Real Estate Investment Trusts (FIBRAs) – Financial Services

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

Footnotes

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.

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