Flagship Communities Real Estate Investment Trust

December 7, 2020

Decision

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- relief from provisions in section 8.4 of National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102) permitting the Filer to include alternative financial disclosure in the business acquisition report pursuant to section 13.1 of NI 51-102 -- the Filer acquired 14 properties for which it cannot obtain certain historical financial information -- the financial statements that will be included in the BAR will be adequate to allow investors to understand the impact of the acquisition of the Initial Properties.

Applicable Legislative Provisions

National Instrument 51-102 Continuous Disclosure Obligations, ss. 8.4 and 13.1.

December 7, 2020

IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO (the Jurisdiction) AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF FLAGSHIP COMMUNITIES REAL ESTATE INVESTMENT TRUST (the Filer)

DECISION

Background

The principal regulator in the Jurisdiction (the Decision Maker) has received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the Decision Maker (the Legislation) for a decision pursuant to Section 13.1 of National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102) that the Filer be exempt from the requirement under section 8.4 of NI 51-102 and Item 3 of Form 51-102F4 Business Acquisition Report to include financial statement disclosure for significant acquisitions, provided that the Filer include or incorporate by reference the Alternative Acquisition Financial Disclosures (as defined herein) of the Filer relating to the Acquisition Transaction (as defined herein) in the business acquisition report (BAR) (the Relief Sought).

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

(a) the Ontario Securities Commission is the principal regulator for this application, and

(b) the Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in each of British Columbia, Alberta, Saskatchewan, Manitoba, Québec, Nova Scotia, New Brunswick, Prince Edward Island, Newfoundland and Labrador, Yukon, the Northwest Territories and Nunavut (collectively, together with Ontario, the Jurisdictions).

Interpretation

Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.

Representations

This decision is based on the following facts represented by the Filer:

1. The head office of the Filer is located at 467 Erlanger Road, Erlanger, Kentucky, 41018, United States of America. The registered office of the Filer is located at 199 Bay Street, Suite 4000, Toronto, Ontario, M5L 1A9.

2. The Filer is an internally-managed, unincorporated, open-ended real estate investment trust established under the laws of the Province of Ontario pursuant to a declaration of trust dated as of August 12, 2020, as amended and restated on September 28, 2020, as may be further amended and/or amended and restated from time to time.

3. The Filer is a reporting issuer or the equivalent thereof in each Jurisdiction and is not in default of any requirement of Canadian securities legislation.

4. The Filer was established for the primary purpose of indirectly acquiring a 100% interest in and owning and operating a portfolio of 45 manufactured housing communities, comprising 8,255 lots located in the following four contiguous states: Kentucky, Indiana, Ohio and Tennessee, and a fleet of approximately 600 manufactured homes available for lease (the Initial Communities and, together with certain ancillary and head office assets, the Initial Portfolio).

5. Prior to the IPO, MHC Management, LLC, d/b/a SSK Communities (the Promoter) was the manager of the Initial Portfolio.

6. The ownership interests in the Filer are divided into trust units (Units).

7. The Units are listed on the Toronto Stock Exchange under the symbol "MHC.U".

8. On September 28, 2020, the Principal Regulator issued a receipt in respect of the final prospectus of the Filer (the Prospectus) relating to the initial public offering (the IPO) of the Units, qualifying 7,187,500 Units for distribution, including Units issuable pursuant to an over-allotment option granted by the Filer to the underwriters of the IPO.

9. On October 7, 2020 (the IPO Closing Date), the Filer issued 6,250,000 Units and, on October 22, 2020, the Filer issued a further 937,500 Units pursuant to the IPO underwriters' exercise of the over-allotment option in full.

10. In connection with the IPO, on the IPO Closing Date, the Filer completed its acquisition of the Initial Portfolio other than two of the Initial Communities comprising 622 lots located in Louisville, being Barrington Pointe and Copperstone Pointe (the Deferred Acquisition Properties), via the acquisition of all of the issued and outstanding securities of Flagship Communities, LLC (FCLLC) and 15 entities (the SSK Entities) managed by the Promoter (other than the SSK Entity that owns the two Deferred Acquisition Properties) from the owners thereof in exchange for cash, new Units and new class B units (Class B Units) of the Filer's subsidiary, Flagship Operating, LLC (the IPO Acquisition).

11. On November 2, 2020, the Filer acquired the Deferred Acquisition Properties in exchange for Class B Units (together with the IPO Acquisition, the Acquisition Transaction).

12. The financial results for (a) 17 of the Initial Communities then owned by the SSK Entities (the Legacy SSK Portfolio) for the three-year period ended December 31, 2019 and the six-month period ended June 30, 2020 were presented in the financial statements contained in the Prospectus; and (b) 14 of the Initial Communities then owned by entities managed by the Promoter were presented (i) in the financial statements of the Legacy SSK Portfolio in the Prospectus for the period from January 1, 2018 to May 24, 2018, and (ii) in the financial statements of FCLLC contained in the Prospectus for the periods May 24, 2018 to December 31, 2019 and the six-month period ended June 30, 2020, as such assets were indirectly transferred on May 24, 2018 from entities managed by the Promoter to FCLLC (collectively, such 31 Initial Communities being the Full Period Properties).

13. FCLLC or an SSK Entity, as applicable, acquired the remaining 14 of the Initial Communities (the Recently Acquired Properties) after January 1, 2017 (and in each case, after January 1, 2018). The financial results for the Recently Acquired Properties for the period from the date financial statements are available to the Filer following their respective acquisition dates (each such date, as applicable, the Acquisition Date) to December 31, 2019 and for the six-month period ended June 30, 2020 are also presented in the financial statements included in the Prospectus.

