Melcor Developments/ REIT -- summary under Privatizations

Overview

Developments, a TSX-listed company, has a 55.4% effective interest in the REIT as a result of holding exchangeable Class B units in the subsidiary limited partnership of the REIT (the LP) and special voting units (SVUs) of the REIT, and is the REIT’s external manager.

Under a proposed Alberta plan of arrangement, there was to be special distribution to the REIT unitholders, payable through the issuance of units, to reflect gains that were expected to have been realized in the year from asset sales, followed by a sale by the REIT of its LP units to Developments and the distribution of those cash proceeds as redemption proceeds for the REIT units. Developments would then convert its SVUs to ordinary units, so that the REIT shell would be wholly-owned by Developments.

This manner of proceeding would permit the allocation to the REIT pursuant to s. 96(1.01) of all the partnership income realized up to the time of the sale of the REIT’s partnership interest, and that income allocation would in turn fall into the taxation year of the REIT ending as a result of the redemption of its units (causing Developments to become a majority-interest beneficiary), given that the REIT would make an election for s. 251.2(6) not to apply.

Amendment to Arrangement Agreement

In a November 25, 2024 News Release, the REIT announced:

• The REIT and Developments had entered into an amended Arrangement Agreement, which ‎increased the per-Unit consideration from $4.95 to $5.50; and
• The special unitholder meeting scheduled for November 26, 2024 was cancelled and the REIT was engaging in a new 90-day extended “go-shop” period.

The REIT

An Alberta mutual fund trust whose units trade on the TSX. It was formed through a spin-off from the Purchaser.

The Purchaser

The Purchaser is an Alberta company trading on the TSX, and is a diversified real estate development and asset management company that develops and manages mixed-use residential communities, business and industrial parks, office buildings, retail commercial centers and golf courses, in Alberta, Saskatchewan, British Columbia, Arizona and Colorado.

The Purchaser holds an approximate 55.4% effective interest in the REIT through ownership of all Class B LP Units of the Limited Partnership through an affiliate and a corresponding number of special voting units (SVUs) of the REIT, being all the SVUs. The Class B LP Units are economically equivalent to and are exchangeable for (REIT) Units.

The REIT is externally managed by the Purchaser.

Limited Partnership (or LP)

Melcor REIT Limited Partnership. Its general partner (GP) is a wholly-owned Alberta subsidiary of the REIT, its Class A LP units are held by the REIT and its Class B (exchangeable) LP units and Class C LP units (back-to-back to retained debt of the Purchaser) are held by the Purchaser.

Telsec Property

Telsec Property Corporation and its joint actors jointly own and have control over 27.3% of Units and 12.2% Voting Units (i.e., Units or SVUs), assuming the issuance of 56,180 Units which are issuable on conversion of $500,000 principal amount of Debentures of the REIT held by one of the joint actors.

Plan of Arrangement

1. The constating documents of the REIT, GP and Limited Partnership will be amended to the extent necessary to facilitate the Arrangement including to accommodate a s. 96(1.01) allocation to the REIT of a proportionate share of LP income for the current taxation year up to the “Effective Time” of the Arrangement.
2. The REIT will be deemed to have distributed the “Special Distribution” (equal to its estimated undistributed taxable income) to Unitholders (including Dissenting Holders) of record immediately before the Effective Time in the form of additional Units having a fair market value equal to the amount of the Special Distribution. Immediately following such distribution, all the Units will be consolidated so that each Unitholder will thereafter hold the same number of Units as those held before the Special Distribution (except, in the case of non-residents, any reduction to reflect the withholding of Units from the Special Distribution on account of withholding tax).
3. The deposit by the Purchaser, to the depositary for the convertible debentures owing by the REIT, of an amount equal to the principal of those debentures, will be deemed to effect a loan of that amount by the Purchaser to the LP and the repayment of the loan in that amount owing by the LP to the REIT.
4. The shares of the GP will be sold to the Purchaser for nominal consideration.
5. The Class A LP Units will be transferred by the REIT to the Purchaser for cash consideration equal to $4.95 per (REIT) Unit minus any cash distributions declared by the REIT between the date of the Arrangement Agreement and the Effective Time (being the amount of the “Consideration”).
6. The Units held by dissenting holders will be deemed to be redeemed.
7. The (REIT) Units will be redeemed for the Consideration.
8. The SVUs will be converted into (REIT) Units on a one-for-one basis.

Canadian tax considerations

Taxation of REIT

The REIT is expected to make an election for s. 251.2(6) not to apply to the loss restriction event (LRE) that will arise as a result of the Arrangement, such that the REIT will be subject to the LRE at the time of the Unit Redemption.

In light of asset sales that are expected to have closed by the Effective Time, the Special Distribution is expected to be in the range of $0.10 to $0.29 per Unit, except that if the due diligence conditions for further asset sales are waived, such distribution is estimated to be in the range of $0.37 to $0.63 per Unit.

The disposition by the REIT of its Class A LP Units of the Limited Partnership is expected to give rise to a capital loss.

Taxation of Unitholders

The cost to the Unitholders of the Units issued on the Special Distribution will equal the amount of the distribution. No gain will be realized on the consolidation.

The proceeds received on the Units redemption will exclude any amounts paid on the Special Distribution.

Non-residents

The Special Distribution will accomplish a distribution of ordinary income that will be subject to Part XIII tax, as well as will amounts determined in accordance with the TCP gains balance rules if more than 5% of the amounts designated by the REIT for the year as net taxable capital gains are designated in respect of Unitholders that are either "non-resident persons" or partnerships which are not "Canadian partnerships".

The redemption of the Units will not be subject to capital gains tax provided that they are not taxable Canadian property.