DIVIDEND DISTRIBUTION UNDER REAL ESTATE INVESTMENT TRUST (REIT)

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Published — May 16, 2021

The following post does not create a lawyer-client relationship between Alburo Alburo and Associates Law Offices (or any of its lawyers) and the reader. It is still best for you to engage the services of your own lawyer to address your legal concerns, if any.

Also, the matters contained in the following were written in accordance with the law, rules, and jurisprudence prevailing at the time of writing and posting, and do not include any future developments on the subject matter under discussion.

Read also: INVESTMENT IN THE REAL ESTATE INVESTMENT TRUST (REIT)

• A Real Estate Investment Trust (REIT) shall distribute annually, a total of at least ninety percent (90%) of its Distributable Income as dividends to its shareholders.

• The dividends shall be distributed not later than the last working day of the fifth (5^th) month following the close of the fiscal year of the REIT.

• The dividends shall be payable only from the unrestricted retained earnings of the REIT.

How should the dividends be distributed under the Real Estate Investment Trust Act?

Implementing Rules and Regulations of the Real Estate Investment Trust (REIT) Act of 2009 (R.A.  No.  9856) provides that:

A REIT shall distribute annually, a total of at least ninety percent (90%) of its Distributable Income as dividends to its shareholders, not be later than the last working day of the fifth (5^th) month following the close of the fiscal year of the REIT subject to the following:

1. The dividends shall be payable only from the unrestricted retained earnings of the REIT. However,  the  retained  earnings  of  the  REIT  may  only  be  restricted  and  not  available  for  distribution  under the circumstances  enumerated  under  Section  42 of the  Revised  Corporation   Code   and   when   approved   by   at   least   a   majority  of   the   entire   membership   of   the   board   of   directors,  including  the   unanimous   vote   of  all  Independent   Directors   of  the  REIT;  provided  finally,  once  the  purpose   of  the  restriction  is  accomplished,  the  REIT  shall  immediately  cancel  the  restriction  and  distribute the corresponding retained earnings  upon majority vote of the  members  of the  board of directors.

   Section 42 of the Revised Corporation   Code   provides that:

   Stock corporations are prohibited from retaining surplus profits in excess of one hundred percent (100%) of their paid-in capital stock, except: (a) when justified by definite corporate expansion projects or programs approved by the board of directors; or (b) when the corporation is prohibited under any loan agreement with financial institutions or creditors, whether local or foreign, from declaring dividends without their consent, and such consent has not yet been secured; or (c) when it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is need for special reserve for probable contingencies.

2. The percentage of dividends with respect to any class of stock to be received by the Public Shareholders   to the total dividends with   respect   to that class of   stock   distributed by the REIT from out of its Distributable Income must not be less than such percentage of their aggregate ownership of the total outstanding shares of the REIT with respect to that class of stock.  Any structure, arrangement or provision which would have the effect of diminishing or circumventing in any form this entitlement to dividends shall be void and of no force and effect.
3. The income distributable as dividend by the REIT shall be based on the audited financial statements for the recently completed fiscal year prior to the prescribed distribution.   The   audited   financial   statements    of   the   REIT   shall   present   a   computation of its distributable dividend taking into consideration requirements under the provisions of the Act and the Implementing Rules.   However, the audited financial statements shall not be required before the REIT can distribute quarterly and/or semi-annual dividends; provided, the REIT has reasonable grounds to believe that the maximum dividends that it may distribute in such fiscal year shall not be more than its Distributable Income based on its audited financial statements   for such fiscal year, as provided above. 
4. A REIT may declare   either cash, property or stock dividends.  Provided that, in addition to the requirements of the Revised Corporation Code, the declaration of stock dividends must be approved by at least a majority of the entire membership of   the   board   of   directors, including the   unanimous   vote   of all   Independent   Directors of the REIT and subject to the approval of the Commission within five (5) working days from receipt of the request for approval. If the Commission does not act on said request within such period, the same shall be deemed approved. 
5. Distributable Income excludes proceeds from the sale of REIT’s assets that are re-invested by the REIT within one (1) year from the date of the sale. Gain from the said sale shall, however, form part of the distributable income.
6. The income distributable by the REIT shall be adjusted by deducting the following unrealized or non-actual gains and losses:
   1. Unrealized foreign exchange gains, except those attributable to cash and cash equivalents;
   2. Fair   value   adjustment   or   the   gains   arising   from   marked-to-market   valuation which are not yet realized;
   3. Fair value adjustment of investment property resulting to gain;
   4. The amount of recognized deferred tax asset that reduced the amount of income tax expense and increased the net income and retained earnings, until realized;
   5. Adjustment due to a deviation from any of the prescribed accounting standard which results to gain;
   6. Other unrealized gains or adjustments to the income as a result of certain transactions   accounted   for under   the   Philippine Financial   Reporting   Standards.
7. Non-actual expenses / losses that are allowed to be added back to distributable income shall be limited to the following items:
   1. Depreciation on revaluation increment (after tax);
   2. Adjustment due to from any of the prescribed accounting standard which results to a loss;
   3. Loss on fair value adjustment of investment property (after tax).

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Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/0917-5772207.

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