Real Estate Gazette – Issue 23: Special Issue: DLA Piper’s 1st European Real Estate Summit
We would like to welcome all our readers to this special issue of DLA Piper’s Real Estate Gazette, which presents material tied to the specialized topics under discussion at our first European Real Estate Summit, to be held at the Landmark Hotel in London on Tuesday 1 March 2016. The theme of our Summit,“Navigating Complexity in Diversified Markets”, acknowledges the challenges to be faced in allocating money in a European market which is becoming increasingly diverse, both geographically and from an asset class perspective. In this issue of the Gazette, we give our readers an insight into a huge variety of topics that concern leading experts from the European real estate industry.
Since the onset of the global financial crisis of 2007/8 changes in the way real estate is financed and the drivers behind that have been a key concern. Our first International article (page 6) examines a recent trend in pan-European re financing, where deals are structured on an individualized approach, with no requirement for cross-collateralization. Although acknowledging that this approach places more risk on the lenders, the authors predict that
it is likely to be used more often in the context of a borrower-friendly market.Articles from the Middle East (page 12—highlighting Islamic finance as a viable alternative to conventional debt funding that facilitates the use of capital from outside Europe), and the Netherlands (page 14—discussing recent case law developments affecting the VAT liability of real estate investment funds) conclude this section.
Please see full Publication below for more information.
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ISSUE 23 | www.dlapiperrealworld.com
REAL ESTATE
GAZETTE
ALTERNATIVE LENDING
INTERNATIONAL REAL ESTATE
FINANCE: AVOIDING CROSS-
COLLATERALIZATION BY TAKING
AN INDIVIDUALIZED APPROACH
ISLAMIC FINANCE AND REAL
ESTATE: THE PERFECT MATCH
LOGISTICS
REAL ESTATE FOR LOGISTICS—THE
CASE FOR PORTUGAL
OFFICES
SEEING AND MANAGING RISKS IN
UK LEASES
HOTELS
REFORM OF LAND LAW SYSTEMS
IN MOROCCO
RECENT TRENDS IN RESORT
MIXED USE DEVELOPMENT
SOUTHERN EUROPE
SHOPPING MALLS IN SPAIN: THE
RETURN OF AN ACTIVE MARKET
CENTRAL AND EASTERN EUROPE
A BREATH OF FRESH AIR FOR
CZECH MORTGAGE LAW
GERMANY VERSUS UK
HIDDEN PROSPECTS—INVESTING
IN SECONDARY LOCATIONS IN
GERMANY
NAVIGATING COMPLEXITY IN
DIVERSIFIED MARKETS
SPECIAL ISSUE:
DLA PIPER’S 1ST EUROPEAN
REAL ESTATE SUMMIT
2 | REAL ESTATE GAZETTE
Although this publication aims to state the law at 31 January 2016, it is intended as a general overview and
discussion of the subjects dealt with. It is not intended to be, and should not be used as, a substitute for taking
legal advice in any specific situation. DLA Piper will accept no responsibility for any actions taken or not taken on
the basis of this publication. If you would like further advice, please speak to Olaf Schmidt, Head of International
Real Estate, on +39 02 80 618 504 or your usual DLA Piper contact on +44 (0) 8700 111 111.
DLA Piper is an international legal practice, the members of which are separate and distinct legal entities.
For further information please refer to www.dlapiper.com.
Copyright © 2016 DLA Piper. All rights reserved.
Rita Jacques – Paris +33 1 70 75 77 27 rita.jacques@dlapiper.com
Thomas Dick – London +44 20 7796 6514 thomas.dick@dlapiper.com
Mushfique Khan – Dubai +971 4 438 6233 mushfique.khan@dlapiper.com
Daan Arends – Amsterdam +31 (0)20 5419 315 daan.arends@dlapiper.com
Wouter Kolkman – Amsterdam +31 (0)20 5419 337 wouter.kolkman@dlapiper.com
Luís Filipe Carvalho – ABBC law firm, Lisbon +351 21 358 36 20 lf.carvalho@abbc.pt
Tânia Gomes – ABBC law firm, Lisbon +351 213 583 620 t.gomes@abbc.pt
Ben Barrison – London +44 (0) 207 796 6184 ben.barrison@dlapiper.com
Myriam Mejdoubi – Paris +33 (0) 1 40 15 24 96 myriam.mejdoubi@dlapiper.com
Christophe Bachelet – Casablanca +212 (0)522 641 623 christophe.bachelet@dlapiper.com
Lynn Cadwalader – San Francisco +1 415 615 6050 lynn.cadwalader@dlapiper.com
Rutger Oranje – Amsterdam +31 (0)20 5419 810 rutger.oranje@dlapiper.com
Janneke Berendsen – Amsterdam +31(0) 20 5419 297 janneke.berendsen@dlapiper.com
Ignacio Antón – Madrid +34 917 887 304 ignacio.anton@dlapiper.com
Denise Hamer – London/Vienna +44 20 7796 6466/+43 1 531 78 1452 denise.hamer@dlapiper.com
Zuzana Slováková – Prague +420 222 817 501 zuzana.slovakova@dlapiper.com
Marek Strádal – Prague +420 222 817 401 marek.stradal@dlapiper.com
Aleksandra Kozłowska – Warsaw +48 22 540 74 07 aleksandra.kozlowska@dlapiper.com
Michael Neumann – Horten, Copenhagen +45 3334 4267 mn@horten.dk
Camilla Wollan – Oslo +47 24131659 camilla.wollan@dlapiper.com
Heiner Feldhaus – Cologne +49 221 277 277 253 heiner.feldhaus@dlapiper.com
CONTRIBUTORSISSUE 23
ISSUE 23 | www.dlapiperrealworld.com
REAL ESTATE
GAZETTE
ALTERNATIVE LENDING
INTERNATIONAL REAL ESTATE
FINANCE: AVOIDING CROSS-
COLLATERALIZATION BY TAKING
AN INDIVIDUALIZED APPROACH
ISLAMIC FINANCE AND REAL
ESTATE: THE PERFECT MATCH
LOGISTICS
REAL ESTATE FOR LOGISTICS—THE
CASE FOR PORTUGAL
OFFICES
SEEING AND MANAGING RISKS IN
UK LEASES
HOTELS
REFORM OF LAND LAW SYSTEMS
IN MOROCCO
RECENT TRENDS IN RESORT
MIXED USE DEVELOPMENT
SOUTHERN EUROPE
SHOPPING MALLS IN SPAIN: THE
RETURN OF AN ACTIVE MARKET
CENTRAL AND EASTERN EUROPE
A BREATH OF FRESH AIR FOR
CZECH MORTGAGE LAW
GERMANY VERSUS UK
HIDDEN PROSPECTS—INVESTING
IN SECONDARY LOCATIONS IN
GERMANY
NAVIGATING COMPLEXITY IN
DIVERSIFIED MARKETS
SPECIAL ISSUE:
DLA PIPER’S 1ST EUROPEAN
REAL ESTATE SUMMIT
ISSUE 23 • 2016 | 3
We would like to welcome all our readers to this special issue of DLA Piper’s Real Estate Gazette, which presents material tied to the specialized topics under discussion at our first European Real Estate Summit, to be held at the Landmark Hotel in London on Tuesday 1 March 2016.
The theme of our Summit, “Navigating Complexity in Diversified Markets”, acknowledges
the challenges to be faced in allocating money in a European market which is becoming
increasingly diverse, both geographically and from an asset class perspective. In this issue of
the Gazette, we give our readers an insight into a huge variety of topics that concern leading
experts from the European real estate industry.
Since the onset of the global financial crisis of 2007/8 changes in the way real estate is
financed and the drivers behind that have been a key concern. Our first International article
(page 6) examines a recent trend in pan-European refinancing, where deals are structured
on an individualized approach, with no requirement for cross-collateralization. Although
acknowledging that this approach places more risk on the lenders, the authors predict that
it is likely to be used more often in the context of a borrower-friendly market. Articles from
the Middle East (page 12—highlighting Islamic finance as a viable alternative to conventional
debt funding that facilitates the use of capital from outside Europe), and the Netherlands
(page 14—discussing recent case law developments affecting the VAT liability of real estate
investment funds) conclude this section.
We go on to consider topical areas of debate in a number of asset classes, namely, Logistics,
Offices, Hotels, and Residential. Featured articles include an assessment of Portugal’s logistics
sector (page 16); a discussion of risk in UK office leases (page 18); a summary of the reforms
to the land law system in Morocco and its rapidly developing hospitality sector (page 20); and
an examination of the restrictions on social housing in the Netherlands (page 25).
From a geographical perspective, the outlook appears to be bright for Southern Europe, with
Spain forecasting the return of an active market in shopping mall development (page 27).
There is good news too from Central and Eastern Europe with significant increases in CEE/
SEE loan and loan portfolio sales (page 28) and the Czech Republic announcing changes to
the way in which mortgages are regulated that should result in greater flexibility (page 30).
In Northern Europe, we look at the importance of pension funds in the Danish investment
market (page 34), some regulatory issues in Norway (page 36) and conclude with a look at
the attractions and pitfalls of investing in secondary locations in Germany (page 38).
It is clear from the breadth of material featured in this issue, and the topics scheduled for
debate at our Summit, that the current real estate landscape in Europe is challenging, but it is
also vibrant, dynamic and ripe with opportunities. We look forward to keeping you abreast of
developments.
