Canadian business owners who own a significant amount of property could be overlooking an untapped resource for growth: the land their business stands on and the buildings in which their business operates.
Within the real estate industry in Canada, few options exist to help owners realize the full worth of their property assets. Establishing a real estate investment trust (REIT) has the potential to help you unlock value in your business.
What is a REIT?
A REIT is a structure that (if formed as a mutual fund trust1) allows many investors (domestic and international) to invest in real estate in a tax-efficient manner. It can be publicly listed on a securities exchange or privately held, and is RRSP-eligible for unitholders.
A public REIT can offer more liquidity for unitholders, allowing them to buy and sell units on the open market. While a private REIT may not provide the same level of liquidity, it can be less expensive to establish, subject to fewer regulatory and reporting requirements, and is not restricted in the types of real estate activities they can invest in (i.e. condo developments, hotels, retirement housing, etc.).
How can establishing a REIT help a business?
Over the last few years, a number of Canadian companies have created a REIT as part of a larger business strategy, including Dilawri Group, which established Automotive Properties REIT in 2015; Canadian Tire Corporation, which established CT REIT in 2013; and Loblaw Companies Limited, which established Choice Properties REIT in 2012.
Setting up a REIT offers a number of potential advantages for business owners, including the following:
A REIT can offer business owners greater flexibility by turning hard asset ownership into ownership of units. Holders can retain, sell, or even donate units.
In circumstances where a business owner needs to liquidate assets (e.g. for financing, emergency situations, or other scenarios), a REIT provides the option to do so at a proportional scale. Rather than divesting themselves of an entire property, or multiple properties, owners only need to sell the specific number of units that will help them achieve their goal.
Establishing a REIT can help business owners free up cash flow and bring in additional investors, to raise capital to grow the company. These funds can support business growth strategies, such as national or international expansion, digital transformation initiatives, or acquisitions to increase market share.
In the case of Automotive Properties REIT, Dilawri Group wanted to strengthen their core business and expand their dealership network. By establishing a REIT through an initial public offering (IPO), the business raised the necessary capital to acquire new dealerships and grow their operations.
Loblaw Companies Limited and Canadian Tire followed similar strategies. After establishing Choice Properties REIT, Loblaws was able to acquire Shopper's Drug Mart. CT REIT has helped Canadian Tire improve cash flow and reinvest in the business.
In family-owned organizations, there can be multiple stakeholders invested in the business's real estate portfolio, with conflicting exit strategies and views on management. As unitholders within a REIT, individuals can sell or hold units according to their interests without forcing the sale of key assets.
For a business owner, a REIT can also play a fundamental role in your plan for retirement. Owners can withdraw their equity or retain units as part of an ongoing wealth management plan.
How to get started on setting up a REIT
Establishing a REIT is complex and can take considerable time and resources. In today's real estate market, however, it can offer opportunities for long-term business growth and flexibility by unlocking value in a previously static asset.
Business owners should obtain a professional assessment to decide whether forming a REIT is the right move. An experienced advisor like BDO can assist with each of step of the process, including the valuation of property assets, assembling a team of advisors, navigating regulatory requirements, and launching the REIT.
1 As defined in the Income Tax Act (Canada).