International Bar Association Conference Real Estate Investment Trusts Panel 3 - REIT Operating Considerations

1. International Bar Association ConferenceReal Estate Investment TrustsPanel 3 - REIT Operating Considerations 17 October 2007 Singapore

2. REIT Operating Considerations - Panellists Jerry Koh, Partner, Allen & Gledhill LLP (Chair) Michael Blair, Partner, Mayer Brown LLP Blair Cowper-Smith, Partner, McCarthy Tétrault LLP Pieter de Ridder, Partner, Loyens & Loeff Scott Newman, Partner, K&L Gates John Sullivan, Partner, Mallesons Stephen Jaques Yap Chee Meng, Partner, KPMG

3. Discussion topics Tax treatment Investment restrictions Financing Financial engineering Accounting Governance framework

4. Tax treatment Panellists: Pieter de Ridder & Scott Newman How is the income derived, and the distribution made, by a REIT taxed in the different jurisdictions, in terms of withholding taxes, dividend/distribution taxes or any taxes payable by the recipients? Are there any jurisdictions which are particularly attractive from a cross-border perspective in Asia or other parts of the world?

5. Tax treatment - General Tax position of dividend and rental income earned by the REIT Are expenses incurred by the REIT tax deductible Gains derived from the sale of assets taxable or non-taxable Stamp duty/transfer taxes on the acquisition and sale of property or shares Withholding tax suffered on overseas income earned by the REIT: cost of business or can it be credited Withholding tax on distributions made by the REIT

6. Tax treatment – United States • At least 95% of REIT’s gross income must be derived from: • Dividends • Interest • Rents from real property • Gain from the sale or other disposition of stock, securities and real property (including interests in real property and interests in mortgages on real property) which is not “dealer” property • Abatements and refunds of taxes on real property • Income and gain from foreclosure property • Amounts (other than amounts the determination of which depends in whole or in part on the income or profits of any person) received or accrued as consideration for entering into agreements (i) to make loans secured by mortgages on real property or (ii) to purchase or lease real property (including interests in real property and interests in mortgages on real property)

7. Tax treatment – United States • At least 75% of the REIT’s gross income is derived from: • Rents from real property • Interests on obligations secured by mortgages on real property • Gain from the sale or other disposition of real property (including interests in real property and interests in mortgages on real property) which is not “dealer” property • Dividends or other distributions on, and gain from the sale or other disposition of transferable shares (or transferable certificates of beneficial interest) in other REITs • Abatements and refunds of taxes on real property • Income and gain from foreclosure property

8. Tax treatment – United States • At least 75% of the REIT’s gross income is derived from (cont’d): • Amounts (other than amounts the determination of which depends in whole or in part on the income or profits of any person) received or accrued as consideration for entering into agreements (i) to make loans secured by mortgages on real property or on interests in real property; or (ii) to purchase or lease real property (including interests in real property and interests in mortgages on real property) • Qualified temporary investment income

9. Tax treatment – United States • At the close of each quarter of the taxable year • At least 75% of the value of the REIT’s total assets is represented by real estate assets, cash and cash items (including receivables) and Government securities; and • (i) Not more than 25% of the value of the REIT’s total assets is represented by securities (other than those includible under (A) above); (ii) Not more than 20% of the value of the REIT’s total assets is represented by securities of one or more taxable REIT subsidiaries; and

10. Tax treatment – United States • At the close of each quarter of the taxable year (cont’d) • (iii) Except with respect to a taxable REIT subsidiary and securities includible under (A) above: (I) Not more than 5% of the value of its total assets is represented by securities of any one issuer; (II) The REIT does not hold securities possessing more than 10% of the total voting power of the outstanding securities of any one issuer; and (III) The REIT does not hold securities having a value of more than 10% of the total value of the outstanding securities of any one issuer

11. Tax treatment – United States • The REIT must distribute at least 90% of its real estate investment trust taxable income (as defined) for the taxable year • Ability of REIT to designate dividends as long-term capital gains dividends • Many REITs distribute far more than their real estate investment trust taxable income, with the result that much of their dividends may very well constitute return of capital distributions

