recognizes that other real rights over real property, which

As to your remaining queries, since it was opined that REITs are not allowed to invest in real estate mortgages or such other legal rights, any further questions relative thereto shall be rendered hypothetical, abstract, speculative and anticipatory in nature, such that the Commission, as a matter of policy, refrains from rendering any legal opinion thereon.

shall be rendered null and void. the facts disclosed in the query and relevant solely to the particular issues raised therein and shall not be used in the nature of a standing rule binding upon the courts investigation, it will be disclosed that the facts relied upon are different, this opinion or upon the Commission in other cases of similar or dissimilar circumstances. If upon It shall be understood that the foregoing opinion is rendered based solely on

csc/vlsg/vjbg CAMLOSACORREA General Counsel

from the Commission. The Commission in issuing such authority shall consider, among others, satisfactory proof "(c) An investment in real estate may be by way of direct ownership or a shareholding in a domestic special purpose vehicle constituted to hold/own real estate, subject to the conditions provided under these Rules "d) Acquisition of a real estate shall include the ownership of all rights, interests and benefits related to the that the valuation of assets is fair and reasonable ownership of the real estate. e The Te I estate to be acquired by the REIT should have a good track record for three 3 years from date of

held for the purpose of generating a regular stream of income such as rentals, toll fees, user's fees and acquisition." (Emphasis and underscoring supplied) promulgate rules to include real rights over real property, provided they generate interest or other SEC Memorandum Circular 2003-15,No. 7. the like, as may be further defined and identified by the Commission. The Commission may regular payments to the REIT (underscoring ours). Republic Act No. 9856, Section 3(m)"Income-generating Real Estate"means real property which is SEC Memorandum Circular 2003-15, No. 5.4