The REILS Program
The REILS program provides flexible and capital efficient financing to U.S. real estate companies in the form of a hybrid instrument which may be syndicated by a combination of both U.S. and non-U.S. investors, each of who benefit from highly efficient U.S. tax treatment.
Investors today have the option to invest in multiple real estate investments vehicles, such as real estate investment trusts (REITs), real estate mortgage investment conduits (REMICs), real estate private equity (REPE) structured as limited partnerships or limited liability companies, Real Estate Operating Company (REOC). Multiple types of investment instruments are also available, such as mortgage loans, B-Notes, second mortgage loans, mezzanine loans, preferred equity, limited partner interests, joint-venture limited liability membership interests.
While each of these vehicles and instruments offer benefits to the investors, they also suffer from certain drawbacks, particularly with respect to syndicating U.S. and non-U.S. capital in an efficient way.
REILS was specifically designed to enhance the tax efficiency of real estate investing by U.S. and non-U.S. investors while complying with the complex requirements of U.S. Agency Debt (Freddie Mac, Fannie Mae), CMBS, healthcare receivables, Sharia compliance and off-shore conduits.
The REILS team also provides servicing and special servicing with experience in workouts, foreclosures and bankruptcy proceedings.
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Benefits to non-U.S. Investors
All non-contingent and contingent payments (including notional appreciation) made to the “indebtedness instrument” are structured to qualify for “portfolio interest exemption” (Under I.R.C. § 871(h)) and thus be exempt from U.S. income tax for qualifying non-U.S. investors.
Instead of (i) taxable operating ordinary income and (ii) liquidation proceeds subject to capital gains, the non-U.S. investors benefit from U.S. tax exempt current yield as well as U.S. tax exempt appreciation.
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Benefits to the Transaction
The REILS transaction is structured to be compliant with senior securitized mortgage debt (i.e. Freddie Mac, Fannie Mae, HUD, CMBS). It also provides enough flexibility to be applied in real estate portfolio transactions (including those held in a REIT) and Opco-Propco (including health care portfolios, e.g. hospitals).
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Benefits to U.S. Investors
The REILS instrument is treaded as a structured note subject to U.S. Tax Code Sec. 1275-4 so that the U.S. issuer of the instrument benefits from (i) the accelerated expense of interest deductions (which may shelter phantom income generated by amortization of indebtedness) as well as (ii) the arbitrage between ordinary income tax rate deductions and U.S. Tax Code Sec. 1231 capital gains rate at the time of realization of the investment.
Additionally, all depreciation and amortization deductions from the property may be “specially” allocated and securitized through another instrument to be subscribed by third party U.S. investors (subject to passive activity limitations) who may benefit from the use of such deductions (subject to future recapture) in other investments in an amount potentially higher than their original investment basis by use of “qualified non-recourse financing” (Under I.R.C. § 465(b)(6)).
Gap Financings
The REILS platform provides efficient and flexible capital needed to fill the gap in refinancings.
Off-Shore Financings
The REILS platform has been specifically built to provide full tax efficiency to non-US investors and includes all necessary compliance including investor on-boarding, AML, KYC, FATCA, servicing, and administration.
Portfolio Financings
The REILS instrument can be applied to portfolios enabling sponsors to efficiently monetize cash flows from stabilized assets in order to develop and/or acquired additional assets.
721 Exchanges
The REILS platform may be used together with 721 exchanges maximizing the tax benefits.
Agency Financings
The REILS instrument has been applied together with agency debt (i.e. Freddie Mac and Fannie Mae) offering additional capital to US sponsors and real estate operators.
Sharia’ Financings
The REILS structure has been reviewed by a Sharia Committee which confirmed that the same complies with principles of Sharia as required pursuant to Sharia Standard No 30 on Commodity Murabaha issued by AAOIFI.
Accelerated Depreciation Benefits
The REILS instrument enables the concentration and acceleration of 1245 real property and 1250 personal assets’ depreciation providing unique tax benefits to US investors and real estate operators.