12. Tax treatment – United States • REITs can engage in hedging transactions to the extent that such transactions hedge any indebtedness incurred (or to be incurred) by the trust to acquire or carry real estate assets, provided such transactions are clearly identified as such on or before the close of the day on which it was acquired, originated or entered into. Thus, hedging gains generally do not enter into the determination as to whether the REIT satisfies the 95% and 75% gross income tests

13. Tax treatment – United States • Taxable REIT subsidiaries can be used to perform activities that cannot be conducted by the REIT itself (e.g., the provision of “impermissible tenant services”). However, corporations that directly or indirectly operate or manage lodging or health care facilities, or provide any person rights to any brand name under which such facility is operated, cannot be taxable REIT subsidiaries. Certain exceptions to the foregoing rule apply, however, where a lodging facility is operated by an independent contractor

14. Tax treatment – United States • No limit on the ability of a REIT to invest in foreign real estate • However, it is unclear whether exchange gains constitute qualifying income for purposes of the 95% and 75% gross income tests • REITs generally will not be able to claim a foreign tax credit for foreign income taxes incurred, nor can they pass-through foreign tax credits to their shareholders

15. Tax treatment – United States • Dividend distributions by a US REIT to foreign shareholders are generally subject to a 30% US withholding tax unless an applicable treaty applies • Under the existing US-Canada Income Tax Treaty, the US withholding tax on dividend distributions from a US REIT are reduced to 15% where such dividends are beneficially owned by an individual holding an interest of less than 10% in the trust; in all other cases, the withholding rates otherwise applicable under US law apply

16. Tax treatment – United States • Under the Protocol to the US-Canada Income Tax Treaty, signed on September 21, 2007, the 15% US withholding rate will apply if: • the beneficial owner of the dividends is an individual holding an interest of not more than 10% in the REIT; • the dividends are paid with respect to a class of stock that is publicly traded and the beneficial owner of the dividends is a person holding an interest of not more than 5% in any class of the REIT’s stock; or • the beneficial owner of the dividends is a person holding an interest of not more than 10% in the REIT and the REIT is diversified • A foreign person is not subject to US income tax (including withholding taxes imposed under Internal Revenue Code section 1445) on the sale of the stock of a US REIT if such stock is regularly traded on an established securities market and such person has not generally held at any time more than 5% of the class of such stock

17. Investment restrictions Panellists: Blair Cowper-Smith, Scott Newman & John Sullivan Why do REITs need to have investment restrictions and what are common examples of these? What is the approach towards development and joint ownership of assets?

18. Investment restrictions – Asia Pacific

19. Investment restrictions – North America and Europe *Cannot hold hotels or retirement homes due to impurity of income stream

20. Investment restrictions – Canada • REIT must qualify as a “mutual fund trust” (“MFT”) • MFT status depends on being widely held and activity of the REIT being limited to holding or managing real property that is capital property of the REIT • Trust-on-trust structures and similar arrangements Public REIT (“MFT”) must be passive Distributions or interest Real estate investments held in Sub’s or partnerships that are not MFTs

21. Investment restrictions – Canada • 2007 new distribution tax introduced on income trusts • Safe harbour for REITs: • REIT must not hold non-portfolio property (shares or ownership interests in other entities that exceed certain value thresholds) other than “qualified REIT properties” which essentially means real property that is capital property • At least 95% of its income must be from property • 75% of its income must be from real property in Canada • 75% of its assets consists of real estate situated in Canada

22. Investment restrictions - Trends • Cross-border REITs • Most jurisdictions now allow overseas investment • A strong trend driven by stable capital markets and scarcity of local property (e.g. Singapore, Australia) • Development and internalised management • Attitudes to development exposure vary between jurisdictions • Move to internalised management in more mature markets • Stapled structures – investors own the manager/developer • Risk/return increase by including operating business • Broader asset classes • Hotels, retirement villages, leisure etc • Toll roads, tunnels and other infrastructure

23. Financing Panellists: Michael Blair, Blair Cowper-Smith & John Sullivan What are the common ways to raise finance in the various jurisdictions - equity, debt (secured/CMBS, unsecured, convertibles/exchangeables), hybrids, derivatives? Are there any gearing or leverage limits imposed by the regulators?

