Thompson & Knight Files First IPO Of A REIT-Like Security In Mexico

Sunday, April 3, 2011 - 01:00
Guillermo Uribe

Editor: Please tell us about your background and Thompson & Knight's Mexico City office.

Uribe: I started my career by working on securities issues as a clerk in a brokerage firm. I was later appointed Director of the National Banking and Securities Commission (CNBV) in connection with activities related to market surveillance and enforcement powers and was subsequently made Director of the Corporate Division of New Agencies at the CNBV. My career took me to New York to practice with the law firm of Thacher Proffitt & Wood. Later I became a partner in the Mexican law firm Rubio Villegas y Associados, and from that firm I came to Thompson & Knight as a partner in the Mexico City office. Thompson & Knight has represented clients in Mexico for more than 35 years, and opened its Mexico City office in 2005. We represent clients in a variety of areas, including matters related to banking and finance, corporate and securities, infrastructure, labor and employment, telecommunications, real estate and intellectual property. We are very active in the Mexican securities market, representing our clients in matters related to securities and securities filings.

Editor: How many lawyers do you have in your office?

Uribe: We have 23 lawyers in the Mexico City office, including five partners, as well as eight lawyers in the Monterrey office, including two partners.

Editor: Thompson & Knight just announced the launch of Mexico's first security similar to a REIT, entitled Fibra Uno, on March 17. What differences are there between a Fibra Uno and a REIT? Does it have the same pass-through tax advantages that U.S. REITs afford their holders?

Uribe: There are some major differences between the types of trusts: (1) in the case of a REIT you have to make distributions on a yearly basis of 90 percent of taxable income, while in the case of the Fibra you have to make distributions in the amount of 95 percent of taxable income; (2) in addition, one other difference that is really critical for this type of deal is that in the United States I understand that at least 75 percent of the assets of the REIT have to be invested in real estate, government securities and cash, while in Mexico, you have to invest at least 70 percent of the assets of the trust in real estate or other REITs related to real estate in order to be recognized as a Fibra. Additionally, there are some tax considerations that are important in terms of what the Mexican tax authorities have provided in the law - they actually make an exception for the payment of income taxes for those individuals who have non-corporate activity in Mexico by exempting them from income taxes. It is my understanding that subject to several restrictions, holders of REITs in the United States are generally subject to a withholding of 30 percent of REIT income for their individual income taxes. This distribution as well as the absence of income taxes is an important factor for certain individuals who purchase these securities.

In addition, we have different guidelines for pension funds. I understand that the REIT in the United States is treated as a corporation, while in Mexico, the Fibra is not a corporation. The latter does not need to be incorporated because the entity that holds the trust (Fibra) is a bank. So I would say in general terms it's a special purpose vehicle that has a specific legal tax regime. Those are the main specific differences between the U.S. REIT and the Mexican Fibra.

Editor: The Fibra structure is similar to an investment company in the U.S.?

Uribe: Yes, more or less, because you have a requirement for corporate governance that is not yet really clear under the Mexican securities law, but government authorities will request that corporate governance provisions be set up. This is only the beginning of our development of this new instrument.

Editor: You have spoken of the regulatory issues. Who regulates the Fibra Uno?

Uribe: The Fibra has federal regulation because the general concept under Mexican tax law is that the Fibra is a security that is now regulated under the federal income tax law. One of the main issues that we had to deal with is that the general applicable rules regarding Fibra at the federal level were not totally clear in several respects. This project was actually first launched eight years ago so that each step along the way to reaching the final listing resulted in taking different steps in most of the transactions. Fortunately, over the past two years the authorities did not take into account the governing bodies overseeing the Fibra and the transactions that constituted the Fibra. We had to deal with the Mexican federal tax authorities in order to convince them that some adjustments in the second level of rules applicable to taxable transactions related to Fibra had to be amended. We convinced them to create a new specific rule for purposes of the duration of the Fibra. For instance, one of the many issues here was that the law provides that in the three months after the establishment of the Fibra you have to be invested 30 percent in real estate; we convinced the authorities to create a specific rule that there should be a period of one year in order to comply with the provision related to the investment of 70 percent of the assets of the Fibra in real estate. This is important because for purposes of launching a Fibra, it is difficult to have an integrated portfolio of 30 percent of real estate in a bank custodian's integrated portfolio.

But in connection with the real estate properties that constitute the assets of the Fibra there are several considerations in the local areas. At the local level there is a tax that is called ISAI - a transfer of property tax - so for purposes of having the transaction cleared for this type of tax at the local level we had to convince the municipalities to issue regulations in connection with the Fibra transaction providing that this ISAI tax is not applicable to this transactions. This is very important because otherwise the ISAI might require a five percent payment of the Fibra transaction. In general terms, if you are selling a property you have to pay the five percent tax on the total amount of the transaction. We had to deal at the local level with each of the municipalities where the properties of the Fibra were located.

