Brookfield Asset Management Leads Effort to Buy Up Rest of Brookfield Property Partners in Go-Private Deal

By Stuart E. Leblang, Michael J. Kliegman and Amy S. Elliott

On January 4, Canadian alternative asset manager Brookfield Asset Management Inc. (NYSE:  BAM) (BAM) announced that it had joined forces with a group of investors to make a preliminary nonbinding offer ¹ to take private the master limited partnership (MLP) Brookfield Property Partners L.P. (NAS³) equity ownership interest iDAQ:  BPY) (BPY). ² 

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BAM already holds a controlling (67.5 percent ^{“the flagship listed real estate company of [BAM].” 4} The privatization will involve acquiring the remaining 357.6 million BPY units that BAM does not already own. ⁵ 

According to the announcement, BPY unitholders could either elect to receive per-unit consideration of $16.50 in cash, 0.40 BAM Class A shares or 0.66 BPY preferred units (with a liquidation preference of $25 per unit), subject to proration.  (In general, aggregate cash consideration will be capped at $2.95 billion, aggregate BAM shares will be capped at 59.5 million and aggregate BPY units will be capped at $500 million in value, representing 50 percent, 42 percent and 8 percent of the consideration, respectively.) ⁶ 

Recall that BPY controls ⁷ Brookfield Property REIT Inc. (NASDAQ:  BPYU) (BPR) (formerly known as GGP Inc.), a real estate investment trust (REIT).  (We wrote four reports back in 2018 about tax issues raised by BPY’s acquisition of GGP Inc., the second of which—“Brookfield-GGP Deal:  Investors Face MLP vs. REIT Choice” (May 3, 2018)—is appended.) As part of the proposed privatization, BPR Class A stockholders will be allowed to exchange their shares into the same consideration offered to BPY unitholders (as BPR shareholders have the right at any time to exchange each of their shares into a BPY unit).⁸ 

BPY and BPR acknowledged receipt of the proposal and said the board of directors of BPY’s general partner has established a committee of independent directors to review the same. ⁹ BAM asked for BPY “to commission an independent valuation of the BPY units.  Once the valuation is available, Brookfield would seek to enter into a definitive agreement with BPY with respect to the proposed transaction for presentation to unitholders.” ¹⁰ 

Tax Treatment to Investors

At a high level, if a BPY unitholder receives only cash or BAM Class A shares in the privatization transaction (or a mix of the two), the exchange will be taxable to the unitholder, because the exchange of a partnership interest for corporate stock or cash does not qualify for tax-free treatment under the Internal Revenue Code as a reorganization or otherwise.  Only if a unitholder receives solely BPY preferred units would it potentially have tax-free treatment.

If a BPR shareholder exchanges its shares for the consideration made available to BPY unitholders, it appears that such an exchange would be facilitated first by a conversion into BPY units, which would be taxable.  If BAM directly acquired BPR in exchange for BAM shares, the transaction could potentially be tax-free, but the release indicates that BAM envisions the interim step of swapping first for partnership units.  Additionally, while BAM is effectively taking BPR private along with BPY and is leaving BPR in place as a corporate subsidiary, it is not clear whether BAM will maintain BPR’s REIT status. ¹¹ 

^{[1] The text of the proposal is available here:  https://www.sec.gov/Archives/edgar/data/1001085/000119312521001046/d56584dex13.htm}

^{[2] Press Release, BAM, Brookfield Asset Management and Institutional Partners Propose to Acquire 100% of the Units of Brookfield Property Partners Not Owned by Brookfield for $5.9 Billion (Jan. 4, 2021) (https://www.sec.gov/Archives/edgar/data/1001085/000117184321000007/exh_991.htm).}

^{[3] “[A]s of November 30, 2020, BAM may be deemed to be the beneficial owner of 600,997,978 Units . . . and such Units would constitute approximately 67.5% . . . of the issued and outstanding Units,” according to BPY Schedule 13D/A (Dec. 2, 2020) (https://www.sec.gov/Archives/edgar/data/1001085/000119312520308530/d92760dsc13da.htm).}

^{[4] Press Release, BPY, Brookfield Property Partners Acknowledges Brookfield Asset Management’s Privatization Proposal and Establishes a Committee of Independent Directors (Jan. 4, 2021) (https://www.sec.gov/Archives/edgar/data/1545772/000110465921000184/tm211469d1_ex99-1.htm).}

^{[5] Id.}

^{[6] Supra note 2.}

^{[7] When the BPY-GGP merger closed, BPY controlled GGP (now BPR) as it held 87% of the voting stock of BPR through its 100% ownership of the BPR Class B and Class C shares (https://www.sec.gov/Archives/edgar/data/1545772/000154577220000007/bpy201920-f.htm).}

^{[8] Id.}

^{[9] Id.}

^{[10] Id.}

^{[11] Supra note 2.  The press release states, “Brookfield is not proposing to acquire other securities of BPY and its subsidiaries, which are expected to remain outstanding.”}