Olaf Schmidt, Head of International Real Estate
A NOTE FROM
THE EDITOR
“
”
The real estate
landscape in Europe
is challenging, but
also vibrant and
dynamic.
The twenty-third
issue of the DLA
Piper Real Estate
Gazette highlights
issues relating to
allocating money
in an increasingly
diverse European
market.
4 | REAL ESTATE GAZETTE
CONTENTS
ALTERNATIVE LENDING—ROOM FOR GROWTH?
INTERNATIONAL
06 INTERNATIONAL REAL ESTATE FINANCE: AVOIDING CROSS-
COLLATERALIZATION BY TAKING AN INDIVIDUALIZED APPROACH
08 BEPS AND REAL ESTATE INVESTMENT FUNDS: WHAT ARE SPONSORS
TO DO?
MIDDLE EAST
12 ISLAMIC FINANCE AND REAL ESTATE: THE PERFECT MATCH
THE NETHERLANDS
14 VAT AND THE MANAGEMENT OF EUROPEAN REAL ESTATE
INVESTMENT FUNDS
LOGISTICS—CREATING A EUROPEAN PLATFORM
PORTUGAL
16 REAL ESTATE FOR LOGISTICS—THE CASE FOR PORTUGAL
OFFICES—DEVELOPING REAL ESTATE FOR MODERN END
USERS
UK
18 SEEING AND MANAGING RISKS IN UK LEASES
HOTELS—A SAFE HAVEN OR OPEN TO DISRUPTION?
MOROCCO
20 REFORM OF LAND LAW SYSTEMS IN MOROCCO
USA
22 RECENT TRENDS IN RESORT MIXED USE DEVELOPMENT
RESIDENTIAL AND PRS—A NEW DESTINATION FOR
INSTITUTIONAL MONEY
THE NETHERLANDS
25 INVESTING IN THE DUTCH HOUSING MARKET
08
18
22
ISSUE 23 • 2016 | 5
SOUTHERN EUROPE—A RETURN TO NORMALITY?
SPAIN
27 SHOPPING MALLS IN SPAIN: THE RETURN OF AN ACTIVE MARKET
CENTRAL AND EASTERN EUROPE—OPPORTUNITIES FOR
BARGAINS?
CEE/ SEE
28 BREAK OUT THE SCHNAPPS AND VODKA: NON-PERFORMING LOANS
IN CEE AND SEE
CZECH REPUBLIC
30 A BREATH OF FRESH AIR FOR CZECH MORTGAGE LAW
POLAND
32 CORPORATE INCOME TAX EXEMPTION FOR FOREIGN INVESTMENT
FUNDS—NEW DEVELOPMENTS
NORTHERN EUROPE AND SCANDINAVIA—SAFE HAVENS
WITH A FUTURE?
DENMARK
34 THE IMPORTANCE OF PENSION FUNDS IN THE DANISH INVESTMENT
MARKET
NORWAY
36 CAN BUYING NORWEGIAN COMMERCIAL PROPERTY TRIGGER
NORWEGIAN FINANCIAL REGULATION?
GERMANY VERSUS UK—WILL SECONDARY LOCATIONS EVER
REALLY MAKE IT?
GERMANY
38 HIDDEN PROSPECTS—INVESTING IN SECONDARY LOCATIONS IN
GERMANY
ISSUE 23, 2016
28
30
36
6 | REAL ESTATE GAZETTE
The security package is the principal instrument by which lenders try to mitigate the risk of default
by borrowers. Typically, when refinancing
the acquisition of a portfolio of assets,
lenders will adopt a global approach
and take full advantage of the security
package by requiring that security
interests be pooled. This is achieved
by each special purpose vehicle (SPV)
granting security interests which secure
not only their own obligations but also
those of the other SPVs of the portfolio,
subject always to rules about corporate
benefit and relevant specific local rules.
However, DLA Piper has seen a move
away from this standard approach in a
recent pan-European refinancing.
In this transaction, our client was
willing to refinance a portfolio of 14
logistics assets located in Belgium, France,
Germany, Portugal, the Netherlands and
Spain indirectly owned by a Luxembourg
holding company, and, during the tender
offer for financing, expressly made the
point to lenders that it was willing to
have absolutely no cross-collateralization
in the portfolio so that it could limit
exposure and, among other factors,
avoid falling within the scope of the
thin capitalization rules. The transaction
was structured on an individualized
approach, with a loan being provided to
the Luxembourg holding company the
proceeds of which were lent by that
holding company to its direct or indirect
subsidiaries (11 refinanced SPVs) through
intragroup loans.
The limitation of the
secured obligations
The absence of cross-collateralization
mainly affected the structuring of
the security package granted by the
refinanced SPVs under the intragroup
loans as well as their direct shareholders.
Our client’s goal was achieved by limiting
the secured obligations covering the
sureties granted by the refinanced SPVs
(whether directly to the lenders or to
the Luxembourg company which in turn
assigned them to lenders) and their
shareholders.
In order to achieve this limitation, two
main categories of secured obligations
were distinguished: the global secured
obligations and the unitary secured
obligations. The task was made easier by
the fact that the main loan was granted
at the holding company level. Therefore,
it made sense that the security interests
granted by the holding company secured
the global obligations whereas those
provided by a refinanced SPV, and as the
case may be, by its shareholders, only
covered the unitary secured obligations
relating to the relevant property held by
the SPV, or as the case may be by one
or several SPVs directly owned by the
shareholder.
The definition of the unitary secured
obligations was also designed to offset
the lack of cross-collateralization.
The same terms which would usually
apply to limit the extent of the cross-
collateralization were included to provide
that the unitary secured obligations
were limited to an amount not greater
than the amount of the intragroup loan
granted to a refinanced SPV and reduced
by the amount of each repayment made,
whether voluntary or mandatory.
Inevitable global assessment
and provision of a limited
event of default
When negotiating events leading to
default and cases of mandatory repayment
of the main loan, the concern was to
exclude the possibility that an event
affecting a single property would lead to
the obligation to repay the entire loan.
This was important in order to avoid a
domino effect, with each intragroup loan
providing for a specific event of default in
ALTERNATIVE LENDING—ROOM FOR GROWTH? | INTERNATIONAL
the event of an acceleration or mandatory
repayment of the main loan in full.
The approach perhaps reached its limits
while discussing the case of an event
of default affecting several properties
at the same time. On the one hand, it
is difficult to argue that the occurrence
of such an event should not be tackled
at the portfolio level. On the other
INTERNATIONAL REAL
ESTATE FINANCE: AVOIDING
CROSS-COLLATERALIZATION
BY TAKING AN
INDIVIDUALIZED APPROACH
RITA JACQUES, PARIS
ISSUE 23 • 2016 | 7
ALTERNATIVE LENDING—ROOM FOR GROWTH? | INTERNATIONAL
hand, it was not in the interest of the
borrower to allow the entire transaction
to be put at risk every time that more
than one property was affected. The
solution adopted was to introduce a
materiality threshold through a specific
event of default. Under this threshold
(cumulatively, one third of properties, one
third of the main loan and one third of
the outstanding amount of the intragroup
loans), an event affecting the relevant
properties would be considered a limited
event of default. It was agreed that the
occurrence of such an event, and receipt
of a notice of limited default sent by the
agent, would only require the borrower
to make early repayment of the
outstanding amount up to the allocated
amount relating to each property to
which the notice related.
However, should the main borrower
breach its early repayment obligation; the
event would be considered an ordinary
event of default. Likewise, if the threshold
of one third was exceeded, an event
affecting the relevant properties would
be considered an ordinary event of
default leading to repayment of the main
loan and as a result to repayment of the
intragroup loans.
The impact on the
subordination
The individualized approach was taken
to its logical conclusion by the provision
for early termination of the subordination
agreement, under which the
subordination period was to end when
all sums due were repaid to the lenders.
However, specific terms were inserted
to provide that the subordination period
would end when the unitary secured
obligations relating to a relevant property
were finally reduced to zero.
On this date, the subordinated debt
ceases and therefore, the relevant
refinanced SPV, its shareholders and
creditors (parties to the agreement as
subordinated lenders) are no longer
affected by the subordination. Once the
relevant debts are repaid, they no longer
fall within the scope of the subordination
and are entitled to pay the former
subordinated debt or be repaid, as the
case may be.
It is submitted that the approach taken
in this case, while certainly placing more
risk on the lenders, is likely to be used
more often in the context of a borrower-
friendly market but such agreements
must be very carefully worded in order
to prevent cross-collateralization being
reintroduced through the back door.
“An individualized approach is
likely to be used more often in
the context of a borrower-friendly
market ”
8 | REAL ESTATE GAZETTE
IntroductionThe final reports on the G20/OECD Base Erosion and Profit Shifting project (BEPS) were
issued on 5 October (referred to in this
article as “the Reports”) after a two-year
consultation period during which 62
countries and many other stakeholders
(such as the World Bank, the IMF and
many trade associations) participated.
The Reports represent a multilateral
approach to common issues of concern
in international taxation law and practice.
They offer countries recommended tax
measures to implement under domestic
law so as to create a more uniform
approach to these issues of concern.
Widespread implementation
in domestic law of the Reports’
recommendations has not yet begun,
but the situation is in flux and tax
developments are moving swiftly. Some
countries have acted unilaterally and
adopted BEPS-like proposals already,
such as the UK’s “diverted profits tax”
(effective 1 April 2015), while the
European Union has introduced a “main
purpose” test and an anti-hybrid element
into its Parent/Subsidiary Directive.