14. No exemption is required with respect to the financial information to be included in the BAR with respect to the Full Period Properties. The Relief Sought is only required with respect to Recently Acquired Properties.

15. The fiscal year end for the Initial Portfolio is December 31.

16. The Acquisition Transaction is a "significant acquisition" for purposes of NI 51-102 and the Filer must file a BAR in respect of the Acquisition Transaction.

17. The Recently Acquired Properties were indirectly acquired by the Filer via the acquisition of FCLLC. FCLLC acquired the Recently Acquired Properties from arm's length third parties after January 1, 2018.

18. Neither the Filer, the SSK Entity, FCLLC nor the Promoter possesses, has access to, nor is entitled to obtain access to, financial information in respect of the Recently Acquired Properties for any period prior to their respective Acquisition Dates. The SSK Entity, FCLLC or the Promoter, as applicable, requested historical accounting records and supporting information at the time of acquisition for each of the Recently Acquired Properties as part of the due diligence review; however, the information received is insufficient to form the basis of audited or unaudited financial statements. The SSK Entity, FCLLC and the Promoter have, without success, made every reasonable effort to obtain access to, or copies of, historical accounting records in respect of the Recently Acquired Properties for the period from January 1, 2018 to the respective Acquisition Date for each Recently Acquired Property. In particular, the applicable entity that sold each Recently Acquired Property to the SSK Entity or FCLLC has in each case refused to provide, at this time, adequate historical accounting records to the SSK Entity, FCLLC, the Promoter and the Filer.

19. The Filer submits that the financial statements for the Recently Acquired Properties that are missing from the BAR are not material. The missing financial information of the Recently Acquired Properties represents an insignificant amount of the overall (a) aggregate fair market value, (b) revenue and (c) NOI, of the Initial Properties. The missing financial information of the Recently Acquired Properties will not be significant or otherwise material (individually or in the aggregate) to the Filer having regard to the overall size and value of the Filer's business and operations.

20. The required financial information for each of the Recently Acquired Properties for the period from January 1, 2018 to the first availability of financial statements following its respective Acquisition Date was not available for the Prospectus.

21. The Filer shall include (or incorporate by reference) the following financial information (collectively, the Alternative Acquisition Financial Disclosures) in the BAR:

(a) in respect of the Filer, the following financial statements, each prepared in accordance with International Financial Reporting Standards (IFRS) and each of which was included in the Prospectus:

a. audited statements of income and comprehensive income, changes in unitholder's equity and cash flows for the one-day period August 12, 2020 (the date of the Filer's formation);

b. an audited statement of financial position as at August 12, 2020;

c. unaudited pro forma consolidated financial statements as at and for the year ended December 31, 2019 and as at and for the six months ended June 30, 2020; and

(b) separate financial statements for the Initial Portfolio as follows, each prepared in accordance with IFRS, and in each applicable case, including the financial results of each Recently Acquired Property for only the period from its Acquisition Date:

a. in respect of the Legacy SSK Portfolio, the following from within the financial statements (and accompanying notes thereto) included in the Prospectus: audited combined carve-out statements of net income and comprehensive income, changes in divisional equity and cash flows for the years ended December 31, 2019 and December 31, 2018; audited combined carve-out statements of financial position as at December 31, 2019 and December 31, 2018; unaudited condensed combined interim carve-out statements of net income (loss) and comprehensive income (loss) for the three and six month periods ended June 30, 2020 and June 30, 2019; unaudited condensed combined interim carve-out statements of changes in divisional equity and cash flows for the six month periods ended June 30, 2020 and June 30, 2019; and the unaudited condensed combined interim carve-out statements of financial position as at June 30, 2020 and December 31, 2019; and

b. in respect of FCLLC the following from within the financial statements (and accompanying notes thereto) included in the Prospectus: audited consolidated carve-out statements of net income and comprehensive income, changes in divisional equity and cash flows for the year ended December 31, 2019 and for the period from March 11, 2018 (date of incorporation) to December 31, 2018; audited consolidated carve-out statements of financial position as at December 31, 2019 and December 31, 2018; unaudited condensed consolidated interim carve-out statements of net income and comprehensive income for the three and six month periods ended June 30, 2020 and June 30, 2019; unaudited condensed consolidated interim carve-out statements of changes in divisional equity and cash flows for the six month periods ended June 30, 2020 and June 30, 2019; and an unaudited condensed consolidated interim carve-out statements of financial position as at June 30, 2020 and December 13, 2019;

(c) a financial forecast in respect of the Filer consisting of consolidated statements of forecasted net income and comprehensive loss for each of the three-month periods ending December 31, 2020, March 31, 2021, June 30, 2021 and September 30, 2021, and for the twelve-month period ending September 30, 2021, with an audit report thereon from the Filer's auditors; and

(d) summary information of an appraisal including an independent estimate of the aggregate market value of the Initial Communities and the Filer's head office property on a portfolio basis as at July 30, 2020, such appraisal having been filed on SEDAR.

Decision

The Decision Maker is satisfied that the decision meets the test set out in the Legislation for the Decision Maker to make the decision.

The decision of the Decision Maker under the Legislation is that the Relief Sought is granted with respect to the BAR provided that the Filer includes the Alternative Acquisition Financial Disclosures in the BAR in respect of the Acquisition Transaction.

"Marie-France Bourret"

Manager, Corporate Finance

Ontario Securities Commission