Hazelview Securities Inc. et al.
Headnote
Registered adviser exempted from paragraph 13.5(2)(a) of NI 31-103 to permit the adviser to cause certain investing entities that the adviser, or an affiliate of the adviser, manages and/or advises to purchase securities of certain other entities, in respect of which a responsible person or an associate of a responsible person of the Filer is then a partner, officer, or director, to facilitate indirect investments by the investing entities in real estate -- The investing entities will not be investment funds or reporting issuers, but may in certain respects operate in manner similar to an investment fund.
Statutes cited
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 13.5(2)(a) and 15.1.
September 7, 2021
IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO (the Legislation) AND IN THE MATTER OF HAZELVIEW SECURITIES INC., FOUR QUADRANT GLOBAL REAL ESTATE PARTNERS, AND BD DEVELOPMENT AGGREGATOR LP
DECISION (Section 15.1 of National Instrument 31-103)
Background
Hazelview Securities Inc. (the Filer) has applied to the regulator in Ontario for a decision under section 15.1 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103), exempting the Filer from the restriction (the Consent Requirement) contained in paragraph 13.5(2)(a) of NI 31-103 that prohibits a registered adviser from knowingly causing an investment portfolio managed by it to purchase a security of an issuer in which a responsible person or an associate of a responsible person is a partner, officer or director unless this fact is disclosed to the client and the written consent of the client is obtained before the purchase is made, in order to permit the Filer to cause:
(a) an Investing Entity (as defined below) to purchase securities of a Master Fund (as defined below), in respect of which a responsible person or an associate of a responsible person of the Filer is a partner, officer or director, without such disclosure or consent being obtained; and
(b) an Investing Entity (as defined below) to purchase securities of a Conduit Entity (as defined below), in respect of which a responsible person or an associate of a responsible person of the Filer is a partner, officer or director, without such disclosure or consent being obtained
(collectively, the Requested Relief).
Interpretation
Terms defined in the Legislation, National Instrument 14-101Definitions or NI 31-103 have the same meaning in this decision unless otherwise defined in this decision, or the context otherwise requires. In this decision, the following terms shall have the following meanings:
"Partnership" means Four Quadrant Global Real Estate Partners.
"Future Investing Entity" means an investment vehicle offered pursuant to prospectus exemptions in respect of which the Filer or an affiliate of the Filer acts as the manager.
"Investing Entity" means the Partnership or a Future Investing Entity.
"manager" means, in the context of an Investing Entity, the person or company that directs the business, operations or affairs of the Investing Entity.
"portfolio adviser" means, in the context of an Investing Entity, the person or company that manages the investment portfolio of the Investing Entity.
"Initial Master Fund" means BD Development Aggregator LP.
"Future Master Fund" means an issuer that is structured in a similar manner to the Initial Master Fund.
"Master Fund" means the Initial Master Fund or a Future Master Fund.
"Blocker" means a person or company through which an Investing Entity may indirectly invest in securities of an Underlying Issuer.
"Underlying Issuer" means a person or company that is an issuer.
"Real Estate Assets" means real estate assets, real estate related debt or investments in real estate.
"Real Estate Holding Vehicle" means a person or company that holds Real Estate Assets.
"Conduit Entity" means a Real Estate Holding Vehicle or a Blocker.
Representations
Representations by the Filer in respect of the status of the Filer, an Investing Entity, Master Fund or Conduit Entity (including a Future Investing Entity or Future Master Fund) will be applicable as of the date the Filer relies upon any of the Requested Relief in respect of the corresponding Investing Entity, Master Fund or Conduit Entity (sometimes referred to herein as the "relevant time").
This decision is based on the following facts represented by the Filer:
The Filer
1. The Filer is a corporation incorporated under the laws of the Province of Ontario with its head office located in Toronto, Ontario.
2. The Filer is registered (i) as an exempt market dealer in Ontario, British Columbia, Alberta, Manitoba, and Quebec; (ii) as a portfolio manager in Ontario; and (iii) as an investment fund manager in Ontario, Quebec and Newfoundland and Labrador.
3. The Filer is not in default of the securities legislation of any jurisdiction of Canada.
The Partnership
4. The Partnership is a limited partnership formed under the laws of Ontario and is not a reporting issuer in any jurisdiction of Canada.