This article explores the principal
features of those Reports which impact
on real estate funds and offers sponsors
recommendations for action.
Real estate investment funds take
differing forms because of the variety
in underlying assets (direct interests in
property, mortgages, development land
or buildings as against infrastructure
or renewable energy, equity in a real
estate business) and in the investor base
(individual, pension fund, corporate,
charitable endowment, insurance
company, sovereign—whether resident
or non-resident, taxable or tax-exempt).
Most funds seek simply to avoid adding
tax costs to the taxes that would be paid
by fund investors if they had invested
directly rather than via the fund; and
indeed the stated purpose of REITs is to
offer investors in a widely held vehicle
similar tax results to those achieved by a
BEPS AND
REAL ESTATE
INVESTMENT
FUNDS: WHAT ARE
SPONSORS TO DO?
THOMAS DICK, LONDON
ALTERNATIVE LENDING—ROOM FOR GROWTH? | INTERNATIONAL
ISSUE 23 • 2016 | 9
limited number of investors participating
in a special purpose partnership. Many
countries accept this “neutrality principle”
that funds should not give rise to a
materially worse tax result for investors,
compared with their direct investment in
the underlying asset. Because much fund
investment is directed at countries which
are politically and legally stable, it can be
expected that a positive amount of taxes
will generally be paid on a cumulative
basis; in short, real estate funds do not
operate as tax havens for their investors.
The three Reports which are most likely
to affect the real estate fund industry
are: “Preventing the Granting of Treaty
Benefits in Inappropriate Circumstances”
(Action 6); “Neutralising the Effects of
Hybrid Mismatch Arrangements” (Action
2); and “Limiting Base Erosion Involving
Interest Deductions and Other Financial
Payments” (Action 4).
Action 6 tax treaties
Regarding double tax treaties, many funds
establish the fund vehicle in a country
where it can benefit from a treaty with
the country of operation (source) so that
the investment’s profits or the return
on debt is paid without source country
withholding tax. The Action 6 Report
demands that such a vehicle’s entitlement
to treaty benefits depends on its
satisfying certain minimum factors, such as
being publicly listed or demonstrating that
a proportion of its owners reside in the
vehicle’s home state under the “limitation
on benefits” rule; or alternatively on its
establishing bona fides under a “principle
purpose test”.
This Report, however, agrees with
source countries granting treaty
benefits to certain “mainstream” funds
irrespective of their listing or residence
of their ultimate owners. Thus, if funds
are “widely held, hold a diversified
portfolio of securities and are subject
to investor-protection regulation in the
country in which they are established”
(CIV Funds), they are entitled to treaty
benefits in their own name. This category
10 | REAL ESTATE GAZETTE
ALTERNATIVE LENDING—ROOM FOR GROWTH? | INTERNATIONAL
is considered to include UCITS funds and
diversified/widely held “funds of funds”.
Other funds, such as most private
equity, hedge funds, real estate and
infrastructure funds, and mortgage CLOs/
securitizations will need to satisfy the
new treaty limitations described above,
on the theory that these non-CIVs are
often used by investors specifically to
obtain treaty benefits that would not be
available in a direct investment. This may
cause material difficulties for many funds,
particularly of smaller size. The Report
does acknowledge that, if a non-CIV Fund
is considered fiscally transparent by the
source country, treaty benefits will often
be granted to those investors who qualify
in their own right and provide sufficient
documentation.
Action 2 hybrid mismatches
as to payment made to
related persons
Regarding hybrid mismatches, some
sponsors introduce debt instruments
into the capital structure of fund vehicles
or SPVs which have a different tax
character in the hands of the holder(s).
This is often done to mitigate entity
level taxation (by means of an interest
deduction), combined with a deferral or
exemption of income in the hands of the
holder(s). An example is the issuance by
a Luxembourg company of “participating
equity certificates” (PECs) to related
US investors, which are treated as debt
by the Luxembourg company (whose
interest expense is deductible on accrual)
and preferred equity by the investors
(who are taxable generally only upon
receipt of payment).
The Action 2 Report encourages
countries to counteract this mismatch
on hybrid securities held by related
persons by denying the party making the
payment a deduction for interest. If that
does not happen, the payee jurisdiction is
encouraged to force holders to take the
income into account currently.
REITs and other entities which provide
for a deduction for dividend payments
are not considered as generating hybrid
payments for the purposes of these rules,
and highly leveraged investment vehicles
that are “subject to special regulation
and tax treatment under the laws of the
establishment jurisdiction” fall outside
their scope in certain circumstances (ie
when the investors can be expected to
take the yield into account currently).
Action 4 interest deductions
The core recommendation of the Report
on interest deductions is to limit the
deduction of net interest expense by a
member of a multinational group (payable
to any party) to a fixed percentage of
that member’s EBITDA, within a range of
10–30 per cent. If the group of which the
entity is a member has a higher ratio of
net interest/EBITDA on its debt owed to
third parties, the entity may deduct its net
interest expense up to this higher ratio. To
address earnings volatility, the Report offers
the option of carrying forward or back
disallowed interest (or interest capacity).
While Germany and the United States
have already implemented EBITDA-based
limitations, other jurisdictions such as
the UK, Ireland, Luxembourg and the
Netherlands would undergo a significant
transition damaging to their real estate
investment industry were they to adopt
the Action 4 Report’s recommendations.
If implemented, these proposals
would be critical for real estate and
ISSUE 23 • 2016 | 11
“Sponsors should continue to form
funds in the most tax-efficient way
under the current laws and treaties
”
ALTERNATIVE LENDING—ROOM FOR GROWTH? | INTERNATIONAL
infrastructure funds seeking to deduct
interest expense on related-party debt
(such as shareholder loans), and also for
traditional leveraged buyout funds used
to acquire real estate businesses.
Other Reports
Because of the frequency of payments
to related (and often non-resident)
parties in the fund management
industry, the Report on transfer pricing
documentation and reporting (Action
13) is highly relevant to sponsors.
Preferential regimes or vehicles relating
to real estate were not considered in
connection with the investigation into
harmful tax practices (Action 5).
Recommendations for action
The real estate investment fund industry
would be turned on its head if all the
jurisdictions which favour it (eg the
Netherlands, Luxembourg, Ireland, Jersey)
were immediately to adopt all of the
recommendations described above. Many
of these jurisdictions are likely to defer
implementing, or not implement, some
of these recommendations. However,
sponsors will need to approach this new
environment with care.
It is advisable for sponsors to continue
to form funds in the most tax-efficient
way under the current laws and treaties.
Jurisdictions that hitherto have been
hospitable to fund formation are unlikely
to be early adopters, and it is better to
form a fund knowing it may need to be
amended, that not to form one at all.
However, the sponsor should ensure
that the fund documentation gives it
maximum discretion to restructure
the fund in the event of changes to
the laws or treaty provisions governing
the material elements underlying the
intended tax results. While investors
may not enjoy participating in a
restructuring of an investment vehicle,
or possibly even the redemption of their
ownership interests, they may prefer
that possibility to the risk of owning an
illiquid investment in a fund suffering
unanticipated taxes.
Second, a sponsor must understand
thoroughly the technical underpinnings
of its fund’s tax planning so that it can
decide quickly in response to a tax law
or treaty change whether the fund needs
to be restructured, and if so, whether in
whole or part. Appropriate tax advice is
required. Such a tax report will highlight
those elements of a fund structure which
are vulnerable under BEPS, but should
also concentrate thinking about standard
structural elements and any alternatives
that may be available.
Lastly, sponsors need either to
commission a tax advisor to maintain a
watching brief on changes to the tax laws
and treaties of the relevant jurisdiction(s),
or do so themselves.
Conclusion
Sponsors and their advisors cannot
ignore the influence of BEPS, but real
estate funds must be formed while we
await the reactions of countries to the
BEPS recommendations. Continuity,
with flexibility, combined with a
thorough understanding of the technical
underpinnings of each element of the
tax planning is required; as well as the
maintenance of a watching brief on
changes to tax laws and treaties relevant
to the structure.
12 | REAL ESTATE GAZETTE
IntroductionThe Islamic finance industry is currently estimated to have assets of around US$ 2 trillion. For many
years, Islamic finance has relied heavily
upon real estate as an investable, tangible
asset class on which to base its financial
structures. This began in the residential
housing sector, but quickly moved into
commercial real estate with this sector
now a key focus for Islamic investors
across the world.
Commercial real estate has been
a major target for Islamic funds and
investors due to the existence of rental
guarantees, steady demand and increasing
rental returns. Further developments
may be seen in this sector due to a
broadening view of social infrastructure
to include healthcare, education and
social housing.
There is a natural match between the
Islamic finance model and the acquisition
and development of real estate assets
and this provides a flexible tool which
can be used for a wide range of real
estate financings. This ranges from
residential mortgages to large scale
financings of prime London real estate
such as the acquisition of Chelsea
Barracks, the construction of The Shard
and the redevelopment of Battersea
Power Station to student housing and
logistics across the UK (and into Europe).
Islamic investors have customarily
preferred investing in prime real estate
in the UK and Europe. In view of the
uncertainty which continues to stalk
some Western markets, there have
been increasing capital flows from these
investors. This has created an ideal
opportunity for Islamic finance to provide
a viable alternative to conventional debt
funding, which can be adapted to suit
the size and tenor of the financing, to fit
within local tax laws and which may even
be used alongside conventional finance.
