Jersey: Offshore Advantages For Real Estate Investment Trusts ("REITs")

• The Channel Island Stock Exchange ("CISX") is a recognised stock exchange for H.M. Revenue & Customs purposes and as such a REIT listed on CISX meets the requirement for stock exchange listing.
• Listing equity securities on CISX is significantly more cost effective and time efficient than other eligible exchanges.
• REITs can avoid the need to have three year audited accounts by listing on CISX under the CISX investment funds listing rules.
• REITs structured as Jersey or Guernsey companies may utilise an expedited regulatory approach in relation to listed investment funds with approvals granted within three working days if eligibility criteria are met.
• Jersey and Guernsey tax law permits Jersey and Guernsey companies to be solely UK resident, when UK managed and controlled as required for REIT eligibility.
• Use of a Jersey or Guernsey company as a REIT will provide a more flexible companies law regime, including in relation to capital distributions and the statutory ring-fencing of liabilities to assets by use of an incorporated cell company.
• A Jersey or Guernsey incorporated REIT will not attract stamp duty on share transfers.

The REIT structure provides an attractive model both for real estate investment companies and UK investors looking for tax efficient property investment structures. Offshore jurisdictions offer significant advantages to investment managers and investors in the establishment and ongoing administration of REITs, as summarised below.

The most salient requirements from a corporate structuring perspective are that a REIT must:

• be a company;
• be closed ended;
• be exclusively UK tax resident;
• have only one class of ordinary shares (other than non-voting fixed rate preference shares);
• be listed on a recognised stock exchange;
• distribute annually at least 90% of property rental profits by way of dividend, to the extent lawfully possible; and
• have no shareholder who holds more than 10% of the shares.

While there are numerous issues which need deliberation when considering a move to REIT status for existing groups or establishing a REIT without a previous trading history there are some key issues where the use of offshore jurisdictions and service providers may entail significant advantages to stakeholders.

In order to meet the listing requirement, a REIT must be listed on a recognised stock exchange under HMRC rules. As a REIT must be listed on a recognised stock exchange, for those not wishing to incur the expense and time commitment of a full London Stock Exchange ("LSE") listing, CISX provides a cost efficient and time effective alternative which may prove attractive.

In December 2002, CISX was designated as a recognised stock exchange by the Inland Revenue and as such a REIT listed on CISX will meet the listing requirement. As the AIM Market is not a recognised stock exchange for HMRC purposes, if a client is seeking to list a REIT in the UK it must do so in accordance with the UK Listing Authority’s ("UKLA") Listing Rules applicable to a full LSE listing. This presents a number of commercial issues in relation to which investment managers and investors may find listing on CISX advantageous, as follows:

• UKLA Listing Rules generally require three year audited accounts for trading companies seeking a listing of their equity securities. This makes the establishment of a "bespoke" REIT more difficult in the context UK listing requirements;
• a full UKLA listing is costly in part due to the extensive requirements of the UKLA Listing Rules;
• the UKLA approval process is lengthy;
• UKLA Listing Rules require the appointment of a sponsor which, in the context of a main market listing, can be costly and may not be commercially appropriate in every set of circumstances; and
• access to the liquidity of the main market of the London Stock Exchange plc ("LSE") may not be necessary depending on the structure of the transaction.

Listing a REIT’s shares on CISX may alleviate these issues. If liquidity is sought, in addition to that provided by a CISX listing, this may be achieved without incurring the initial and ongoing costs associated with a full listing by combining a primary listing on CISX and a secondary listing on AIM.

CISX listing can be utilised by REITs incorporated in any of Jersey, Guernsey or the UK.

Listing REITs on CISX - Trading Company or Investment Fund?