24. Financing – United States • No statutory or regulatory limits on leverage • Limits may be imposed by indentures, lenders and credit rating agencies • Common REIT capital raising: • Common Stock • Preferred Stock (perpetual or convertible) • Debt Securities (senior unsecured, CMBS, mortgage or convertible) • Private Funds • REITs typically maintain standard bank operating lines to support operating and related cash flow needs (paid down with public debt issuances)

25. Financing - Canada • Declaration of Trust generally includes loan to value limits • REIT credit ratings are generally not sufficient to support unsecured debentures • REITs not permitted to finance by way of preferred equity • REITs typically maintain standard bank operating lines • Long-term debt needs - convertible debentures • Recent amendments to the Canada/US Tax Treaty will reduce the cost of capital further with the elimination of withholding tax

26. Financing - Australia • Typical REIT funding sources – choice varies with market conditions • Further equity (e.g. rights issue or placement) • Wholesale fund spin-off • Bank and other debt • Convertibles/hybrid securities • Hybrid securities popular for REITs • Usually an attached funding vehicle • Usually listed either on ASX or more recently Singapore • Often convertible/exchangeable into REIT equity • Often equity for accounting and bank covenants but with debt-like features • Driven by lower cost of capital and ability to tap different investor base

27. Financing – Leverage limits

28. Financial engineering Panellist: Yap Chee Meng When does financial engineering cross the line and make investors and regulators uncomfortable?

29. Financial engineering • Market conditions may encourage use of financial engineering, e.g. to boost distribution yields • A variety of methods used in different jurisdictions, many essentially involving return of capital to investors as part of distributions • Examples: • Step-up interest rate swaps, fees and interest rates on borrowings • Hedging/borrowing arbitrage for cross-border REITs • Management fee waivers, or fees paid in units • Income support in relation to properties • Deferred payment for acquisition • Borrowing to pay distributions (distribution in excess of cashflow from operations)

30. Financial engineering • Generally, regulators will allow a level of engineering with clear disclosure. Similarly, investors will accept some, but over-engineering has led to capital strikes (e.g. Hong Kong step-up swaps)

31. Accounting Panellist: Yap Chee Meng What are the common accounting issues experienced by a REIT? E.g. investment property classification/cash trap, deferred tax, marking to market financial instruments etc.

32. Accounting Cash trap arising from differences in accounting standards on cross-border REITs Deferred taxation on revaluation of investment property Income support – revenue or adjustment to purchase price? Acquisition of property holding company - acquisition of asset or acquisition of business? Revenue recognition – straight-lining of step-up rental income, lease incentives e.g. rent-free Consolidation - should a REIT Manager consolidate the REIT?

33. Governance framework Panellist: Blair Cowper-Smith Do REITs really provide an enhanced governance framework? What are the pros and cons of the trust/trustee vs company models, external vs internal management models?

34. Governance framework - General • Governance framework for REITs quite different than for corporations • REITs may lack statutory protections: • Dissent rights in re-organization transactions may be lacking • Oppression remedy may be absent • Unitholder proposals may not be possible • Derivative actions not necessarily available • Creditor rights • Two tier structure a challenge in relation to governance

35. Governance framework - General Public UPREIT Structure 100% REIT LimitedPartners OperatingPartnership Assets

36. Governance framework - General • Fiduciary duties for trustees may be somewhat different than as prescribed by corporate law • Risk of unitholder trust liability has resulted in the introduction of protective unitholder legislation • Many REITs are managed externally - spin-off history • Separating management from the REIT permits isolation of management related costs and limits the possibility of unwarranted internal overhead growth but valuation discounts may apply

37. Governance framework – United States • US REITs – Maryland statute • Many US REITs organized in Maryland • Corporate or Trust REITs • Corporations have well-defined statute and that may not be altered in certain cases: • Standard of conduct for directors; standards for dividends; stockholder approval for charter amendments; procedures for voluntary dissolution; appraisal rights; record dates • Trust REITs have more general statute and offer greater flexibility • Must be dealt with in the declaration of trust or bylaws • Shareholders appraisal rights in mergers may not be modified

38. International Bar Association ConferenceReal Estate Investment TrustsPanel 3 - REIT Operations 17 October 2007 Singapore