Shari’a-compliant real estate
funds
Currently, there is no uniform approach
to the structuring of Shari’a-compliant
funds. It will depend on the identity of
the Islamic investors and how strict/
conservative they are in terms of their
Shari’a requirements. The tax efficiency
of a real estate fund structuring will also
influence the structure very heavily. Some
of the areas that tend to distinguish a
Shari’a-compliant real estate fund from a
conventional one include:
• The underlying investment (ie the
properties) must be used for Shari’a-
compliant purposes. This means
that any real estate where haraam
(prohibited) activities are carried out
would need to be avoided (casinos,
sales of pork and alcohol are obvious
ones, but conventional banking,
insurance, defence and weaponry
are also prohibited). However, if the
portion of haraam income is sufficiently
nominal (often 5 per cent or less) and
is segregated or purified in some way,
then it is sometimes possible for an
investment to be made.
• In general terms, all Islamic investors
into the fund would have to be
treated equally. This means that any
losses should be borne equally (and
preference shares can therefore be
problematic).
• If the fund is leveraged, some Islamic
investors will insist that such leverage
also needs to be Shari’a-compliant.
The availability of such Islamic
financing, Islamic swap products and/
or tax or regulatory constraints in the
conventional markets can present a
few challenges here.
• However, Islamic funds which use
conventional loans to leverage
ALTERNATIVE LENDING—ROOM FOR GROWTH? | MIDDLE EAST
ISLAMIC FINANCE AND
REAL ESTATE: THE PERFECT
MATCH
MUSHFIQUE KHAN, DUBAI
ISSUE 23 • 2016 | 13
acquisitions have been able to make
the Islamic investors comfortable that
such leverage does not directly affect
the returns on the Islamic part of the
investment structure. In this context,
it has been possible to use an ijara
(leasing) structure in order to provide
the requisite levels of segregation from
the returns to the Islamic investors.
• The fund will often have its own
Shari’a supervisory board that
provides independent supervision of
the fund and its investment activities.
Relevant Islamic financing
techniques
Commodity Murabaha
This structure enables Shari’a-compliant
funding for customers who require a cash
sum to be advanced to them.
In general terms, the financier (typically
a bank), either directly or indirectly
purchases an asset at market value
(for spot delivery and spot payment)
and then immediately sells that asset
at an agreed mark-up sale price to the
customer for spot delivery but on a
deferred payment basis with an agreed
profit element (often calculated using
LIBOR as a benchmark). The customer
then immediately on-sells that asset
at market value to a third party for
spot delivery and spot payment so as
to obtain the cash proceeds (ie the
funding it requires). The end result of
this arrangement is that the customer
receives a cash amount and has a
deferred payment obligation to the
financier for the marked-up sale price.
The concept of “rolling” commodity
murabaha trades has also been
developed in recent years as financiers
have sought to structure Islamic facilities
in a way that replicates the economics of
conventional term and revolving facilities.
Ijara
The ijara contract is Islamic financing’s
equivalent of leasing and is often
described as a hybrid between an
operating lease and a finance lease. In
general terms, the financier (typically a
bank) will act as lessor and the customer
(ie the borrower) will act as lessee.
As with murabaha financings, rental
payments under an ijara will typically
reflect an agreed profit element (again,
often calculated using LIBOR as a
benchmark) and, as such, comparisons
with rentals payable under a conventional
finance lease can readily be made.
Unlike a conventional finance lease,
the obligation to insure and undertake
any major maintenance in respect of
the leased asset remains with the lessor
(as owner) as does the responsibility
for settling any ownership-related
taxes. However, the lessor will typically
appoint the lessee as its service agent
and, pursuant to that appointment
(documented outside of the ijara
contract), require that service agent to
take responsibility for discharging all of
those obligations.
In the context of Islamic fund or
investment structures, the ijara contract
can also sometimes be used to create
a segregated structure that allows
conventional loans to be used to leverage
acquisitions without affecting the returns on
the Islamic part of the investment structure.
Conclusion
Year by year, Islamic finance is expanding
and developing into an important sector
of the wider global economy. Though
it is still modest in size, nevertheless
it is a sector which cannot be ignored
by financial institutions. As the world’s
Muslim population expands, the demand
for Shari’a-compliant products will grow
and the sector looks set to thrive and
prosper well into the twenty-first century.
“As the world’s Muslim population
expands, the demand for Shari’a-
compliant products will grow ”
ALTERNATIVE LENDING—ROOM FOR GROWTH? | MIDDLE EAST
14 | REAL ESTATE GAZETTE
VAT AND THE MANAGEMENT
OF EUROPEAN REAL ESTATE
INVESTMENT FUNDS
DAAN ARENDS AND WOUTER KOLKMAN, AMSTERDAM
IntroductionIn a recent judgment, the Court of Justice of the European Union (CJEU) ruled that real estate
investment funds can qualify as “special
investment funds” for the application of
the VAT exemption for management of
such funds. However, the CJEU went on
to confirm that the actual management
of properties cannot benefit from the
VAT exemption. This article discusses the
judgment and assesses its impact.
Background of the case
The fund management company in this
case provided several Dutch real estate
investment funds with the following
services:
a. acting as managing director of the funds;
b. carrying our statutory and
administrative (executive) tasks;
c. property management (ie, handling
day-to-day matters);
d. carrying out the financial reporting,
data processing and internal audit;
e. asset management (ie, acquisition and
sale of real estate); and
f. acquisition of shareholders or
certificate holders.
The management company did not
account for VAT on the fees charged,
taking the view that the provided services
were VAT exempt under the exemption
applicable to “the management of
special investment funds”. The Dutch tax
authorities did not agree and argued that
the VAT exemption only applied to the
services e. and f.
The Dutch Supreme Court referred
to the CJEU the question of whether a
company that has been set up by more
than one investor (pension funds in this
case) for the sole purpose of investing
in real estate can qualify as a “special
investment fund” within the meaning of
the VAT exemption. Furthermore, the
Supreme Court questioned whether the
property management itself qualifies as
“management” of a special investment fund.
Real estate investment
funds may qualify as special
investment funds
The CJEU ruled that the nature of the
investments held by an investment fund
(ie, financial assets or real estate assets)
is not relevant for the classification of the
fund. A real estate investment fund can
therefore qualify as a “special investment
fund” within the meaning of the VAT
exemption, provided two conditions
are met: (i) the real estate investment
fund must be subject to specific state
supervision in its Member State, and (ii)
it must display characteristics identical to
collective investment undertakings within
the meaning of the UCITS Directive and
thus carry out the same transactions
or, at least, display features that are
sufficiently comparable for them to be in
competition with such undertakings.
Under the second condition, an
investment fund is deemed comparable
to collective investment undertakings if
several investors purchase participation
rights in the fund; if the return on
the investments depends on the
performance of the investments made by
the fund’s managers over the period for
which those investors hold those rights;
and if the investors are entitled to profits
or bear the risk connected with the
management of the fund.
Actual management of
properties cannot benefit
from VAT exemption
According to the CJEU, the “management
of special investment funds” involves
the selection and the disposal of the
managed real estate as well as the related
administration and accounting tasks.
The actual management of properties,
however, is not deemed specific to the
management of a special investment fund
in that it goes beyond the various activities
connected with the collective investment
of capital raised. The CJEU concluded
that insofar as the actual management of
real estate is intended to preserve and
build up the assets invested, its objective
is not specific to the activity of a special
investment fund but is inherent in any
type of investment. Therefore, property
management of real estate cannot benefit
from the VAT exemption.
Impact of the ruling
The CJEU ruled that real estate
investment funds may qualify, subject to
certain conditions, as special investment
funds for the purposes of the VAT
exemption for management of such
funds. Real estate investment funds
in certain countries may have already
qualified under national law as special
ALTERNATIVE LENDING—ROOM FOR GROWTH? | THE NETHERLANDS
ISSUE 23 • 2016 | 15
investment funds. As specific state
supervision must now be considered
a clear condition for the application of
the VAT exemption, these funds may
lose this classification as a result of this
ruling. Since there are discrepancies in
national VAT regimes throughout the
EU, it is important to verify the VAT
consequences in each jurisdiction.
Furthermore, the CJEU ruled that a
broad range of management services
relating to real estate investment funds
can benefit from the VAT exemption.
The “actual management” of properties
however, is not covered by this
exemption. As the CJEU did not provide
a clear definition of “actual management”,
discussions with the relevant tax
authorities may be anticipated. In this
regard, it should be noted that on 1
January 2017, new VAT rules on the
place of supply of real estate services will
come into effect. These rules embody
the principles of CJEU case law but the
new legislation provides more detailed
definitions of real estate and some clarity
on the distinction between “services
connected with immovable property”
and other services.
In the light of this case, all parties
concerned, funds as well as their
managers, are advised to reconsider
the VAT implications of their activities.
Fund arrangements and management
agreements should be reviewed to
determine the correct VAT treatment,
both retrospective and current.
16 | REAL ESTATE GAZETTE
REAL ESTATE FOR
LOGISTICS—THE CASE FOR
PORTUGAL
LUIS FILIPE CARVALHO AND TÂNIA GOMES, ABBC LAW FIRM, LISBON
Over the last year, the Portuguese real estate market, especially in Lisbon and Oporto,
has experienced a growth driven not
only by national investors looking
for opportunities, but also by foreign
investors. Seeking alternative markets for
their investments, important international
players have recently turned their
attention to Portugal, looking for less
obvious opportunities, beyond office
and residential properties, and focusing
on the logistics sector. To take just one
example, one of the major real estate
players, both in Europe and the United
States, has just acquired a portfolio of
logistics assets in Portugal which will
become part of its European logistics
platform, playing a significant role in its
strategy and business plan.
