A. Overview of Business Trusts (REITs / InvITs): > Real Estate Investment Trust (REIT) is a tax-efficient vehicle that owns a portfolio of income-generating real estate assets. It is an entity that is created with the main purpose of channelising the funds that could be invested in operational functioning or ownership of the real estate to further generate income for the investors. InvITs stands for Infrastructure Investment Trusts.
B. Structure of Business Trusts & SPVs: > A REIT is created by a sponsor, who transfers ownership of assets to the trust in exchange for its units. > Think of it like a mutual fund, where money is pooled from investors in return of which investor gets mutual fund units and then on behalf of investor mutual fund invest that in stocks and other securities. Now, instead of stocks and other securities, the funds will have investments in either SPVs (Special Purpose Vehicles) owning project; or directly in the real estate or infrastructure projects. > The funds will earn income from the SPV/projects and the income will be distributed to the investors. The units of the trust will be listed on the stock exchange. Investors will be able to sell the units on the stock exchange also.
> REIT is designed for “completed” real estate project. Thus, those projects which can earn incomes post completion, can be considered for investment. InvITs is for infrastructure projects which are completed and also for those that are not yet completed.
> SPVs:
1) Features: Formed for a special purpose; powers are limited to what might be required to attain that purpose; Life ends when the purpose is attained; SPVs are also referred to as a “bankruptcy-remote entity” whose operations are limited to the acquisition and financing of specific assets.
2) Difference between Company and SPV: a) Although both these entities are established as per Company Act and also follow the all the regulations in the Company Act, the difference lies in the purpose. The company, as distinguished from an SPV, may be called a general-purpose vehicle.
b) A company may do several things which are mentioned in the Memorandum of Association (MoA) or permitted by the Companies Act. An SPV may also do the same, but its scope of operation is limited and focused. The MoA is quite narrow in the case of an SPV. This is primarily to provide comfort to lenders who are concerned about their investment.
C. Parties in the structure: 1) Sponsor – The person who develops the projects and sets up the business trust. The sponsor can own the shares of the SPVs which will own / operate the real estate / infrastructure project. The sponsor will transfer the shares of the SPVs to Business trust and in turn he will get units of business trust. He can then sell the units of the business trust on the stock exchange.
2) Business trust – The sponsor may settle a Business Trust in which investors will invest funds.
3) SPV – Indian company which will be the owner of the project.
4) Financial Institutions – They may buy/subscribe units from the sponsor or the business trust.
5) Retail Investors – Resident and non-resident persons who will invest in the business trust.
