After nearly five years of legislative effort in Mexico, particularly in the area of tax, a structure has been established that will make it attractive for companies to issue, and investors to acquire, securities based on a beneficial interest in an Infrastructure and Real Estate Trust (known by its Spanish acronym “FIBRA”).
FIBRAs are modeled after investment vehicles used in other countries that have worked very effectively, such as the Real Estate Investment Trusts or “REITS” used in the United States. These types of instruments have enabled investors to participate in large real estate projects, with good returns, a favorable tax regime, and low risk.
FIBRAs are trusts into which one can contribute lease revenue-generating real property; they allow trust share certificates to be issued to investors at large in initial public offerings. It is also possible to conduct private offerings of FIBRA securities, provided they meet the following requirements: (i) the trust shares must be acquired by a group of at least ten investors; (ii) members of the group must not be related to each other; and (iii) none of the investors may own more than 20 percent of the total number of shares issued.
The issuance and placement of FIBRA shares on the Mexican Stock Exchange will be backed up by the real estate portfolio comprising the trust assets. These securities will give their holders the right to the revenue stream from the lease payments generated by the real estate in the trust. They will also be able to trade them on the secondary market and earn profit from price fluctuations in the securities.
Companies that choose to issue trust share certificates based on FIBRAs will be able to earn money on the placement of those securities, use the proceeds to acquire real estate, undertake construction, or obtain the right to receive lease revenue generated by the real estate.
Even though Mexican tax rules relating to FIBRA-based securities go back a few years, there were inconsistencies in the regulation itself that made using this vehicle unviable. For instance, simply putting the real estate into the trust triggered a tax even though there was no transfer or sale of real estate, only the establishment of a trust. Moreover, although income tax reforms were instituted to incentivize investment in FIBRAs, in practice the incentives did not work because the funds were subject to the Entrepreneurial Fixed Rate Tax when they were put in the trust. These drawbacks have now been eliminated, making these instruments viable and attractive.
In the most recent tax reforms, the provisions of the tax code related to the Entrepreneurial Fixed Rate Tax, or IETU, were harmonized with the provisions relating to the Income Tax, or ISR. As a result, once a FIBRA has met the relevant requirements, it will offer various tax benefits, among them the deferral of ISR payments by the settlors of the trust on contributions of real estate into the FIBRA, and acquisitions of real estate, as well as an exemption from having to make provisional payments of ISR and IETU, making a single payment at the end of the fiscal year instead.
On another front, the National Commission for the Pension System, CONSAR, has been implementing a series of amendments to allow investment by pension fund administrators, AFORES, in structured instruments such as those issued by FIBRAs. It is worth noting that from a tax standpoint, another attractive feature of these securities for investors like pension fund administrators and private pension funds is the tax relief they afford.
With these reforms FIBRAs, and securities that represent a beneficial interest in FIBRAs, create a vehicle that will invigorate the real estate market in Mexico and offer investors like pension funds, investment funds, and foreign and domestic investors in general, a new and attractive investment alternative.