However, the exceptional growth of the
logistics sector in Portugal is due not only
to the significant number of real estate
transactions which were undertaken by
important international players between
2014 and 2015, but also because the
logistics market itself increased by 5.3 per
cent in 2015 alone, and is now valued
at €500 million. These figures propelled
Portugal to the 29th position on the
World Bank’s Logistics Performance
Index (LPI) in 2014.
Statistics aside, the law has also
LOGISTICS—CREATING A EUROPEAN PLATFORM | PORTUGAL
ISSUE 23 • 2016 | 17
LOGISTICS—CREATING A EUROPEAN PLATFORM | PORTUGAL
“
The Government
wanted to
position Portugal
as the main
gateway for the
international
movement of
goods in the
Iberian and
European markets
”
been playing an important role in
the promotion of this sector. Until
2006, there was very little regulation
in this area, causing the logistics real
estate market to become somewhat
fragmented and lacking consistency in
terms of specific rules and regulations.
As a consequence, private operators
providing services in logistics and
transportation developed their own
premises, creating land transport chains
which typically comprised warehouses
distributed in different regions of the
country (mainly in the suburbs). Such
operators took advantage of the fact
that these locations were not subject
to any national regulation and could
therefore be developed in accordance
with the market’s needs. Thus, the choice
of location could also be driven by costs
(eg property costs and taxes) with no
regard for long-term investment criteria
such as proximity to ports, airports and
rail stations. As a result of this flexibility
and lack of specific regulation, major
international operators also started
to build their own infrastructure and
developed logistics facilities tailored to
their individual needs.
However, in 2006 the Portuguese
Government launched the “Portugal
Logístico” Program, a plan to develop and
restructure the logistics infrastructure in
Portuguese ports through the creation
of logistics platforms. This project aimed
to regulate the structure of logistics
and distribution of goods, implementing
a network of 11 logistics platforms,
complemented by two air cargo facilities.
These were to be located near the most
important points of production, ports
and airports, taking into consideration
too national borders and the existing
transport infrastructure. The Government
wanted to position Portugal as the main
gateway for the international movement
of goods in the Iberian and European
markets, stressing the potential offered
by its privileged geographical position
in relation to intercontinental maritime
freight routes.
Following this trend, in 2008 the
Portuguese Government enacted
Decree-law 152/2008, of 5 August, setting
out the National Network of Logistic
Platforms (“Rede Nacional de Plataformas
Logísticas” (NNLP)). This network is
essentially based on partnerships with the
private sector to develop, together with
national or local authorities, sustainable
and efficient logistics platforms, integrated
in the NNLP. These platforms may be
created on private or public property
and can be managed by a private or
public entity. The Decree provides for
various ways in which the acquisition of
logistics platforms may be structured.
Although the “Portugal Logístico”
Program was not fully implemented
and the results were not as expected,
mostly due to the financial crisis, it has
introduced a new model into the logistics
real estate market, which will ultimately
lead to a much more organized (and
demanding) type of user/owner. As a
consequence, private operators have
developed more efficient logistics parks,
either directly managed or via third
parties, focusing on strategic locations,
with the sole purpose of selling, renting
or transferring the right to use a property
located in a logistics park.
It has also contributed to the creation
of a new type of agreement, as an
alternative to the non-residential
lease regime, commonly known as an
“agreement for the use of space in a
logistics park”. These agreements may
govern not only the logistics platforms
developed under the “Portugal Logístico”
program but also other types of logistics
premises. As well as the right to use
the premises, the agreements also
cover other associated rights, such as
common services and facilities, including
maintenance, cleaning and safety services.
Use of such an agreement may be a way
for the owner or the manager of the
logistics parks to avoid the application
of the non-residential lease regime set
out in the Portuguese Civil Code. This is
attractive because although the non-
residential lease regime is more flexible
than it was, there are several rules that
cannot be waived by parties, such as the
rules regarding eviction, and preemption
rights, amongst others, which may not sit
well with the practicalities of the market.
In summary, Portugal may be considered
to be an important and strategic country
in which to invest, particularly the logistics
sector which is, to a certain extent,
greenfield. The sector is growing, and
there is still plenty of growth to come.
Note: Logistics and related real estate
matters were examined in detail in Issue
17 of the Gazette.
ABBC law firm is DLA Piper’s focus firm
in Portugal.
18 | REAL ESTATE GAZETTE
Like afternoon tea, cricket and other great British institutions, the real estate law of England and Wales can be a bit of a
mystery for those who are not familiar
with it. This article considers three areas of
the real estate law of England and Wales
that can give rise to significant problems if
parties are not aware of the risks.
Pre-contract negotiations
Many jurisdictions require parties to
act in good faith in their dealings with
other parties. Unless the parties agree
otherwise, there is no duty to act in good
faith in England and Wales. Therefore,
parties are free to negotiate and behave
according to their own self-interest.
In the case of real estate contracts,
this freedom is supported by section 2
of the Law of Property (Miscellaneous
Provisions) Act 1989, which stipulates
that a contract for a real estate
transaction must (a) be in writing, (b)
incorporate all of the terms of the
agreement between the parties and (c)
be signed by the parties. Until the parties
have entered into a contract that meets
those requirements, they are usually
free to withdraw at any stage. Letters of
intention to enter an agreement (also
known as “heads of terms”) should
be endorsed with the words “subject
to contract” to indicate that a formal
contract has not yet been created.
The unexpected consequences of
section 2 were illustrated in the case of
Dudley Muslim Association Limited v Dudley
Metropolitan Borough Council [2015]
EWCA Civ 1123. The parties wished
to vary an existing section 2-compliant
contract and the High Court decided
that a failure to ensure that the agreed
variation also complied with section 2
meant that the agreed variation was not
binding on the parties.
Security of tenure for
business tenants
The Landlord and Tenant Act 1954
provides security of tenure for tenants who
occupy premises for business purposes. In
any commercial letting scenario in England
and Wales, parties should take care to
properly understand the effect the 1954
Act may have on their ability to either stay
at the premises or take back the premises,
as the case may be.
Security of tenure under the 1954 Act
is a very powerful and valuable right for
tenants. The main consequences are:
• Tenants can acquire security of tenure
without a written lease because
the right derives from the tenant’s
occupation of the premises. This is
a serious risk where the basis of a
BEN BARRISON, LONDON
SEEING AND
MANAGING RISKS
IN UK LEASES
ISSUE 23 • 2016 | 19
tenant’s occupancy is not validated
and they are permitted to occupy
premises for an extended period.
• Unless the statutory requirements
to either renew or terminate the
tenancy are followed, or the tenancy
is terminated by forfeiture, a break
option or an agreed surrender, the
tenancy continues on the same
terms after the contractual expiry
date provided the tenant remains in
occupation of the premises.
• If the landlord wishes to terminate
the tenancy pursuant to the 1954 Act,
it can only do so if it meets one or
more of the seven statutory grounds
stipulated by the 1954 Act:
(a) disrepair—breach of tenant’s
obligations;
(b) persistent delay by the tenant in
paying rent;
(c) other substantial breaches of the
lease by the tenant;
(d) alternative accommodation can be
provided for the tenant;
(e) possession required for letting or
disposal of the property as a whole;
(f) demolition or reconstruction of the
premises;
(g) landlord’s own occupation of the
premises.
• If the parties are not able to agree
the terms upon which the tenancy
will be renewed or terminated,
either party can apply to the court
for a determination of the terms of
the new tenancy or the landlord’s
ground(s) for termination.
• If the court is called upon to
determine the terms of the new
tenancy, it will do so according to its
statutory powers which provide for
a maximum term of 15 years and
an open market rent. Those powers
provide the basis upon which any
negotiations as to renewal terms will
proceed.
• If court processes are engaged, it will
usually take between nine and 12
months to reach the trial at which the
terms are determined or the tenancy
is terminated.
Parties can “contract out” of the security
of tenure provisions of the 1954 Act by
following statutory notice and declaration
processes. The effect of contracting out
is that the tenant will not have security
of tenure and the lease will terminate
on its contractual expiry date. This is an
important consideration for any landlord
that may wish to take back the premises
at a later date, let them to another tenant
or negotiate renewal terms with the
existing tenant in the open market.
The benefits to the landlord of
contracting out were demonstrated in
the case of Erimus Housing Limited v
Barclays Wealth Trustees (Jersey) Limited
& Anr [2014] EWCA Civ 303. The
Court of Appeal decided that when a
tenant remained in occupation of the
premises even after the expiry of its
contracted out lease while the parties
were negotiating a new lease, the tenant
occupied the premises as a “tenant
at will” rather than as a true tenant
even if the negotiations were slow and
protracted over a period of year. Tenants
at will are expressly excluded from 1954
Act protection, and the tenant in this
case did not have security of tenure.
Tenant break options in
leases
Many leases contain provisions by which
the tenant can terminate the lease on
non-fault grounds. These provisions
are often referred to as break options
and commonly require parties to meet
certain conditions precedent otherwise
the break option will not operate and the
lease will continue.
Common conditions precedent include:
• service of a notice at the time and in
the form required by the lease;
• paying sums such as rent falling due
before the break date;
• complying with the tenant covenants;
and
• delivering vacant possession of the
premises on the break date.
