Private real estate firms with a goal of obtaining a public listing as a real estate investment trust (REIT) now have a new path to market. Ironically, this path comes courtesy of one of the TSX Venture Exchange’s oldest vehicles, the capital pool program.
This innovation has been made possible thanks to the creation of a new form of capital pool company (CPC), the CPC trust. And its promise is clear. Until now, real estate companies seeking a public listing as a REIT have had go through an expensive and time-consuming conversion process at the time of listing. But the CPC trust process smooths the way to a public listing by eliminating the need for any conversion—the trust structure is already in place the moment the venture first goes public as a CPC.
Other than their different structure, the process is the same as traditional CPCs—the CPC trust does an IPO on the TSX-V as a capital pool company and then that shell company has 24 months to complete a “qualifying transaction” by acquiring an existing business. The latter purchase, once approved by the exchange, provides the gate- way to a full listing—but in this case, as a trust.
The CPC trust owes its existence primarily to the work of Robb McNaughton, a Calgary partner with the law firm, Borden Ladner Gervais LLP, who spent more than a year devising the streamlined convert-to-trust-mechanics. Once done, he then assisted in the recent birth of Echelon Wealth Partners’ Value Capital Trust (TSX-V:VLU.P). Its IPO in August raised $500,000 through the sale of five million trust units at 10¢ per unit.
Looking back over the past year, McNaughton notes that his crusade was driven by Echelon’s desire to get it done. “Once its executives grasped the benefits of setting up a trust, they embraced the idea and sold it to its client base,” he says. “We also realized that the challenges we faced were mainly tax-related. We had to develop a CRA-acceptable framework to make it fit within its existing tax rules.”
Some existing REITs started as conventional CPCs, but they had to go through the costly conversion process to get there. As McNaughton explains: “The CRA considers such business status changes a ‘deemed disposition’ triggering a taxable event. What we have done is to create a structure…that avoids the tax by meeting the CRA’s existing rules.”
Securities commissions and TSX Venture Exchange personnel also played a role. “Our involvement added credibility, responsibility and security to the process,” says Brady Fletcher, the TSX-V’s Vancouver-based managing director. It also had to give the new structure the green light.
Admittedly, the target market for this offering is relatively narrow. But Fletcher says he believes there is real appetite for such trusts: “It appeals to the deal-making community who want to increase the pool of real estate properties in our major cities.” He expects we’ll see more.