Editor: What are the regulatory bodies that govern the Fibra?

Uribe: Actually, on the tax level it is the Mexican Ministry of Finance, the Secretaría de Hacienda y Crédito Público. The regulatory body for purposes of securities regulation of the Fibra as well as its agents is the National Bank and Securities Commission.

Editor: What are the components of the Fibra's portfolio?

Uribe: Currently, it is only unencumbered properties. There are no mortgages at this point. The three properties that will be acquired with the proceeds of the IPO will be clear of any mortgages so this Fibra has no debt and will have no debt at least at the inception. We have made a global study of REITs around the world and most have at least 35 percent of their total assets in mortgages - another reason this Fibra is considered to have great growth potential.

Editor: Is there a Fibra Uno prospectus that you offer as we do in the U.S. as the offering document?

Uribe: Actually in general terms, we have information provided in a memorandum that was published and distributed for purposes of the investors in the United States, who purchased under 144A, as this offering is considered in Mexico as a federal district security. The Mexican prospectus describes the fund formation, which actually provides the information provided in the offering memorandum pointing out differences between the global markets and the Mexican market.

Editor: Do you expect to have the Fibra listed elsewhere?

Uribe: We shall not list it at the inception but probably in the near future. The underwriters are considering going globally in a different market but it all depends on the size of the Fibra. I had this conversation previously with my colleagues at Clifford Chance who think that probably in a few years when the size of the Fibra is really interesting for the initial public market, Fibra probably will go public as a fully registered security in the United States, but right now this is not planned.

Editor: Please talk about the subscription activity before you listed. Did you go to institutions? Did you go to individuals? Banks?

Uribe: Actually the book has more than 800 investors with a number of retail investors along with some major funds that normally make investments in REITs. In general terms, 77 percent of the IPO investment was made in Mexico and the rest was distributed in the global markets.

Editor: What firms are the underwriters?

Uribe: Underwriters in the United States are Evercore Group L.L.C. and Santander Investment Securities Inc. In Mexico the underwriters are Casa de Bolsa Santander, S.A. de C.V., Grupo Financiero Santander, Protego Casa de Bolsa, S.A. de C.V. and Actinver Casa de Bolsa, S.A. de C.V., Grupo Financiero Actinver.

Editor: Was the offering over-subscribed?Uribe: I have heard that it was oversubscribed by 50 percent and that most of the over-subscription was owing to participation by individuals, who feel comfortable with this kind of security. I expect that even more individuals will purchase the security in the secondary market.

Editor: Were the securities rated by any of the U.S. services such as Moodys or S&P?

Uribe: No, because in general terms this offering was considered an equity security. However, like any debt security, there is a stream of income coming from the leases on the properties. The Fibra should be considered a hybrid in terms of its operation for legal purposes, but the National Bank and Securities Commission considers this type of a security equity, while the Mexican Stock Exchange considers the Fibra a hybrid on its web page.

Editor: What kinds of properties make up the Fibra?

Uribe: It's a mix of properties because from the inception the advisors felt that for purposes of having the first Fibra in Mexico they needed to have at least a presentation of the entire real estate market in Mexico. One will find retail, commercial, industrial and offices in the portfolio.

Editor: How are properties spread geographically?

Uribe: While we don't have properties in the north of our country, there are properties in Jalisco, Estado de México, Guanajuato, Chiapas, Quintana Roo and Distrito Federal.

Editor: What does this major transaction mean in enhancing Thompson & Knight's profile in Mexico and all of Latin America?

Uribe: Thompson & Knight has worked on a variety of capital markets transactions in Mexico, and we are ranked among the top firms in Mexico by the Chambers Latin America 2011 legal directory for our capital markets practice. There are four or five other firms in Mexico with capital markets experience, however, we are the only firm with this specific type of experience. As a result, not only are we recognized as a firm that can assist our clients with any capital markets transaction in Mexico, but this transaction also clearly sets Thompson & Knight apart from other law firms.

Editor: Anything more you would care to add?

Uribe: We are really proud to have played a part in this landmark project that established the first Fibra in Mexico. We have worked on this deal since November 2009 - creating the structure, working with federal and municipal authorities to create a legal regime for purposes of the launching of the Fibra, and dealing with the National Bank and Securities Commission and Banco de Mexico as well as with many authorities in Mexico in order to cover every specific aspect of the transaction. We also did all the real estate work related to the transaction. Additionally, our Firm conducted the due diligence as well as all the specific aspects of the transaction. It was a challenge to explain the structure of the Fibra, every component of which required in-depth analysis.

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