Problems that have been litigated in
recent years include:
• Form and timing of the notice—
serving the notice on the wrong
person, serving the right person but at
the wrong address and miscalculating
the break date.
• Payments—apportioning rent up
to the break date and failing to pay
interest which has become due on
historic late payments of rent even if
not demanded.
• Complying with the tenant’s
covenants—misunderstanding
pre-conditions requiring “material”
or “substantial” or “reasonable”
compliance, failing to follow the
absolute requirements for decoration
and leaving it too late to reinstate
alterations.
• Delivering vacant possession on
the break date—sub-contractors
completing last minute works beyond
the break date and leaving office
furniture behind.
In many cases, the problems that can
arise when a break option is being
operated can be eliminated or, at least,
made less significant by looking very
carefully at the terms of the break option
when it is being negotiated in heads of
terms and/or the lease. For example:
• The term “vacant possession” is
commonly seen in break options
but it has no defined legal meaning
and will mean different things in
different circumstances. Therefore,
parties should clearly set out in the
lease either what is meant by “vacant
possession” or simply state that the
tenant will have ceased to occupy the
premises and will have determined
any interest deriving out of this lease
by the break date.
• In English leases rent is conventionally
payable in instalments four times a year.
Each payment of rent is intended to
relate to the three months following the
date for payment. Perhaps surprisingly, if
the date on which a break option takes
effect is part way through one of those
three-month periods, the tenant must still
pay a full three months’ rent in advance
and is not automatically entitled to any
refund for the period following the break
date. The parties may however agree
to include an express term in the lease
providing for such a refund. Commonly,
additional capital payments over and
above the rent due must be made by
tenants to exercise a break right. In all
such cases, the parties should seek to
eliminate any uncertainty as to what has
to be paid and by when. If the intention
is that the rent for the full rent period
is to be paid but that the tenant will be
entitled to recover any “overpayment” of
rent for the period after the break date,
if the break option operates successfully,
the lease should include provisions
entitling the tenant to do so. This will
ensure the tenant knows it has to pay
the full rent but that it can recover the
overpayment. In addition, the parties
should stipulate precisely what payments
are required—all sums under the lease
or just the principal rent?
In 2015 the UK’s Supreme Court
unanimously dismissed an appeal by
a tenant who contended that a term
should be implied into its lease by which
the tenant would be entitled to recoup
overpaid sums after exercising its break
option. The decision reinforces best
practice: If parties want to be able to
claim back overpaid sums, then they
should ensure the lease includes express
apportionment or recoup provisions that
entitle them to do so (Marks and Spencer
Plc v BNP Paribas Securities Services Trust
Company (Jersey) Limited and another
[2015] UKSC 72).
OFFICES—DEVELOPING REAL ESTATE FOR MODERN END USERS | UK
20 | REAL ESTATE GAZETTE
Morocco is an increasingly favoured target for international investors looking to diversify real
estate investment opportunities. In 2014,
the real estate sector represented 38.6 per
cent of foreign international investment
compared to 14 per cent in 2013.
A series of reforms to provide safer
and simpler real estate transactions
is currently being introduced by the
Moroccan authorities in response to
persistent criticism from international
investors. The National Land Law Policy
Conferences held on 8 and 9 December
2015 in the resort town of Skhirat
enabled them (with the assistance of
legal professionals, developers and
property investors) to debate over 50
recommendations in several different
areas: legislation, legal protection, the
management and governance of state
land, town-planning and development
plans. The challenge they face is to
produce a clearer legislative framework
by overhauling Moroccan land law.
The variety of land law
regimes
The complexity of the land law system
in Morocco is a result of various factors,
principally the variety of legal regimes
governing land: “public” land (Habous
or Guich) co-exists alongside melks
and land privately owned by the state,
whose characteristics are very different.
For example, certain properties are
inalienable or can only be transferred
subject to certain conditions, while other
properties require state permission in
order to be transferred or, where the
proposed purchaser of agricultural land
is foreign, a certificate of non-agricultural
purpose must be obtained.
Registered and unregistered
property
The complexity of the land law system
in Morocco is also a result of the co-
existence of registered and unregistered
property. Lack of registration affects quite
a significant proportion of properties in
urban areas (mainly the medina historic
towns) and properties in rural areas.
Registration procedures do exist but they
are lengthy and complex.
Under the “traditional” system, based
on local customs, title to unregistered
property is based on (i) peaceful
possession and (ii) uninterrupted
common knowledge for a period of
10 years (vis-à-vis third parties) or 40
years (vis-à-vis family members). Title
to unregistered property is proved by
presentation of a moulkiya, namely an
official document by which 12 witnesses
confirm before two Adouls (Shari’a law
notaries) that the person claiming title
to the property has lawful possession.
Obtaining these declarations can be a
painful process.
Transfer of title is another way of
obtaining ownership. It presupposes
however that the property in question
is alienable, yet certain land (by virtue of
its legal nature) is inalienable or can only
be transferred on certain conditions. In
practice, therefore, it is advisable to carry
out full due diligence on the legal nature of
the land before purchasing and to conduct
a prior check of the administrative/town
planning consents required to carry out
the proposed transfer.
The transfer of title to unregistered
property occurs at the moment when
both parties wish to be bound (Articles
488 and 489 of the Obligations and
Contracts Dahir/Decree), although title
will not be enforceable against third
parties until it is registered with the
Registration and Stamp Duty Authority.
It is mandatory that any transaction
relating to rights in rem over unregistered
property be established by means of
an official document drafted either by
Adouls, notaries or (since the passing
of Act No. 39-08) lawyers who are
registered with the Court of Cassation.
While unregistered property has several
drawbacks for real estate investors due to
unreliable proof of ownership, the lack of
precise identification and the uncertainty
regarding which regime applies, many
properties in Morocco, particularly in out-
of-town areas, are registered.
A property is considered registered
when the registration/publication
process has been followed through and
benefits from the probative effect of
REFORM OF LAND LAW
SYSTEMS IN MOROCCO
MYRIAM MEJDOUBI, PARIS AND CHRISTOPHE BACHELET,
CASABLANCA
HOTELS—A SAFE HAVEN OR OPEN TO DISRUPTION? | MOROCCO
ISSUE 23 • 2016 | 21
being recorded in the land register. Title
to registered property passes when it is
recorded in the land register.
The registration of land covered by any
of the regimes remains a priority for the
Moroccan State.
Sales of uncompleted
properties
Whilst the acquisition of registered
and unregistered property remains a
significant way of transferring land, buying
uncompleted properties off-plan (a
method which is gearing up for a major
new reform) has also been very popular
with investors.
The sale of an uncompleted property
(vente en état futur d’achèvement)
is defined in Article 618-1 of the
Obligations and Contracts Dahir as any
contract by which a vendor agrees to
build a property within a set timeframe
and the purchaser agrees to pay the
purchase price for it as work proceeds.
In principle, a preliminary contract can
only be entered into on completion
of the building’s foundations (failing
which it will be null and void) and it is
only at that point that the vendor is
entitled to require a down payment.
Although this provision protects the
interests of purchasers, it constitutes a
financial constraint for developers who
have to advance the funds to build the
foundations. However, in practice, in most
cases vendors require investors to enter
into reservation agreements and make
down payments before any work begins.
This highly contentious practice (given
the legal context) is increasingly being
brought to the attention of the courts.
Mainly in order to end this practice,
a draft law for an overhaul of the
regime governing sales of uncompleted
properties in Morocco and to provide
better legal protection for purchasers is
currently being discussed in Parliament.
The draft law, which at this stage
comprises about 20 articles and which
adopts certain recommendations
made by the Economic, Social and
Environmental Council (ESEC), provides
that vendors and purchasers may only
sign a contract for sale once the building
permits have been obtained, bringing the
practice of reservation agreements to
an end while satisfying the concerns of
developers in terms of the financing of
building projects. Vendors must define
precisely a property’s characteristics and
surface area, and the instalment dates
and percentage of the sums advanced.
The draft law gives purchasers the right
to insert an advance notice on the land
register without the vendor being able
to object, whilst the current law requires
its prior consent. However, this right may
not be exercised until the purchaser
has paid at least 50 per cent of the total
purchase price. The project owner must
provide the new owner with a certificate
of conformity for the works, drawn up by
an architect, as proof that the structure
complies with the specifications and
that the developer has complied with its
obligations.
Building rights
In addition to sales, Moroccan real estate
practice has seen an increase in the use
of building rights (droits de superficie),
defined as rights of ownership over
buildings or structures on land belonging
to third parties. The holder of a building
right may assign it, mortgage it (if the
underlying property is registered) or
grant easements over the property in
question. For example, building rights
are used as part of project financing to
enable lenders to register a mortgage
as security for the loans granted to the
project company.
Leases
The Dahir of 24 May 1955 introduced
a mandatory regime for leases of
properties or premises in which a
business undertaking is operated. This
regime has many similarities to the
French legal system governing business
leases although it is less developed. In
practice, business leases entered into in
Morocco incorporate the characteristics
of triple net or FRI leases ie, fixed terms
(with a break option at three, six and
nine years), costs being recharged to
tenants, maintenance obligations being
placed on tenants, etc.
