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Thinking of Selling Your Building? REITs Talk on Unit Swaps, Taxes and How to Save Big Money
March 2010
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| Jason Castellan, Chief Executive Officer, Skyline |
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Jason Castellan, Chief Executive Officer, Skyline
Another option for multi-residential owners looking to sell their building to a REIT is that by accepting a share swap and deferring the taxes, the vendor will have more money to invest.
Jason Castellan, the Chief Executive Office of Skyline Apartment REIT, a private REIT based in Guelph, Ontario, says if an owner sells his building and pays the tax, they will, of course, have less to invest. If they exchange the building for REIT units, they can defer the tax and generate income on the full amount of the sale price.
As an example, if the vendor had a building valued at $3 million, and took the cash, they would pay tax on that amount and have about $2 million to invest. If they swap the equity for REIT units, they have the full $3 million to invest. “That makes a huge return on their bottom line,” says Castellan.
Castellan says he’s suggested the idea to vendors but so far most have preferred to take the cash. However, he is currently in negotiations with one vendor who wants to defer the tax and accept a limited partnership unit swap as payment for a building.
“It’s a very good structure for not only us, but for the sophisticated vendor who wants to continue to defer taxes, but doesn’t want the headache of the day to day management of the property,” says Castellan.
While only one vendor has agreed to a unit swap, Castellan says seven people who sold buildings to Skyline have eventually become investors in the REIT.
“They sold the building to us and went away and put the money in the stock market for six months. They couldn’t sleep at night so they turned around and invested their after tax money with us,” says Castellan. The company currently owns 89 multi-residential buildings, mainly in smaller cities in eastern Canada.
The rules governing private REITs, like Skyline, are similar to publicly traded REITs. The main difference is that private REIT units do not trade on any stock exchange. Castellan says that causes some investors to fear that their investment will not be liquid or will be difficult to sell. “It’s one of the biggest hurdles to overcome,” he says.
To counter those fears, Skyline offers unit holders the opportunity to sell their units on a daily basis if they have a sudden need for cash. “We’ve always had our investors out on their time line, at current market value, without any fees or penalties,” he says.
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