SEC-OGC Opinion No. 22-10: Real Estate Investment Trust

The Securities and Exchange Commission (“SEC”) explained the nature and allowable investments of Real Estate Investment Trust (“REIT”) companies in Opinion No. 22-10 dated 15 August 2022. 

The SEC addressed various matters involving Pryce Corporation (“Pryce”), a property holding and real estate development company duly registered with the SEC, engaged in the development and operation of memorial parks. Pryce is planning to put up a REIT company (“Pryce REIT”) pursuant to Republic Act No. 9856 (“REIT Act”). Once Pryce REIT is incorporated, Pryce will lease to Pryce REIT some of its real properties used in the operation of its memorial gardens business. In the alternative, Pryce is also considering conveying to Pryce REIT, either through sale or assignment, the above-described real properties. 

Currently, the types of income that Pryce generates from the operation of the memorial parks are (a) the sale of the burial lots; (b) the sale of double interment right; (c) collection of periodic maintenance assessment charges; and (d) rentals from the use of the memorial park facilities.

In view of the above, Pryce requested the SEC’s opinion on the following:

1. Whether the term “income-generating real estate” excludes income from (a) to (d) enumerated above. 
2. Whether Pryce can lease to Pryce REIT its real properties used in the operation of its memorial parks business; and
3. Whether Pryce can convey by sale or assignment to Pryce REIT the memorial parks. 

 Nature and Allowable Investments of REIT

The REIT Act defines an REIT as a stock corporation established in accordance with the Corporation Code, now Revised Corporation Code (“RCC”), and the rules and regulations promulgated by the SEC principally for the purpose of owning income-generating real estate assets. The term “income-generating real estate” means real property which is held for the purpose of generating a regular stream of income such as rentals, toll fees, user’s fees and the like, as may be further defined by the SEC.

Section 8.3 of the REIT Act provides the allowable investments that a REIT may only invest in, which includes real estate on leasehold that is located in the Philippines, to wit:

“8.3. Allowable Investments- A REIT may only invest in:

1. Real estate, whether freehold or leasehold, located in the Philippines. A REIT may invest in income-generating real estate located outside of the Philippines: Provided, That such investment does not exceed forty percent (40%) of its deposited property and only upon special authority from the Commission. The Commission in issuing such authority shall consider, among others, satisfactory proof that the valuation of assets is fair and reasonable. An investment in real estate may be by way of direct ownership or a shareholding in an unlisted special purpose vehicle constituted to hold/own real estate;
2. Real estate-related assets, wherever the issuers, assets, or securities are incorporated, located, issued, or traded:
3. Managed funds, debts securities and listed shares issued by local or foreign non-property corporations;
4. Government securities issued on behalf of the Philippine government or government of other countries and securities issued by multilateral agencies;
5. Cash and cash equivalent items; and
6. Such other similar investment outlets as the Commission may allow.” [Emphasis supplied]

These real property assets form part of the deposited property of the REIT, which is the total value of the REIT’s assets reflecting the fair market value of the total assets held by the REIT. Further, at least seventy-five (75%) of the deposited property of the REIT must be invested in, or consist of, income-generating real estate.

Thus, the SEC opined that Pryce REIT must meet the requirements of the REIT Act, among which is that it primarily invests in real estate which has a steady stream of income. Specifically, at least seventy-five (75%) of the deposited property of Pryce REIT must be invested in, or consist of, income-generating real estate. 

The SEC also opined that the sale of the burial lots and double interment rights, which are the primary sources of income of the memorial parks, are dispositions of real property assets, thus would be no generation of recurring income for the REIT selling such real property assets. Upon the sale by the REIT of the burial lots and double interment rights to the buyers, the REIT divests itself of its ownership rights in favor of the buyer. Thus, these properties may not be considered as part of the income-generating real estate assets of a REIT. 

Meanwhile, the collection of periodic maintenance assessment charges and rentals from the use of the memorial park facilities may fall under the definition of income-generating real estate as these may generate a regular stream of income, same as the nature of the rentals and user’s fees mentioned in the definition of REIT under the REIT Act. In this case, there is no deprivation of the REIT’s ownership rights over the real property assets subject of these maintenance assessment charges and rentals on the use of the memorial park facilities. 

For the second and third queries, the SEC opined that Pryce may lease or convey, either by sale or assignment its real property assets used in the operation of its memorial parks business to Pryce REIT, provided that Pryce REIT must ensure that at least seventy-five (75%) of its deposited property must be invested in, or consist of, income-generating real estate as discussed above.