5. The Partnership is not in default of the securities legislation of any jurisdiction of Canada.
6. The Partnership was formed for the purpose of constructing, on a discretionary basis, a globally diversified, actively managed portfolio of real estate investments. The investment objective of the Partnership is to maximize total returns for its unitholders, consisting of income and capital appreciation, and to provide its unitholders with regular distributions, by selecting, purchasing and actively managing a diversified portfolio of real-estate-related assets and investments, including but not limited to, direct interests in real estate, mortgages and other real-estate-related investments.
7. Securities of the Partnership have only been, and will only be, offered in accordance with applicable prospectus exemptions.
8. The Partnership is not considered to be an "investment fund" (as such term is defined in the Legislation), but, in certain respects, operates in a manner similar to an investment fund. The Partnership is administered by the Filer, as the entity which directs the business, operations and affairs of the Partnership. Its assets are managed by the Filer, as portfolio adviser, and a valuation agent calculates a net asset value that is used for purposes of determining the purchase and redemption price of the units of the Partnership.
Future Investing Entities
9. Each Future Investing Entity will be:
(a) a trust formed under the laws of Ontario or another jurisdiction of Canada;
(b) a limited partnership formed under the laws of Ontario or another jurisdiction of Canada; or
(c) a corporation incorporated under the laws of Ontario or another jurisdiction of Canada
and will operate in a manner similar to the Partnership, with a similar investment mandate to invest in Real Estate Assets.
A valuation agent will calculate a net asset value that will be used for the purposes of determining the purchase and redemption price of units of each Future Investing Entity.
10. Each Future Investing Entity will not be a reporting issuer in any jurisdiction of Canada and will not be considered to be an "investment fund" (as such term is defined in the Legislation).
11. Securities of each Future Investing Entity will only be offered in accordance with applicable prospectus exemptions. Each Future Investing Entity will not, at the relevant time, be in default of the securities legislation of any jurisdiction of Canada.
12. The manager and the portfolio adviser of each Future Investing Entity will be the Filer or an affiliate of the Filer.
The Initial Master Fund
13. The Initial Master Fund is a master limited partnership formed under the laws of Ontario and is not a reporting issuer in any jurisdiction of Canada.
14. The Initial Master Fund is not in default of the securities legislation of any jurisdiction of Canada.
15. The Initial Master Fund was formed for the purpose of facilitating investment by the Investing Entities and other third-party investors who are interested in investing in Real Estate Assets. The Initial Master Fund will invest in Real Estate Assets through the creation of Real Estate Holding Vehicles. The Initial Master Fund will not carry on any business other than to facilitate investment in Real Estate Assets through Real Estate Holding Vehicles. Each Master Fund may invest in Real Estate Assets through one or more Real Estate Holding Vehicles.
16. The Initial Master Fund is not considered to be an "investment fund" (as such term is defined in the Legislation). The Initial Master Fund will be administered by its general partner, and its assets will be managed by affiliates of the Filer, as asset, property and development managers (none of which are registrants under Canadian securities laws).
17. Securities of the Initial Master Fund will only be offered in accordance with applicable prospectus exemptions.
Future Master Funds
18. Each Future Master Fund will be:
(a) a trust formed under the laws of Ontario or another jurisdiction of Canada;
(b) a limited partnership formed under the laws of Ontario or another jurisdiction of Canada; or
(c) a corporation incorporated under the laws of Ontario or another jurisdiction of Canada
and will operate in a manner similar to the Initial Master Fund, with a similar investment mandate to invest in Real Estate Assets.
19. Each Future Master Fund will not be a reporting issuer in any jurisdiction of Canada and will not be considered to be an "investment fund" (as such term is defined in the Legislation).
20. Securities of the Future Master Funds will only be offered in accordance with applicable prospectus exemptions. Each Future Master Fund will not, at the relevant time, be in default of the securities legislation of any jurisdiction of Canada.
Real Estate Holding Vehicles and Blockers (Conduit Entities)
21. Each Conduit Entity will be a trust, corporation or limited partnership established under the laws of a jurisdiction of Canada or a foreign jurisdiction and will not be a reporting issuer in any jurisdiction of Canada.
22. Each Real Estate Holding Vehicle will restrict its activities to owning and holding one or more similar Real Estate Assets. A Real Estate Holding Vehicle may further interpose an additional holding vehicle to hold such underlying Real Estate Assets (rather than hold such Real Estate Assets directly). For greater certainty, no one Real Estate Asset will be held by more than one Real Estate Holding Vehicle.
