Jacob Farquharson / Clifford Chance, NYC
The creation of FIBRAs; a landmark achievement
Similar to real estate investment trusts (REITs) in the United States, Fideicomisos de Inversión en Bienes Raíces
(FIBRAs) are Mexican trusts dedicated primarily to the acquisition and development of real estate assets in Mexico.
The creation of FIBRAs is a landmark achievement for Mexico as FIBRAs are transforming the way Mexican real
estate assets are transferred and held. Since the first FIBRA was brought to market in 2011, FIBRAs have had a
significant impact on both the real estate market and the capital markets in Mexico. Seven FIBRAs have
successfully completed IPOs and some of the most high profile real estate transactions in Mexico have involved
FIBRAs. While FIBRAs are still in their infancy, they have proven to be commercially viable investment vehicles and
are well-positioned to become the dominant players in the sector for the foreseeable future.
Structural Considerations; Comparison to US REITs FIBRAs are tax efficient vehicles for both sponsors and investors. Similar to US REITs, FIBRAs operate as transparent, «pass through» tax structures. In order to qualify for this tax treatment, a FIBRA must satisfy certain requirements including, among others, that (i) at least 70% of its assets must be invested in real estate (or rights derived therefrom) that are held for lease or under development, and (ii) it must distribute annually at least 95% of its net taxable income. In addition, sponsors and other parties who contribute properties to a FIBRA in exchange for FIBRA certificates are able to defer their taxable gain until they sell the certificates or the property is sold by the FIBRA.
This opportunity to defer tax is an important incentive for property owners to transact with FIBRAs. In the United States, there are two types of REITs: (i) «equity» REITs, which own real properties such as office, industrial, retail and hotel assets, among others, and (ii) mortgage REITs, which own mortgages, mortgage-backed securities and other mortgage-related assets. Equity REITs are generally internally managed whereas mortgage REITs are externally advised. Similar to equity REITs, FIBRAs have thus far invested in real properties, such as office, industrial, retail, hotel and mixed-use assets.
However, FIBRAs share a structural similarity to mortgage REITs in that they are externally advised pursuant to an advisory agreement. While the day-to-day activities of a FIBRA are typically conducted by employees that are housed within a subsidiary of the FIBRA, known as the management subsidiary, the strategic vision, investment and financing strategies of the FIBRA are carried out by the advisor and its officers. In exchange for these services, the FIBRA pays the advisor management fees.
The externally managed structure can provide significant benefits such as access to the scale and resources of the advisor. However, externally managed structures, whether for FIBRAs or REITs, have the potential to create conflicts of interest and corporate governance risks. Accordingly, FIBRAs have adopted policies and procedures that are designed to help mitigate these risks. These policies and procedures include preference rights in favor of the FIBRA for investment opportunities sourced by the advisor, long-term lockup arrangements whereby the advisor and its officers are restricted from selling their FIBRA certificates for a period of time, and the requirement that related party transactions be approved by the independent members of the technical committee.
FIBRAs: a game changer for investors and sponsors The creation of FIBRAs has changed the dynamics of the real estate sector in Mexico for both investors and sponsors. From an investor’s perspective, FIBRAs offer the following advantages:
Through the ownership of a FIBRA, investors can now access the Mexican real estate market through the ownership of a liquid security with a readily identifiable market price. Prior to the creation of FIBRAs, in order to gain access to Mexican real estate an investor generally needed to buy a building or invest in fund, but the investment in either case would not be liquid.
The investment can be made in a tax efficient vehicle as FIBRAs are transparent for tax purposes. Because FIBRAs operate in a variety of sectors and geographic regions, investors are able to diversify their portfolios. Some of the top real estate companies in Mexico have created FIBRAs, and investors now have access to these quality local management teams. This is particularly important for international investors, who may not have sufficient local market knowledge.
From a sponsor’s perspective, FIBRAs have created a number of attractive options. Real estate companies now have access to another source of financing to fund the growth of their portfolio – the public capital markets. No longer are owners of real estate reliant on bank financing or capital contributions from partners.
