The next big thing: PH RE

99.9% of the time, PH property owners lodge real estate assets under individuals' names or companies. Yet, there's another juridical entity they can lodge RE assets in: a "Trust."

What is a Trust?

A trust is a method to separate LEGAL and BENEFICIAL ownership over a property to control who gets to receive an owner's assets.

For example, companies' retirement funds are mandated to be lodged under "trusts"–to prevent the company's decision-makers from funneling the funds into unideal investments.

Another famous example is when basketball star Allen Iverson signed a deal with Reebok that guaranteed him a $32 million trust when he turned 55. With the precedence of NBA players going broke, Reebok decided to put the money from Iverson's endorsement into a trust fund with the promise that he'll get the total amount after certain milestones.

In two of these cases, the trustor (the company and Reebok) will cease to have control over what to do with the funds, thus protecting them for the benefit of the beneficiary (retirees and Iverson). The trustee (the now legal owner) will manage the funds based on the trust agreement.

What's the connection to PH RE?

Before, lodging properties under companies for estate planning was a smart move. That worked until the BIR imposed VAT on the future sale of these properties. Lodging properties in a trust will shield them from the assets being considered ordinary assets since trusts are subjected to a different set of tax rules.

Are trust arrangements for RE properties possible in the PH?

Yes, I've seen several properties lodged under a trust.

Then how come only a few people are doing this?

Trust companies ("TCs," which are regulated by the BSP) shy away from these arrangements because of the venture's high regulatory risk and low profitability. TCs typically charge annual fees of 0.25% to 0.75% for lodging these assets under their books. This will only make financial sense for TCs if the property values are enormous.

Why the next big thing?

With taxation's evolution and the appreciation of RE assets in the past decade, getting into this business will be attractive for medium-sized trust entities. The only significant hurdle would be the capital requirements imposed by the BSP/SEC.