23. The business carried on by Real Estate Holding Vehicles will be limited to the management of the underlying property owned by such Real Estate Holding Vehicle.
24. The assets of each Real Estate Holding Vehicle will consist primarily of the interest in the Real Estate Assets, cash and cash equivalents. The liabilities of each Real Estate Holding Vehicle will consist primarily of any amounts owing for accounting, legal and tax services provided to the Real Estate Holding Vehicle.
25. Each Blocker will restrict its activities to owning and holding securities of one Underlying Issuer. For greater certainty, different Blockers will hold securities of different issuers and no Blocker will carry on any active business.
26. The assets of each Blocker will consist primarily of securities of an Underlying Issuer, cash and cash equivalents. The liabilities of each Blocker will consist primarily of any amounts owing for accounting, legal and tax services provided to the Blocker.
27. All issued and outstanding securities of each Conduit Entity will be owned by one or more Investing Entities, Master Funds and/or third-party investors that seek to make an investment in Real Estate Assets or an Underlying Issuer through the Conduit Entity.
28. Securities of the Conduit Entities will only be issued pursuant to applicable prospectus exemptions. Each Conduit Entity will not, at the relevant time, be in default of the securities legislation of any jurisdiction of Canada.
Investments by Investment Entities in Master Funds, Real Estate Holding Vehicles and Blockers
29. When investing in real estate, rather than hold the title of an asset directly, an Investing Entity may invest in a Master Fund and/or Real Estate Holding Vehicle for a desired underlying Real Estate Asset.
30. Each Investing Entity may invest in one or more Master Funds (which may in turn invest in Real Estate Holding Vehicles) and may also invest in a Real Estate Holding Vehicle directly.
31. The Real Estate Holding Vehicles will only purchase Real Estate Assets which the Investing Entities are permitted to purchase directly under applicable securities laws.
32. To ensure compliance with Canadian tax filing obligations and/or ownership restrictions on certain of an Investing Entity's investments and/or minimize withholding tax issues, the Filer may also interpose a Blocker between an Investing Entity and any one or more Underlying Issuers.
33. Each Investing Entity may invest in one or more Blockers for the purposes of making an indirect investment in an Underlying Issuer.
34. A Blocker will only purchase securities of an Underlying Issuer which the Investing Entities are permitted to purchase directly under applicable securities law.
35. An Investing Entity may transfer an existing Real Estate Asset to a Real Estate Holding Vehicle in exchange for securities of the Real Estate Holding Vehicle. In addition, an Investing Entity may purchase securities of a Real Estate Holding Vehicle for cash or loan cash to a Real Estate Holding Vehicle, which the Real Estate Holding Vehicle would use to invest in Real Estate Assets. Where an Investing Entity transfers an existing interest of the Investing Entity in a Real Estate Asset to a Real Estate Holding Vehicle, the Investing Entity will retain the identical beneficial interest in such Real Estate Asset.
36. An Investing Entity may transfer an existing interest in an Underlying Issuer to a Blocker in exchange for securities of the Blocker. In addition, an Investing Entity may purchase securities of a Blocker for cash or loan cash to the Blocker, which the Blocker would use to purchase real estate or securities of an Underlying Issuer. Where an Investing Entity transfers its existing interest in an Underlying Issuer to a Blocker, the Investing Entity will retain an identical indirect beneficial interest in the Underlying Issuer.
37. The Filer is not aware of any additional risk of insolvency to an Investing Entity that may arise as a result of the Investing Entity using a Master Fund or Real Estate Holding Vehicle to indirectly invest in Real Estate Assets.
38. The Filer is not aware of any additional risk of insolvency to an Investing Entity that may arise as a result of the Investing Entity using a Blocker to indirectly invest in an Underlying Issuer.
39. Each Conduit Entity will exist solely to achieve the objectives of the applicable Investing Entities that are invested in the Conduit Entity.
40. No Underlying Issuer will be related to the Filer or an Investing Entity (other than through indirect ownership by the Investing Entity in securities of the Underlying Issuer).
41. Although each Investing Entity will indirectly bear additional costs resulting from the use of a Blocker (mainly in the form of incorporation and maintenance costs of the Blocker, as well as the costs of preparing its annual financial statements), the cost savings and/or other benefits resulting from the Investing Entity using the Blocker are expected to significantly outweigh such additional costs.
