Real Estate Investment Trusts (FIBRAs)
Real estate investment trusts ("FIBRAs") are structured financing vehicles that—by means of the contribution (whether direct or indirect) of a certain real estate portfolio to the corresponding trust estate and their subsequent issuance and offering of real estate trust certificates ("CBFIs") in the Mexican stock market—are used to raise funds for investing in (i) real estate development, commercialization or management; (ii) companies that carry out such investments; (iii) securities or rights of any kind over such real estate assets; or (iv) a combination of any of the foregoing.
FIBRAs emerged at the end of 2003 as a result of tax law amendments to attract investment in large-scale real estate projects. As a result, FIBRAs became an attractive asset class especially for those investors (e.g., retail investors or institutional investors such as Afores, insurance companies and surety companies) who wanted to diversify their investments safely and securely. Additionally, investment returns related to FIBRAs are easily predicted given that FIBRAs are engaged in the acquisition or development of real estate assets for subsequent leasing purposes, which makes investment returns fixed or even increased by the revaluation of the underlying assets of the issuing trust of the CBFIs.
FIBRAs became popular in the stock market as an alternative to traditional investment schemes. Moreover, FIBRAs offer several benefits (especially regarding taxation) both for the settlor that transfers the real estate to the equity trust and for the CBFI holders. Benefits include:
- FIBRAs offer a way to diversify investment portfolios and consequently reduce risk.
- FIBRAs are obligated to allocate to investors (i.e., CBFI holders) 95% of the taxable income (resultado fiscal), at least on a yearly basis, and to keep at least 70% of the trusts’ assets invested in real estate assets that comply with local legal and regulatory provisions.
- FIBRAs’ taxable basis (base gravable) consists only of taxable profits (contrary to what would apply to traditional companies, where the gross profit is the taxable basis for income tax purposes). Therefore, the distributable cash available to the CBFI holders is higher considering that the amount has not been taxed prior to such allocation.
- The withholding rate for cash flow distributions (dividends) made by FIBRAs to foreign investors is equivalent to the traditional corporate withholding rate, with certain exceptions.
- Capital profits derived from the price increase of the CBFIs are exempt from income tax provided that the CBFIs are sold through an authorized stock exchange in Mexico.
- FIBRAs offer direct exposure to assets that are historically developed to increase their value over time (capital gains).
- CBFIs are governed by securities issuance regulations and have a high standard of corporate governance.
FIBRA typical structure1
1 It is not necessary for the FIBRA Manager to be an entity external to the vehicle itself. In recent issuances of CBFIs carried out by a FIBRA, some structures with an "internalized" Manager have been adopted, which has additional benefits and challenges.
Disclaimer: This material should not be construed as legal advice and is provided for informational purposes only.