Distribution declaration mechanics

This article describes distribution mechanics as they apply to the Canada and United States Direct-Hold Solutions, which are structured as limited partnerships. The Spain SOCIMI and Mexico FIBRA are governed by their own jurisdictions' distribution regimes, not by a partnership agreement, and are not covered by the mechanics described here.

In the established Canada vehicle, distributions are declared by the general partner when the asset's operating performance satisfies the interest coverage ratio (ICR) floor. No distribution is declared from an asset whose ICR is below 1.2×. When distributions are declared, they are allocated to all outstanding units of the relevant asset in equal proportion — no unit carries a preferential distribution right over another. The planned United States vehicle is intended to apply an equivalent ICR gate, proportional calculation, and suspension protocol once established.

Key takeaways

• A distribution is declared by the general partner only when stabilised operating income covers interest obligations by at least 1.2×; no exception to this gate exists and no distribution is advanced from any other asset or entity.
• Distributions are proportional to outstanding unit counts; an investor holding five percent of a direct-hold LP's units receives five percent of any distribution declared from that LP — no priority class, no catch-up mechanism, no preferred return.
• Declared distributions are income allocations of the limited partnership; the tax treatment of any distribution depends on each partner's own circumstances and is a matter for qualified tax counsel.
• At least 90% of a fiscal year's Distributable Income is paid to limited partners within 90 days of fiscal year-end; the remaining 10% is retained for partnership purposes during the Initial Period, then applied to redeem First Secured Mortgage Debentures.

The ICR gate

The interest coverage ratio for each asset is calculated as stabilised net operating income divided by total annual interest obligations on all debt secured against the asset. A ratio at or above 1.2× indicates that operating income covers interest with a 20% buffer. A ratio below 1.2× means that operating income is insufficient to service debt with the required cushion and that declaring a distribution would reduce the cash available for debt service.

The ICR gate is not a soft guideline — it is a hard operating constraint built into the partnership agreement. The general partner cannot lawfully declare a distribution that would reduce the ICR below 1.2×. This constraint is the primary mechanism by which unit holders are protected from distributions that outpace the asset's ability to sustain them.

The ICR is calculated per asset and per period. It does not aggregate across assets in the portfolio or across the holding structure. An asset with a 1.5× ICR and an asset with a 0.9× ICR are evaluated independently; the strong ICR of one asset does not supplement the weak ICR of the other.

Proportional allocation

When the general partner declares a distribution, the aggregate amount to be distributed is divided by the total outstanding unit count to produce a per-unit distribution amount. Each unit holder receives the per-unit distribution amount multiplied by their unit count. An investor holding 250 units in a 10,000-unit register receives 2.5% of the aggregate declared distribution.

There is no preferred class of units, no minimum preferred return that must be satisfied before ordinary units participate, and no accumulated preferred distribution that must be paid up before a regular distribution is declared. The distribution waterfall contains a single level: all outstanding units of the same asset receive the same per-unit amount.

Minimum distribution and retention

In the established Canada vehicle, where a distribution is declared, the partnership pays at least 90% of the fiscal year's Distributable Income to limited partners within 90 days of the fiscal year-end. Until cumulative distributions equal 100% of the gross proceeds limited partners paid for their units (the Initial Period), the remaining 10% is retained for partnership purposes. After the Initial Period, that 10% is applied to redeem First Secured Mortgage Debentures until fully redeemed, after which it reverts to partnership purposes.

Suspension protocol

If the ICR falls below 1.2× — due to a vacancy, a tenant default, a maintenance cost spike, or adverse market conditions — the general partner suspends distributions and enters a cash-preservation protocol. Under the protocol:

• Operating income is retained within the partnership rather than distributed
• Debt service continues to be paid from operating income
• Capital expenditure required to restore occupancy or address deferred maintenance is funded from retained operating cash
• Distributions resume only when the ICR has been restored to 1.2× or above

The suspension is not a gate that queues distributions for later payment in the manner of a preferred dividend in arrears. Distributions suspended during the ICR shortfall period are not subsequently paid to unit holders who held units during the period of suspension. The general partner's discretion in declaring distributions does not extend to promising future distributions that compensate for the suspended period.

Tax treatment

The limited partnership does not pay income tax at the entity level; income and deductible expenses pass through to the partners in proportion to their unit holdings. The tax treatment of any distribution depends on each partner's own circumstances and is a matter for qualified tax counsel.

See also

• Limited partnership structure — the LP form through which distributions flow to limited partners
• Asset vehicle isolation — why distributions from one LP asset cannot be supplemented by assets held in another LP