42. Although each Investing Entity will indirectly bear additional costs resulting from the use of a Master Fund or a Real Estate Holding Vehicle to make indirect investments in Real Estate Assets (mainly in the form of incorporation and maintenance costs of the Master Fund or Real Estate Holding Vehicle, as well as the costs of the Master Fund or Real Estate Holding Vehicle preparing its annual financial statements), the cost savings and/or other benefits resulting from the Investing Entity's use of the Master Fund or Real Estate Holding Vehicle are expected to significantly outweigh such additional costs.
Benefits that may be available to an Investing Entity investing through a Conduit Entity
43. Investing in real property indirectly through a Real Estate Holding Vehicle is common in the investment industry, where a transfer of the securities of an entity is more efficient than the transfer of title to land/property, particularly across different provincial jurisdictions where land title systems may differ. Investment by an Investment Entity indirectly in Real Estate Assets through a Real Estate Holding Vehicle may also help the Investment Entity to avoid negative tax consequences associated with holding the Real Estate Assets directly.
44. Structuring investments through the use of a Blocker is common in the investment industry to protect investors from recognizing negative tax consequences of holding the underlying investments directly, which is why such entities are often described as "blockers".
45. The tax purposes and benefits of an Investment Entity investing through a Conduit Entity will vary depending on the particular investment being made.
46. With respect to Blockers, in the case of Underlying Issuers that are U.S. issuers:
(a) the use of a Blocker may block potential U.S.-source effectively connected income at the Blocker level so that only the Blocker will be required to make U.S. tax filings with respect to such income (i.e., the Blocker and not the owners of the Blocker will be subject to U.S. tax); and
(b) the use of a Blocker may prevent attribution of a U.S. trade or business up the chain to the Investing Entity and potentially the investors in the Investing Entity, which may otherwise result in investors in the Investing Entity being subject to U.S. tax filing obligations.
Therefore, the Investing Entity-Blocker structure may eliminate both the risk of filing a U.S. tax return and the risk that an investor in an Investing Entity may be deemed to be engaged in a U.S. trade or business.
47. The indirect investment by an Investing Entity in an Underlying Issuer in other foreign jurisdictions through a Blocker may also minimize tax filing obligations in the foreign jurisdiction for the Investing Entity and/or its investors.
48. Withholding taxes payable on distributions by an Underlying Issuer that are based in certain jurisdictions may also be eliminated, minimized or deferred through the use of a Blocker.
49. The constating documents or investment agreements for international fund issuers typically contain restrictions on direct transfers of investments. If an Investing Entity invests in an Underlying Issuer through a Blocker, this may ease a transfer of beneficial ownership of the investment where indirect transfer by an underlying investor (an Investing Entity or an investor in an Investing Entity) is not prohibited or other types of ownership transfer restrictions. The Investing Entity-Blocker structure will only be used in those jurisdictions where to do so would be consistent with applicable laws in such jurisdictions.
50. In the absence of the Requested Relief, each Investing Entity would be precluded from investing in one or more Master Funds and/or Conduit Entities unless the specific fact is disclosed to securityholders of the Investing Entity and the written consent of the securityholders of the Investing Entity to the investment is obtained prior to the purchase, since a "responsible person" (as defined in section 13.5 of NI 31-103) or an associate of a responsible person of the Filer may also be a partner, officer and/or director of the applicable Master Fund and/or Conduit Entity, including a partner, officer and/or director of the general partner of a Master Fund and/or Conduit Entity where the Master Fund and/or Conduit Entity is a limited partnership, and including a partner, officer and/or director of the corporate trustee of a Master Fund and/or Conduit Entity where the Master Fund and/or Conduit Entity is a trust. Where an Investing Entity has a large number of investors, obtaining individual consent from each investor pursuant to the Consent Requirement is generally not practical.
51. In the absence of the Requested Relief, each Investing Entity would be precluded from investing in one or more Blockers unless the specific fact is disclosed to securityholders of the Investing Entity and the written consent of the securityholders of the Investing Entity to the investment is obtained prior to the purchase, since a "responsible person" (as defined in section 13.5 of NI 31-103) or an associate of a responsible person of the Filer may also be a partner, officer and/or director of the applicable Blocker, including a partner, officer and/or director of the general partner of a Blocker where the Blocker is a limited partnership, and including a partner, officer and/or director of the corporate trustee of a Blocker where the Blocker is a trust. Where an Investing Entity has a large number of investors, obtaining individual consent from each investor pursuant to the Consent Requirement is generally not practical.
