MEXICO´s INCENTIVES FOR REAL ESTATE INVESTMENT October 20, 2007 Course Number MUNOZ MANZO y BELAUNZARAN, S. C. SPEAKER ALEJO MUNOZ

FIBRAS – THE NEXT STEP IN THE MEXICAN STOCK EXCHANGE EXPECTATIONS OF FIBRAS IN THE SORTH TERM According to the Mexican Stock Exchange, FIBRAS will be strongly promoted and have the next expectations of business: – Create a new opportunities of invest – Flexible to any kind of Investors – Decreasing financial risk – A better control of the administration – Attractive for local and foreign Investors – Tax incentives are granted to the Investors

INVESTMENT FUNDS IN MEXICO How to Establish investment funds in Mexico for real estate projects Potential investors: – Mexican individuals and companies – Non-Mexican tax residents – Foreign pension and retirement funds – Other Institutional

INVESTMENT FUNDS IN MEXICO How to Establish investment funds in Mexico for real estate projects (Cont…) Main activities: – Acquisition of real estate for leasing: Offices Commercial Industrial – Infrastructure – Hospitality – Residential developments for sale – Financing the abovementioned activities

INVESTMENT FUNDS IN MEXICO VEHICLES Some alternatives for the constitution of the investment vehicle are: – Real Estate Investment Trust (FIBRAS) SIBRAS (Legal Entities similar to FIBRAS) – Private Equity Investment Trust (PEITS) – Private Investment Corporation (SAPI) – Mexican Trust – Permanent Establishment

FIBRA - INCOME TAX LAW FIBRA (Mexican REIT) Requirements The trust must be incorporated in Mexico and issue Certificates (CPIs). Line of business: – Acquisition or development of real estate projects for leasing – Acquisition of the rights to receive the gains generated by said leasing – Grant financing for the referred purposes At least 70% of their assets invested in above-mentioned activities. Said real estate can only be sold after 4 years of leasing. At least 10 investors, which may not be related parties. No investor can have more than 20% of participation.

FIBRA - INCOME TAX LAW FIBRA (Mexican REIT) Tax Regime Annual distribution by Trustee of at least 95% of the annual income. Annual distribution is subject to withholding at a 28% rate. Investors shall include the annual income distributed by the FIBRA and take the credit of the tax withheld. Non-residents, shall consider the tax withheld as a definitive payment. Capital Gains from sale of CPIs are taxable, except if are sold on the Mexican Stock Exchange or on recognized markets.

FIBRA - INCOME TAX LAW FIBRA - SIBRA SIBRA is a Mexican Legal Entity that has the same activities than FIBRA. Benefit: defer the gain obtained by properties contribution to the SIBRA. Pension Funds investing in SIBRAS receive a tax credit for the annual income tax with same effects than exemption. Comply with other rules issued by Mexican Tax Authorities. No requirements on number of shareholders. Better position than FIBRAS in this regard.

PEIT - INCOME TAX LAW PEIT Trust organized in Mexico. Line of business: – Invest in equity of Mexican companies not listed in the Mexican Stock Exchange at the time of the investment. – Participate in their board of directors – Granting financing to such companies At least 80% of the trust's assets invested in: – Shares of the promoted companies – Financing granted to the promoted companies

PEIT - INCOME TAX LAW PEIT The shares of promoted companies must be held for at least 2 years. Trust has term no longer than 10 years. Distribution of at least 80% of the annual income obtained by the trust. Comply with general rules issued by the Mexican Tax Authorities.

FOREIGN PENSION FUNDS Exemptions: interest, capital gains and lease of properties (located in Mexico). Requirements: – Fund incorporated under foreign laws and exempt in the country of its incorporation. Must be the beneficial owner – The Fund must be registered with Mexican Tax Authorities – Exemptions in capital gains will apply only if real estate is leased at least one year before the sale Pension Funds may invest directly in real estate or through a vehicle.

FOREIGN PENSION FUNDS Investing directly in properties Exemptions: – Lease – Interest – Sale of real estate if it was rented at least one year Consider restricted zones for foreign investors.

FOREIGN PENSION FUNDS Investing through FIBRAS FIBRAS are pass through vehicles. Same exemption treatment as direct investment. Gains from selling FIBRAS’ CPIs are exempt.

