Daniel made a comment in another thread which I want to clarify. That thread is closed and the REIT comment was way off topic so not the best place to have a REIT discussion. Hence a new thread.
Daniel said something to the effect that I was somehow selling or accepting investments in a REIT I am running. As there is no REIT in existence the assumption has a bit of a flaw. Maybe more helpful is if I share how a REIT is structured here in the UK and where I am in the process in terms of starting one.
To be a REIT in the UK, that means there is a PLC company that is listed on an approved stock exchange. Assuming those two conditions are met and a number of other conditions, the PLC can apply to HMRC to have the tax status for the PLC converted to a REIT tax status.
A REIT must have the following characteristics. Also covered are some benefits. This is not exactly the fully and final set of details. Just the major elements.
PLC. This means an audited company that has certain minimum capital and other characteristics.
The primary business focus is buy and hold real estate for income purposes. Rental property business is another way to say it.
75% of the assets must be cash or income producing real estate. This is an annual test.
75% of the annual income should be from the collection of rents.
90% of the normal profits (income minus expenses) needs to be paid out each year to the investors in the form of dividends. The investors would pay tax at their normal rate.
As a listed company, the normal rules for the exchange apply. This includes public communication, reporting of the numbers, etc. It also helps to define what can be shared with the general public, the offer perspectives, etc. A normal company on a normal stock exchange with normal stock exchange disclosure responsibilities.
The REIT will have a fund manager and that could be an external manager or it can be self managed with the associated rules from the FCA for fund management.
The PLC is a closed ended fund which means that there are a fixed number of shares. Holders of the shares are free to sell on the exchange and new buyers can buy shares through the exchange. Likely this will happen through stockbrokers, IFAs, etc. In other words, the investors have liquidity through the buying and selling of the shares and not through the purchase or sale of the real estate. The REIT has no control over who owns the shares and the REIT does not have to sell property to fund the exit of a shareholder.
There is a rule against concentration of ownership. This is a collective scheme that should be broadly owned rather than a way for 1 or a small number of investors to club together to avoid tax. More on the tax element later.
The PLC is designed for buy and hold or build and hold. If the PLC builds, the property has to be held for 4 years for it to fit the 75% requirement above.
If there was some sort of buy to sell or activity that does not fit the REIT model, either the REIT has to pay a special dividend and pay corporate tax like any other company or then REIT could lose its REIT status.
The benefit to a REIT for buy and hold business is there is no tax on the income and not CGT. It is a pass thru tax vehicle that is designed by the Treasury / HMRC to allow smaller investors to club together without double taxation.
REITs came into existence in the USA about 60 years ago and in the UK starting in 2007.
In 2012 the legislation for REITs was modified so that new ones could be started as the old legislation tended to only work for large corporates that had been around for a long time (Land Securities, British Land, etc).
To start a new REIT from the ground up is estimated to cost in the region of £500K. That is the cost for the paperwork (legal, accounting, NOMAD sponsored listing on AIM, regulatory compliance, etc). Yes, a large expense or capital cost that happens on the front end with no guarantee of success.
FCA PS 13/3 does not apply to a REIT. The notification that this exemption exists is what caused me to dig further into what PS 13/3 does apply to and why I subsequently raised the flag concerning traditional RE JVs and PS 13/3
At this time I have a letter from HMRC confirming that if am successfully in doing what I am saying I will do, they expect that the company will be awarded REIT status. This is all subject to verification as and when a formal application is made to HMRC, the status of the PLC and its business activities and the prevailing laws at the time of the application. Call the HMRC letter a comfort letter if you like. That HMRC sees no reason why what I am proposing is not going to comply with the regulations if I do what I stated in the request for an opinion.
To list on AIM requires that the PLC raise £3M or more as the company will be viewed as an investment company so the minimum fund raising is higher than if the company was considered a trading company.
Property Fortress Education Ltd. is part of the Property Fortress brand. The Ltd company's focus is on property education. As the REIT is not really suited to be in the education business (needing to focus on rental income), a separate LTD company was created.
By being an education company, that means it is a trading company. As a new company, it can apply for SIES tax credits for the seed investors in the educational company. HMRC will provide tax credits to the shareholders who buy new shares issued by Property Fortress Education Ltd subject to the SEIS limits and regulations. HMRC has issued a pre-approval letter concerning the SEIS status. This is a benefit to the seed investors and not something that changes the company's tax position. It is a way the UK government wants to stimulate new trading companies. We are talking about a tax credit for UK taxpayers who have paid tax in prior years. Less useful for me given I also pay tax in the USA so not something I am thinking of taking advantage of. Definitely something other investors can benefit from if they are UK taxpayers and no other country taxes their world wide income (like the USA's IRS does for me).