FIBRAs have created a path to liquidity for both domestic and international owners of real estate in Mexico. One liquidity option for sponsors is to IPO their portfolio through the creation of a FIBRA. Alternatively, as a result of the creation of FIBRAs, there are now an increased number of well-capitalized buyers in the market and owners of real estate can exit via a sale of properties to another FIBRA. Sales of real estate in Mexico can be done in a tax efficient manner. If a seller receives FIBRA certificates in exchange for the properties, the seller is able to defer the taxable gain until the certificates are sold or the property is sold by the FIBRA. The opportunity to earn management fees.
International investors are attracted to FIBRAs and generally optimistic about the sector, as evidenced by the international demand in FIBRA offerings. FIBRAs have raised more than US $6.5 billion through offerings of certificates, and more than half of this capital has come from international investors. In addition to the benefits of FIBRAs described above, international demand has been driven by factors such as optimism about Mexico’s growth potential, increasing foreign direct investment in Mexico and bilateral trade between Mexico and the United States, the continued emergence of a middle class in Mexico with increased spending power and the perception that there is significant room for growth in rents in Mexico relative to other Latin American countries.
While these long-term trends bode well for FIBRAs, international investors will be closely monitoring the performance, growth and evolution of FIBRAs. Factors and trends that investors will analyze include the supply of high quality properties in Mexico and whether any shortage in supply will further drive up prices and compress cap rates. As prices for properties escalate, investors, both domestic and international, will watch carefully to see if FIBRA management teams have discipline and are making acquisitions that are accretive to shareholders. In addition, because FIBRAs and REITs have bond-like features and can be sensitive to changes in interest rates, investors will be keeping a close eye on movements in interest rates and, in particular, the spread between the yields on FIBRAs and interest rates. Investors will also continue to analyze the structure and management fee arrangements of FIBRAs, as well as the effectiveness of the policies and procedures that FIBRAs have put in place to address the conflicts of interest and corporate governance risks that are inherent in any externally managed structure.
The Future of FIBRAs
FIBRAs and REITs are extremely dynamic and versatile vehicles. Even in a mature market such as the United States, the REIT product is continuing to evolve and has very recently been used for «alternative» real estate assets, such as cell phone towers, billboards, data storage and renewable energy assets. In addition, REITs have been used as an excellent solution for companies looking for a more capital light model. These companies have been separating their real estate assets from the core business by spinning the real estate into a REIT. The REIT can then lease the properties to the core business so that the business continues to have access to the properties, or the REIT can lease the properties to other parties. In this way, businesses have been using the REIT product to unlock the value of real estate.
Over time, with thoughtful collaboration among market participants and regulatory and tax authorities, it is foreseeable that FIBRAs will evolve to include a variety of real estate assets. FIBRAs could be used to find innovative solutions involving infrastructure assets, housing and apartment buildings, medical office buildings, marinas, farmland, data centers, mortgages and mortgage-related assets and energy assets, among other asset classes. Other possibilities for FIBRAs include the issuance of debt, the creation of a FIBRA index and the listing of a FIBRA on a US exchange, such as the NYSE or NASDAQ. The opportunities for FIBRAs are numerous, and the future is bright.
Es miembro del grupo de mercados de capital de la oficina de Clifford Chance LLP EE.UU. de Nueva York, se centra en las transacciones internacionales y nacionales del mercado de capitales. Jacob se especializa en la representación de los emisores, bancos de inversión y los patrocinadores en las OPI, da seguimiento de acciones y deuda ofrendas, financiación pre-IPO, 144A y Regulación S ofrendas y otras colocaciones privadas. Jacob informa EE.UU. REITs, de los REITs mexicanos (FIBRAS), empresas financieras especializadas y otros clientes en varias industrias, incluyendo la aviación, la energía renovable, la hospitalidad y el juego. En los últimos tres años, Jacob ha trabajado de manera activa en las FIBRAS, representando Fibra Uno, Fibra Hotel and Fibra Danhos, entre otros.
Jacob fue reconocido por The Legal 500 USA 2013 por su trabajo en FIBRAs. Jacob recibió su B.A. en Ciencias Políticas de la Universidad de Tufts en 1997, un JD de la Escuela de Derecho de la Universidad del Noreste en 2002 y un MBA de la Escuela de Administración de Negocios de la Universidad del Noreste en 2002, donde fue incluido en Beta Gamma Sigm