HOTELS—A SAFE HAVEN OR OPEN TO DISRUPTION? | MOROCCO
“Buying uncompleted properties off-plan
(a method which is gearing up for a
major new reform) has also been very
popular with investors ”
22 | REAL ESTATE GAZETTE
RECENT TRENDS IN RESORT
MIXED USE DEVELOPMENT
LYNN CADWALADER, SAN FRANCISCO
IntroductionResort communities have evolved over the last several decades from communities comprised of
an amalgamation of distinct projects
and uses with no common plan and
scheme of development, to forward-
thinking “sustainable” communities with
planned integration of uses and major
amenities (referred to as “planned unit
developments” or “master planned
communities”). Most state laws now
grant greater flexibility to mixed use
master planned communities than with
single use communities, including in
establishing the covenants, conditions,
easements and restrictions (the
“CC&Rs”) that govern the property
within the community.
Historical perspective
A major boom in recreational real estate
development occurred in the 1960s and
early 1970s. Most local governments
lacked zoning or other land-use
regulations at this time and recreational
lot sales and real estate development
in resort areas went forward relatively
unchecked. As complaints of fraud and
misrepresentation in “dirt” sales began
to surface, consumer and environmental
groups began to take issue with
irresponsible development practices.
Perhaps motivated by the abuses then
occurring in the development of scenic
resort areas, a movement began in
the resort industry to establish higher
standards for resort development in
major destination resort and second-
home communities.
The demand for recreational real
estate in the 1970s began to move
away from recreational lot sales toward
second-home and resort condominium
communities featuring significant
recreational amenities. Timesharing
made its appearance on a large scale
basis in the United States at this time
as well. State and local governments
began to enact statutes that required
comprehensive community-wide land-
use planning prior to consideration of
zoning and development in many areas,
with the requirement that all zoning,
subdivisions and development permits be
consistent with the general plan for the
area. However, many resort communities
were located in unincorporated areas
and lacked a general plan or the forces to
implement and enforce such a plan.
The 1980s and 1990s were a period of
major growth and change for resorts and
resort communities. The master planned
communities of this era were generally
targeted to those in the top income levels,
as baby-boomers with excess cash began
to look toward retirement with the desire
for continuing their active lifestyles.
Entering the new millennium,
resort development experienced a
consolidation in the industry, with resort
industry giants being the only players
with sufficient capital to initiate the
development or re-development of large
master planned resort communities. The
limited availability of developable resort
sites within the United States, and the
high costs of such development, led to
the trend of “revitalizing” existing resort
communities. Many resorts around
the United States and Canada began
planning or building “base villages” at their
resorts in order to accommodate the
diverse interests of people visiting the
resorts. Resorts are no longer built to
accommodate one main season or one
major amenity, but include a wide array
of year-round recreational amenities
and services such as golf courses, water
sports, skiing and ice-skating, fishing and
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ISSUE 23 • 2016 | 23
HOTELS—A SAFE HAVEN OR OPEN TO DISRUPTION? | USA
gaming, horse-riding, hiking trails and
bike paths and health spas, designed to
appeal to a broad-base of users with
varying interests. The re-created resort
communities tend to embody European-
influenced, pedestrian-oriented villages
encompassing a mix of residential units
and carefully planned high-end retail
outlets and restaurants, designed for
maximum year-round occupancy and
cash flow.
Distinguishing characteristics
of resort communities
Resort communities can generally be
categorized by three primary criteria: (i)
“destination” or “nondestination” resorts,
which are defined by the proximity of
the resort to its primary markets; (ii)
setting and primary recreational mix (for
example, ocean resorts, mountain/ski
resorts, golf resorts); and (iii) type and
mix of real estate products being offered.
Destination or nondestination resort
Destination resorts are located some
distance from the markets which feed
the resort, which means that the resort
visitors reach the resort by journeying
a fair distance (generally by air as
opposed to car), and visit less frequently
(often less than once per year or less,
and sometimes only once). Stays are
generally longer. Nondestination resorts
are often located within a fairly short
drive (between two and four hours) of
their primary market(s) and generally
do not market heavily to visitors from
farther away than the primary market(s).
Visitors come more frequently and stay
for shorter periods of time, often for the
weekend. Nondestination resorts located
close to large urban areas can also be
primary residence communities, providing
resort living within commuting distance
to work. Destination resorts tend to
cater more to the second home market,
and are generally more upscale and
expensive. They generally have shorter
seasons (for example, the ski season
generally ends in April vs. late spring or
early summer). They also generally have a
higher ratio of hotels and condominiums
than second homes.
Setting and primary recreational
amenities
The setting of a resort and its primary
amenity mix often shape the character of
a resort. Skiers gravitate toward mountain
resorts, while beach-goers and boaters
may prefer ocean resorts. Having a master
plan in place which reserves large amount
of open space and ensures that the
beauty of the region will be preserved is
critical to the resort’s success.
Type and mix of real estate products
Real estate is often the primary revenue-
generating source of the resort (as
opposed to the recreational amenities,
which often operate in the red for long
periods of time during the start-up of the
resort, and due to seasonal variances),
thus obtaining the right mix of product is
critical to success.
Recent trends in mixed use
resort development
Industry consolidation
The consolidation trend in the resort
industry that began in the 1990s has
accelerated at a rapid pace over the past
two decades. This trend has been driven
by the substantial capital requirements
of resort development and business
operations, as well as volatility in the
financial markets. Most large-scale resorts
are now owned by private equity funds
and REITS, which can efficiently integrate
groups of income-producing properties
into investment portfolios, offsetting
regional and market-driven irregularities.
24 | REAL ESTATE GAZETTE
Brand expansion into mixed use
development
One of the most significant trends in
resort development in recent years has
been the expansion of major hotel and
hospitality brands into the mixed use
resort market.
Hospitality brands can be strong
contributors to resort communities: (a)
strong hospitality brands can enhance the
image of the resort, create a special address,
or provide name recognition for the
project through an established name and
proven effective marketing plan; (b) a well-
known brand name has credibility in the
minds of guests/purchasers, and consumers
feel more comfortable staying at a hotel
they know by name, or purchasing real
estate under a known brand; (c) a hotel,
as a mixed use resort component, brings
24-hour vitality to a resort, attracting
people and groups throughout the day and
evening by providing dining, entertainment,
recreation, and other amenities that serve
not only hotel guests, but also other resort
visitors or resort property owners.
Mixed use resort villages
Most resort communities are now being
developed as self-contained mixed use
resort villages (branded and non-branded)
featuring: (a) multiple revenue-producing
uses, (b) significant physical and functional
integration of project components, and
(c) development in conformance with a
coherent plan and scheme.
Multiple revenue-producing uses
Mixed use developments generally have
three or more significant uses, which
should each attract a market in their
own right. In most mixed use projects,
the primary uses are income-producing,
such as retail, major amenities, and hotel
facilities. Other significant uses might
include residential use, convention facilities,
performing arts facilities and museums.
Physical and functional integration
The second characteristic of mixed use
developments is a significant physical
and functional integration of project
components, including careful positioning
of project components around central
public spaces, and interconnection of
project components through pedestrian-
friendly pathways and trails, and a vertical
mixing of project components in a single
structure in the village areas.
“It takes a village”
The recent focus of resort master planned
communities is the creation of pedestrian-
oriented “villages,” which marry the beauty
of the surrounding area (for example,
beach, mountain or desert) to the village.
These new resort operators are often
very “formulaic” in their approach both as
to location of the resort and in master-
planning the resort, with the goal being
the creation of residential property as
“revenue annuity” that will provide year-
round rental income for the developer.
The real money is in the real estate
Although resort development (and
redevelopment) invariably includes on-site
improvements, such as golf courses, marinas,
ski-mountain improvements, a close look
at the economics of owning and operating
resorts shows that the real money for
master developers during the first 10 years
the resort’s development comes from real
estate sales, not resort operations.
The challenge of mixed use
resort communities
Mixed use resort communities have
become increasingly popular in recent
years. Where resorts once tended to be
developed as single-purpose sites with
primarily one exclusive form of ownership
or use, resorts now appeal to a broad
range of visitors and owners by developing
multiple uses and types of vacation
properties within a large resort.
The following are important factors
to consider in developing a mixed use
resort community:
• Initial planning and start-up costs.
Due to the trend toward mixed use
resort development, master planning
the resort, or creating a comprehensive
plan and scheme of development,
has become more important. Multi-
use resorts have the potential to be
much more profitable than single-use
resorts, but pose more challenges and
complications than a smaller single-use
project that can be easily constructed,
managed and marketed. Multi-use
resorts require much more initial
planning, and more up-front capital is
required for land acquisition, master
planning the development and for
putting in the initial resort infrastructure.
• Each resort use must stand on its own.
It is often assumed that a use that will
not succeed on its own will suddenly
work in a multi-use resort. While the
varied uses of the mixed use resort
will support and enhance each other,
they will not create a market for an
otherwise non-viable use. Successful
projects start with one or two
products and one significant amenity,
and as these projects mature and other
products and additional amenities to
meet the demands of the expanding
community can be added.
• Flexibility and vested development rights.
Maintaining flexibility to build and sell
what the market demands is critical
to the success of a mixed use master
planned community. It is important to
allow for the time necessary to achieve
build-out if market conditions change
and the build-out takes longer than
anticipated. Developers should ensure
that approvals allow for re-allocation of
density within the resort.
• Extended developer control period.
The master developer must be able
to proceed with build-out of the
resort without being unduly hampered
by the requirement of obtaining
owner consent. Extended developer
control periods set out in the
master association documents is key.
Establishing a developer control period
that is based on density or acreage
build-out is a way to remain flexible in
this regard, as opposed to setting an
artificial number of years that may end
up not being long enough.