The germ of the Property Fortress structure started years ago when we had the FSA and REITs first became legal in the UK. The modern version of the evolving story is as follows.
The FCA expects an investment company to Know Your Customers (KYC) and Treat the Customers Fairly (TCF). Running an educational company under the same brand as the REIT means I can help raise the standard of education for the wider market. By being online we can use a Fremium model for an educational platform which has lots of free content and some fee based content that is on a PAYG model. For example, we are expecting that the day long training content when delivered online can be priced at £97 with a money back guarantee. The stuff that normally would be sold for £500 or £997 and delivered in a live seminar over 8 or so hours with upscale pitches. We expect the weekend long content when delivered online would be priced at £197 with the same money back guarantee. This is the content that others sell for £997 to £3,000.
Film once, edit, remove sales pitches from the live session and you get content that can be viewed many times by multiple students or can be viewed multiple times by an individual student if they need a refresher. No need for upscales and no reason not to offer full money back after someone has completed the course.
We also will be creating quizzes for the content so that people know when they have mastered the topic. You do not get to move on to the next lesson if you do not pass the quiz. Competence rather than just spending as much as you can on endless live courses which require travel and other student costs.
By helping to raise the educational standard, we can more easily report back to the FCA in terms of KYC and TCF. It is not a perfect model as anyone can buy shares through the stock exchange so most REIT share holders could be people who never took a course. In addition, anyone can invest their pension funds in a REIT so we would not even know who was behind the pension in most cases. While all of that is true, there is no good reason to not make educational material more accessible and on a fair economic basis with full money back guarantees.
All of the above applies to shareholders to the REIT. If students had a deal they needed a JV partner for the REIT can enter into a JV. The REIT is classed as a sophisticated investor so the students can legally share the deal info with a representative of the REIT without concern about the FCA's PS 13/3. The REIT is mostly interested in yield and can happily offer more of the capital gain to the JV partner if that is what makes sense in the transaction. The party with the deal can check out the REIT through the public records so there is lots of transparency in terms of DD before evening suggesting a JV to the REIT. The REIT has no need to exit so could hold the property long term if that is what is desired. The REIT can buy out the JV partner in an agreed sale and it is possible to wipe out any CGT the JV partner might have based on the present regulations.
Another motivation is I want to increase the odds that people can afford to learn what they want to learn while putting pressure on the sharks who are only too happy to take money for what is flawed strategies.
So, KYC and TCF are important to me and it has been designed in both strategically and through transparence from following the required regulations.
The REIT will a PLC so it is monitored by the auditors, the stock exchange and the HMRC on an annual review basis. The REIT annual financial statements will be published after the audit each year as per Companies House and the stock exchange rules. Investors in the shares can get in or out at any time by making a call to their broker. Assuming another investor wants to buy through the stock exchange, the investor who wants to sell will be liquid in 1-5 days depending on the settlement rules at the exchange.
If the REIT chooses to JV, the other JV partner(s) will know what they are dealing with and the REIT will have limited debt exposure (REIT rules & regs set limits on debt). The company's books will be independently verified and searchable at any time.
Where am I at this stage. The education company is legally open though we are not selling anything. We have a crowd funding campaign to fund the capture of course content and build a larger community. We expect to release some beta courses to test the platform and the course structure. The software platform was funded and built prior through my own funds. Those who want to sign up to be beta users can do so at PropertyEducation.org.
The REIT is a longer term project and being expensive I am using a bootstrap process. We are looking at possible deals where we can use the early profits to fund the REIT paperwork. We would apply for HMRC REIT status after we have listed the company as that is what HMRC requires.
If I had £500K sitting around in cash and wanted to pull the trigger, it would take 12 or so weeks for the lawyers and others to make it happen. Then there would be the HMRC review. In my thinking it is better to move a bit slower and self-fund the start up costs from other transactions which are likely to be deals that would not make sense in an approved REIT (buy to sell type deals). In other words, watch this space or other places for updates when there is news to report on there REIT formation.
Assuming you read this far, thanks for the interest. I am happy to address questions on any of the above. If you want to talk about investing in the Property Fortress Education Ltd company, there are lots of details that can not be discussed in a public forum given the PS 13/3 restrictions. For HNWI or Sophisticated Investors, I can have a 1 to 1 discussion after verifying that you fit one or the two exempt groups. That is the point of PS 13/3 so the FCA requires I avoid public posts in an unregulated forum.
I am very happy to discuss the REIT regs or legal framework. There is no offering at this time so there is nothing much to worry about in terms of promotions. Strictly educational. If and when there are shares on offer, there will be a carefully followed process to announce this and the process is dictated by the FCA and the AIM stock exchange if we choose to list on AIM. At this time AIM, is the best choice for a UK REIT so likely we will go for a full AIM listing.
Does that help Daniel?