Mitigation Measures for Potential Conflicts
52. The Filer will not cause an Investing Entity to purchase securities of a Master Fund in respect of which a responsible person or an associate of a responsible person of the Filer is a partner, officer or director unless:
(a) the Filer has established an internal process to review, and has reviewed, the pricing terms to ensure that the purchase will be conducted at fair market value;
(b) the arrangements between or in respect of the Investing Entity and the Master Fund will not result in any duplication of management fees or incentive fees;
(c) the offering document (if applicable) of the Investing Entity describes the Investing Entity's authority and intent to invest in securities of the Master Fund;
(d) the purchase represents the business judgement of responsible persons of the Filer uninfluenced by considerations other than the best interests of the Investing Entity;
(e) there is no conflict between the interests of the Filer, or any of its responsible persons, and the interests of investors in the Investing Entity resulting from the purchase; and
(f) no responsible person of the Filer has any personal interest in the Master Fund other than by virtue of: (i) their position as a director or officer of the Master Fund (for which they will not receive any remuneration); or (ii) their personal investment in the Investing Entity (which translates into an indirect personal interest in the Master Fund).
53. The Filer will not cause an Investing Entity to purchase securities of a Conduit Entity in respect of which a responsible person or an associate of a responsible person of the Filer is a partner, officer or director unless:
(a) the Filer has established an internal process to review, and has reviewed, the pricing terms to ensure that the purchase will be conducted at fair market value;
(b) the arrangements between or in respect of the Investing Entity and the Conduit Entity will not result in any duplication of management fees or incentive fees;
(c) the offering document (if applicable) of the Investing Entity will describe the Investing Entity's intent and authority to invest in securities of the Conduit Entity;
(d) the purchase represents the business judgement of responsible persons of the Filer uninfluenced by considerations other than the best interests of the Investing Entity;
(e) there will be no conflict between the interests of the Filer, or any of its responsible persons, and the interests of investors in the Investing Entity resulting from the purchase; and
(f) no responsible person of the Filer will have any personal interest in the Conduit Entity other than by virtue: (i) of their position as a director or officer of the Conduit Entity (for which they will not receive any remuneration); or (ii) their personal investment in the Investing Entity (which translates into an indirect personal interest in the Conduit Entity).
Decision
The regulator in Ontario is satisfied that the decision meets the test set out in the Legislation for the regulator to make the decision.
The decision of the regulator in Ontario is that Requested Relief is granted, provided that:
(a) securities of the Investing Entities are distributed in Canada solely pursuant to applicable prospectus exemptions;
(b) prior to an Investing Entity entering into a transaction with a Master Fund or Conduit Entity, the Filer (through its internal process) reviews the pricing terms to ensure that the purchase will be conducted at fair market value;
(c) with respect to the Investing Entity-Blocker structure, each issuer is at arm's length from the Filer and the Investing Entities;
(d) prior to the Investing Entity entering into a transaction with a Master Fund or Conduit Entity, the Filer will make reasonable efforts to ensure that the proposed transaction:
(i) is entered into free of influence by an entity related to the Filer and without taking into account any consideration relevant to a person or company related to the Filer;
(ii) is uninfluenced by considerations other than the best interests of the Investing Entity;
(iii) is in compliance with the written policies and procedures of the Filer; and
(iv) achieves a fair and reasonable result for the Investing Entity;
(e) each of the Investing Entity-Master Fund-Real Estate Holding Vehicle structure, Investing Entity-Real Estate Holding Vehicle structure and Investing Entity-Blocker structure is compatible with the fundamental investment objectives of each Investing Entity;
(f) the arrangements between or in respect of each Investing Entity and a Master Fund or Conduit Entity will not result in any duplication of management fees or incentive fees;
(g) all new investors in an Investing Entity will consent generally to the Investing Entity-Master Fund-Real Estate Holding Vehicle structure, Investing Entity-Real Estate Holding Vehicle structure and Investing Entity-Blocker structure through the investment management agreement or subscription agreement or other document; and
(h) in the case of each Investing Entity in respect of which the Filer relies upon the Requested Relief to purchase securities of a Master Fund or Conduit Entity, investors in the Investing Entity will be provided with disclosure from the Investing Entity of the circumstances of this reliance no later than their next scheduled report from the Investing Entity.
"Felicia Tedesco"
Deputy Director
Compliance and Registrant Regulation
Ontario Securities Commission
Application File #: 2021/0098