There are essentially two ways to list a REIT on CISX. A REIT can either be listed as a trading company under Chapter 6 or as an Investment Fund under Chapter 7 of the CISX listing rules (the "CISX Rules"). Given the nature of a REIT, in particular that it is:

• required to distribute the majority of its property rental income;
• holds property for investment and not for trading or development purposes; and
• the investment of its assets represents a spread of investment risk (given its requirement to hold at least three properties with no more than 40% of the value in any one property),

CISX listing as an investment fund is a viable option.

While the technical requirements for listing a trading company and an investment fund differ in a number of respects, the critical difference in the context of REITs is that a company listed under the investment funds requirements of the CISX Rules does not need to have three years audited accounts or a trading history. As such, it is possible to set up a "bespoke" REIT without requiring three year’s audited accounts.

If it is nonetheless considered appropriate to list as a trading company, the CISX Rules require three years audited accounts although this can be relaxed in the event that there are at least two years audited accounts and one full year’s un-audited accounts for inclusion in the prospectus. Alternatively, a newly incorporated holding company can also be listed on CISX under the trading company chapter of the CISX Rules provided it holds subsidiaries that meet the three year audited accounts rule.

Before a security is considered for admission to listing on CISX, the listing conditions must be vetted by a sponsor. While a company’s securities are listed on CISX, it will be required to maintain a sponsor. However, the costs associated with sponsors in respect of the application for and retention of listing on CISX are considered to be significantly lower than those often associated with listing on the main market of the LSE.

CISX require that a company listing on the exchange is not closely held (i.e. by related parties) but they do not necessarily require that the shareholdings be extensively diffused. While this will need to be considered on a case by case basis, it should still be possible to obtain and maintain a CISX listing for REITs found at the less public end of the spectrum, where shares may be held by the minimum number of investors only and trading in the shares may be less frequent.

The CISX Rules are based broadly on the principles of the UKLA Listing Rules, and may therefore be familiar to investors and advisors but are significantly less onerous in application. CISX responds promptly and will consider an issuer’s requests for derogations from the CISX Rules quickly and commercially. CISX is also flexible as to the management of the transaction timetable. The costs of listing securities on CISX are often considered to be substantially lower than those associated with a main market listing in the UK.

1. Jurisdiction of Incorporation of the REIT

To qualify for REIT status, a company must be tax resident solely in the UK and (per the UK Finance Act 2006) not "resident in another place in accordance with the law of that place relating to taxation". This does not mean however that only UK incorporated companies are eligible, under English law tax residency is determined by the place of a company’s central management and control which is not necessarily its place of incorporation.

Jersey’s principal tax law, was amended with effect from 1 January 2007 to confirm that a Jersey incorporated company will not be regarded as resident in Jersey for the purposes of Jersey’s principal tax law, if:

• it is centrally managed and controlled in another jurisdiction, outside Jersey;
• it is tax resident in that other jurisdiction; and
• the highest rate of corporation tax in that other jurisdiction is 20% or above.

Under Guernsey tax law a Guernsey company can apply for exempt status from the Administrator of Income Tax on various grounds including that there are no shareholders that are resident in Guernsey. If the exemption is granted the company will treated as non-resident in Guernsey. Under current proposals before the States of Guernsey it is expected that the rate of income tax for Guernsey companies (other than in respect of certain regulated banking activities) will be reduced to zero. It is currently proposed that exempt status may still be obtained for investment funds (such as REITS) which will mean that they will remain non-resident in Guernsey.

The use of a Jersey or Guernsey incorporated REIT may entail significant advantages over a UK incorporation. Jersey and Guernsey companies offer greater flexibility to investors as the respective Island’s companies laws utilise many of the same concepts as English company law (and will therefore be familiar to investors) but apply these concepts in a lighter fashion.

In particular, Jersey and Guernsey companies may be incorporated with no par value shares which can be redeemed or purchased by the company (subject to the terms of the issue of the shares and the company’s memorandum and articles) out of its stated capital account (i.e. the equivalent of its share and share premium accounts) without recourse to its distributable reserves. Given that REITs will, by their very nature, be heavily utilising their distributable reserves due to the need to maintain an annual 90% distribution of property rental profits (to the extent lawfully possible), in the event that a REIT disposes of property and does not wish to reinvest it, a Jersey or Guernsey vehicle can allow for a more streamlined and cost effective return of capital to investors, without recourse to distributable profits, in these circumstances.

