A Social Purpose REIT

The problem:

Co-operatives and other social purpose organisations (SPOs) such as charities face problems raising capital. particularly for property-related investment, due to the large sums involved. As a result, SPOs often rely heavily on debt financing, increasing their risk, weakening their covenant and reducing their room for manoeuvre. Their weaker balance sheets can also affect their ability to win public sector and other contracts, even though they are in fact resilient due to the commitment of their stakeholders. SPOs also miss many opportunities for growth and development because they cannot access finance for property-related projects quickly enough. Some SPOs expend enormous efforts trying to raise funds to take advantage of the opportunity a specific property would give them to grow. If they fail, this effort is wasted, and if they succeed, the effort can mean they have engaged members with different skills from

Our Solution:

Real Estate Investment Trusts have their earliest origins in the USA but now exist in many countries. They are well-developed with a significant track-record in the UK. Indeed most property companies have now adopted REIT status We aim to address this problem by creating a friendly property partner for SPOs, in the form of a listed REIT. The REIT structure would be attractive to ethical investors (both retail and institutional) as REITs are exempt from corporation tax, and when REIT shares are held in a tax wrapper such as an ISA or SIPP, or in an employer pension scheme, no income or capital gains taxes are payable. The REIT would act as partner to SPOs, acquiring properties to meet their needs. It would have the ability to act swiftly to acquire properties when necessary to secure sites. It would also be able to fund the development of those premises, e.g. by building an extension to facilitate growth. Sale and leaseback of existing properties would provide a way for SPOs to raise capital for new activities. We plan an innovative option for the tenant to buy the property back at a future date on agreed terms

REITs are companies, listed on a recognised stock exchange. They benefit from different tax treatment from normal commercial companies:

  • They are not subject to corporation tax on their profits from property investment, provided they distribute 90% of the profits from their rental business to shareholders. They also don’t pay capital gains tax on property investments.

  • The distributions made by REITs are not treated as dividends for tax purposes, but as property rental income in the hands of shareholders. These are known as Property Income Distributions (PIDs)

  • If some activities fall outside the definition of what is eligible for REIT treatment, a REIT can pay a combination of PIDs and dividends, in proportion to the profits from its different activities. However, at least 75% of a REIT’s profits must derive from property rental and at least 75% of its assets must be involved in its property rental business.

  • For assets held within SIPPs and ISAs this effectively means the income and capital gains on REIT activity are not taxed at all.

Areas Of Impact:

  • Warehouses

  • Healthcare property

  • Care homes

  • Self-storage

  • Properties with specific types of leases

  • Retail property

  • Office property

  • Social housing

  • Student housing

  • Industrial property

A Social Purpose REIT would focus on acquiring assets which would be leased to organisations with a social purpose.

  • Charities

  • Social enterprise

  • Student Housing Co-ops

  • Housing Co-ops

  • Retailer and worker Co-ops

Why does this help?

  • Co-operatives and social purpose organisations don’t have to raise capital to pay for the property assets their business model depends on (e.g. ethical property, student co-ops, housing co-ops). Instead they can lease from a mission aligned REIT vehicle.

  • Existing co-operatives with large assets can release equity by selling their assets to the Social Purpose REIT, leasing back the premises and then using the cash to expand their business.