FOREIGN PENSION FUNDS Investing through Corporations Mexican Corporation is exempted if: – At least 90% of total revenues come from lease or capital gains – Capital gains include selling of shares of corporations which value is at least 50% in properties

FOREIGN PENSION FUNDS Investing through SIBRAS Pension Fund will receive a tax credit for the SIBRA’s annual income tax. SIBRA may offset against its own annual income tax the tax credit granted to Pension Funds.

FOREIGN PENSION FUNDS Pension Funds must be registered in the “Banks, Financing Entities, Pension and Retirement Funds, and Foreign Investment Funds Registry” following the next requirements: – Copy of the minute of incorporation – Copy of the official documentation issued by the corresponding authorities granting the exemption in the country of its incorporation (transparency), or certification issued by a CPA member of an international audit firm – Certification issued by a CPA member of an international audit firm certifying the Fund´s participation into the Investment Funds or Foreign Entities – Comply with other rules issued by the Mexican Tax Authorities

2008 MEXICAN TAX REFORM NEW FLAT RATE BUSINESS TAX (Spanish acronym “IETU”) New Minimum Tax in effect January Substitution of Asset Tax. Based on cash flows, considers sales, rents and services. Rate is 17.5% (16.5% in 2008 and 17% in 2009). CPI´s (trust certificates) issued by FIBRAS are not taxable in the understanding that CPI´s are traded on Securities markets. Distortions of income tax vs. IETU, in the case of the contribution of properties by the FIBRAS’ founders, because income tax defers the tax on the gain which is not the case for IETU purposes.

COMMON STRUCTURES OF INVESTMENT FUNDS COMMONS STRUCTURES Example # 1. Foreign Limited Partnership INVESTORS LIMITED PARTNERSHIP (LP) THIRD PARTY BANK DEBT JOINT VENTURE PARTIES Mexican Properties or Companies

COMMON STRUCTURES OF INVESTMENT FUNDS COMMONS STRUCTURES Example # 2. FIBRA (MEXICAN REIT) INVESTORS THIRD PARTY BANK DEBT JOINT VENTURE PARTIES FIBRA (REIT) Mexican Properties or shares

COMMON STRUCTURES OF INVESTMENT FUNDS COMMONS STRUCTURES Example # 3. SIBRA (Legal Mexican Entity) INVESTORS THIRD PARTY BANK DEBT JOINT VENTURE PARTIES SIBRA (S.A.) Mexican Properties

COMMON STRUCTURES OF INVESTMENT FUNDS COMMONS STRUCTURES Example # 4. PEIT INVESTORS THIRD PARTY BANK DEBT JOINT VENTURE PARTIES PEIT PROMOTED COMPANIES Mexican Properties

CASE 1 SPLIT OF ACTIVITIES FIBRA (Renting revenues) – Tax transparent entity for investors – Foreign pension and retirement funds exempt of income tax – No asset tax payment – No income tax nor asset tax prepayments – Deferral of gain obtained by real estate contributions to the trust PEIT (other income) – Tax transparent entity for investors – No need to obtain a tax ruling from the Mexican Tax Authorities for tax transparency – Foreign exempt pension and retirement funds are not corrupted by non-lease income

CASE 1.2 SPLIT OF ACTIVITIES - FIBRA INVESTMENTS TROUGH SPVs FIBRA – Segregation of Properties in different vehicles, such as trusts – Same advantages as in Alternative 1 and could receive investors in each vehicle – Must obtain a tax ruling from the Mexican Tax Authorities to confirm the tax transparency PEIT – Same advantages as in Alternative 1

CASE 2 ONE VEHICLE FOR ALL THE ACTIVITIES Foreign Vehicle participating in FIBRA and other projects. Pension Funds participating in FIBRAS only FIBRA – Same advantages as in Alternative 1 Foreign Pass-through vehicle (LP) – Mandatory to obtain a tax ruling from the Mexican Tax Authorities to confirm the tax transparency

CASE 2.1 ONE TRUST FOR ALL THE ACTIVITIES Mexican Trust participating in FIBRA and other projects. Pension Funds participating in FIBRAS only FIBRA – Same advantages as in Alternative 1 Mexican Trust – Required to obtain a tax ruling from the Mexican tax authorities to confirm that the Trust does not carry out business activities, therefore, being considered tax transparent

MEXICO´s INCENTIVES FOR REAL ESTATE INVESTMENT ALEJO MUNOZ MUNOZ MANZO y BELAUNZARAN, S. C.