The criteria for the payment of dividends by Jersey companies, a key area for REIT eligibility, are proposed to be amended in 2007 to provide that dividends may be paid on the satisfaction of a cash-flow solvency test only. This would remove the current requirement (modelled on the English law position) to pay dividends out of distributable profits / reserves only.

The position in Guernsey remains similar to that in England, with dividends being payable from profits available for the purpose. However, it is a well established practice in Guernsey that profits may include unrealised capital gains, provided that unrealised losses are also taken into account.

The flexibility of Jersey’s companies law is proposed to be further enhanced by the abolition of the prohibition on financial assistance during 2007. Unlike the position under English law, post-2006 amendment, where financial assistance continues to be prohibited if provided by a public company (or a subsidiary of a public company), the abolition of the prohibition in Jersey law is proposed to extend to both private and public companies. This will entail significant transaction management advantages for Jersey public companies, which will include all Jersey REITs by definition as a result of the requirement for a stock exchange listing.

Under Guernsey companies law a Guernsey company is not prohibited from giving financial assistance, so long as it is permitted to do so by its memorandum and articles and will satisfy a statutory solvency test immediately after the financial assistance is given. Similar to the proposed changes under Jersey law, this flexibility provides significant transaction management advantages to Guernsey companies.

Share transfers of companies incorporated in Jersey or Guernsey are not subject to stamp duty provided the share register is maintained offshore. Jersey and Guernsey companies are required by law to maintain their share register in the respective Island of incorporation.

Jersey and Guernsey REITs may also be structured as incorporated cell companies. A key innovation, a Jersey or Guernsey incorporated cell company provides separate legal personality for each cell. As a matter of substantive law (and not merely a procedural rule), this innovation is designed to ensure cross-jurisdictional recognition (including on insolvency) of the ring-fencing of each cell’s respective assets and liabilities. In the real estate context this may be of particular relevance to asset-specific financing, and the ring-fencing risks of environmental and occupiers’ liability to the property of individual cells.

The combination of stock exchange listing and the REIT diversification requirements is likely to characterise Jersey and Guernsey REITs as collective investment funds under Jersey and Guernsey law respectively. Expedited regulatory approval is available from the Jersey Financial Services Commission ("JFSC") in relation to such closed ended, listed, Jersey corporate funds meeting the criteria of the JFSC’s Listed Funds Guide. The principal criteria relate to the investment manager/adviser and the inclusion of certain prescribed information in the offer document required in connection with the listing. The investment manager/adviser will be approved if regulated for this purpose in an OECD member state and otherwise if sufficient track record and experience can be demonstrated to JFSC. Where the criteria of the Listed Funds Guide are met, JFSC aims to issue regulatory approvals within three working days.

Similarly in Guernsey, regulatory approvals may be obtained from the Guernsey Financial Services Commission ("GFSC") within three working days in relation to closed-ended Guernsey funds meeting the GFSC’s ‘qualifying investor fund’ or ‘registered fund’ criteria. Similarly to the policy of the JFSC’s Listed Fund Guide, the Guernsey ‘qualifying investor fund’ or ‘registered fund’ policy focuses on the administrator warranting that the promoter of the fund is fit and proper (after conducting its own due diligence) and various filing requirements.

REITs are set to become a highly utilised structure in the UK real estate investment market. In relation to both very public and also less widely held vehicles, Jersey and Guernsey REITs can offer investors considerable cost savings together with the prospect of significant structural advantages over the life of the REIT. It is anticipated that these aspects of the offshore REIT may deliver real competitive advantages to both investors and investment managers.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.