HOTELS—A SAFE HAVEN OR OPEN TO DISRUPTION? | USA
ISSUE 23 • 2016 | 25
INVESTING IN THE
DUTCH HOUSING
MARKET
RUTGER ORANJE AND JANNEKE BERENDSEN,
AMSTERDAM
The Dutch economy is gradually improving and showing modest growth. House sales are picking up
and the decrease in house prices has
flattened out. It is not only Dutch, but
also foreign investors, aiming at a stable
return in long term investments, who
are increasingly looking at the Dutch
residential market. This article examines
the attractions of the Dutch housing
market and considers potential pitfalls.
The Dutch housing market
Approximately 75 per cent of the three
million rented houses in the Netherlands
belong to housing associations. These
associations are responsible, among other
things, for letting social houses, defined
as homes for which the monthly rent is
under €711. Housing associations may
only let social housing to people with a
maximum yearly income of €35,739 gross.
The social housing sector is highly
regulated, unlike the more expensive
private housing sector (where rents are
higher than €711).
In the social housing sector, the rent
payable depends on the quality of the
house and is based on a points system,
although, as noted earlier, rents in this
sector are subject to a ceiling figure of
€ 711. In addition, rent indexation is
regulated. As at 1 July 2015 the maximum
rent indexation was 2.5 per cent (inflation
+ 1.5 per cent) for people with an
income of €34,329 or less, 3 per cent for
those with an income between €34,229
and €43,786 and 5 per cent for those
with an income of more than €43,786.
These different indexation levels were
introduced to motivate tenants to move
up the housing ladder and to ensure that
the cheaper homes remain available for
people with a relatively low income.
In the private sector however, tenants
and landlords have more freedom to
agree the rent and services provided and
there is no maximum rent and indexation
is not capped.
In general, investment opportunities
in the private sector really only exist
in relation to those properties which
generate a rent of between €711 and
€1200. This is because if the monthly costs
for housing exceed €1200, most people
will consider buying a house rather than
renting it. However, there is still a shortage
in the supply of houses in the €711–
€1200 range and the Dutch housing
market is currently focused on satisfying
the increasing demand for such properties.
Investors looking at the Dutch housing
RESIDENTIAL AND PRS—A NEW DESTINATION FOR INSTITUTIONAL MONEY | THE NETHERLANDS
26 | REAL ESTATE GAZETTE
RESIDENTIAL AND PRS—A NEW DESTINATION FOR INSTITUTIONAL MONEY | THE NETHERLANDS
market will not only need to consider the
commercial issues noted above, they will
also have to comply with specific Dutch
legal and tax issues. Some of these issues
are highlighted very briefly below.
RETT
First, the good news for investors is that
real estate transfer tax (RETT) for private
houses has been decreased to 2 per cent,
compared to the 6 per cent payable on
transfers of commercial real estate. This
decrease is specifically aimed at boosting
the recovery of the housing market.
Landlord tax
Landlords with a portfolio of more than
10 social housing units (whether the
landlord is a housing association or a
private investor) will have to pay a special
tax (“verhuurdersheffing”) on the value
of their portfolio of 0.491 per cent (to
be increased to 0.536 per cent in 2017),
subject to a maximum of €15 million per
taxpayer. This tax has been introduced
to lower the national debt and also to
improve the housing market. (NB: This
landlord tax is not applicable to houses in
the private sector.)
Approvals
Where a housing association wants to
sell a portfolio of houses to third party
investors, the sale requires the approval
of the Dutch Minister of Housing. The
approval procedures vary depending
on whether the sale concerns social or
unregulated housing. Where the sale
involves 90 per cent or more unregulated
housing, a public offering will be sufficient.
However, where the sale involves 90 per
cent or more social housing, the houses
must first be offered for sale to the
existing tenants, and after that to other
housing associations. Only then may the
houses be offered for sale to the market.
In addition to the ministerial approval
required, in case of the sale of social
housing all relevant local authorities will
also have the opportunity to give their
view on the proposed transaction from a
public housing perspective.
Tenant associations
Finally, investors in the residential property
market will have to deal with tenant
associations during negotiations: where an
owner owns more than 25 rental houses
(in either sector) the Landlord and Tenant
Consultation legislation (“Overlegwet”)
will apply. In such cases the following
requirements apply:
The landlord of more than 25 houses
will need to ensure that the tenants
form a tenants’ association, and this
association must be involved in all
asset- and property management issues.
The association has the right to be kept
informed regarding these issues by the
landlord, and also regarding decisions to
sell and/or purchase property. A landlord
may not take any asset- or property
management decision before the tenants’
association has had the opportunity
to meet with the landlord or give the
landlord written advice. The landlord
may refuse to accept the advice of the
tenants’ association, provided that it
gives a reason for doing so. The tenants’
association can take the matter to court
if it is not satisfied that the landlord has
complied with these requirements. The
limited case law we have in this area
indicates that the courts will be slow
to prohibit actions taken by a landlord,
provided that the landlord has complied
with its obligation to keep the tenants’
association informed and has given good
reason as to why the association’s advice
is not being followed.
Conclusion
The Dutch residential market has
the potential to be very attractive as
an alternative asset class with stable
returns for long term investments.
Buying portfolios from social housing
associations may be interesting, although
there are some constraints, especially the
landlord tax and the various approvals
required from stakeholders. The private
sector with rents of between €711
and €1200 seems to be attracting an
increasing number of investors, but
there is still a shortage of properties
in that sector. This may account for the
current trend of investors developing
their own properties in this area of the
Dutch housing market, as part of their
investment strategy.
“The good news for investors is that real
estate transfer tax (RETT) for private
houses has been decreased to 2 per cent
”
ISSUE 23 • 2016 | 27
According to the latest market research publications, the shopping mall floorspace in Europe
has substantially increased during the
last few years, amounting now to more
than 152.3 million sq m. However, due
to the financial crisis, there was almost
no shopping mall development activity in
Spain at all during 2014. At the beginning
of 2015, there were 544 shopping malls
and retail parks in Spain, with a total
gross lettable area (GLA) of over 15.4
million sq m.
Things are now looking brighter: during
2015 and 2016, around 105,000 sq m of
GLA are expected to be developed or are
already under development. This returns
Spain to the top ten countries in Western
Europe regarding the development of
new shopping malls and retail parks.
As additional good news, sales in
Spanish shopping malls grew by 5 per
cent during 2014, and although final
figures have not yet been published,
a solid increase is expected for 2015.
Spanish shopping malls and retail parks
bring together more than 33,000
traders, and this group increased their
workforce by 2.6 per cent in 2014,
currently employing 327,000 people. This
is an excellent indicator of the upturn
experienced by the Spanish economy in
the last two years.
As a result of this positive outlook
in Spain, investment transactions on
shopping malls reached a figure of €2.9
billion in 2014, a sixfold increase on the
2013 figure. According to the Spanish
Association of Shopping Malls and Retail
Parks (AECC), a total of 24 transactions
were undertaken in 2014, which affected
34 of Spain’s 544 shopping malls over the
course of the year. Seventy per cent of
that investment came from abroad.
During 2015 the investment trend
remained solid (although it is not
expected to achieve the record
investment figures reached during 2014).
For example, at the end of third quarter
of 2015, a total of 23 transactions had
been completed, with an aggregate
transaction value of €1,500 million. From
these figures, it seems fair to suggest
that if 2014 was the year of economic
recovery in relation to investment in
shopping malls, 2015 was the year of
consolidation (albeit the final figures have
not yet been published).
The main features that emerge from
the transactions that have taken place are
as follows:
• Listed vehicles such as SOCIMIs
(Spanish REITs, very active currently
in Spain—see Orson Alcocer,
“SOCIMIs—At last, REITs in Spain” Real
Estate Gazette (Issue 15, 2014) page
38), and investment managers are now
the key players in the acquisition of
shopping malls and retail parks in Spain.
• The most desirable assets are (i)
consolidated shopping malls located in
or around main cities, such as Madrid
and its surrounding area, and (ii) local
and regional shopping malls located in
smaller provincial cities.
• While for other categories of assets,
such as industrial warehouses, share
deal structures are quite typical, the
most common investment procedure
for acquiring shopping and retail malls
continues to be through asset deals,
under which real estate assets are
directly acquired by the investor by
means of one or more real estate
vehicles.
Aside from the improving economic
situation in Spain, the main attraction
in investing in shopping malls lies in the
investors’ belief that rents in this sector
will increase substantially over the next
few years, as most existing tenants are
currently paying very low rents. It seems
reasonable to assume, therefore, that
shopping malls and retail parks will
remain an attractive sector for investors
in the near future.
IGNACIO ANTÓN, MADRID
SHOPPING MALLS IN SPAIN:
THE RETURN OF AN ACTIVE
MARKET
SOUTHERN EUROPE—A RETURN TO NORMALITY? | SPAIN
MAIN INVESTMENT TRANSACTIONS IN SPAIN DURING 2015
Description Location
GLA
Transaction
SQM
Price Vendor Purchaser
Plenilunio Madrid 70,000 375,000,000 Orion Capital Klepierre
Puerto Venecia
(5%) Zaragoza 103,500 255,400,000 Intu CPP
AireSur Seville 20,000 76,500,000 Grupo Lar CBRE GI*
Zielo Shopping Pozuelo, Madrid 15,555 71,500,000 Hines UBS
As Termas Lugo 46,500 67,500,000 ADIA LAR Socimi*
* DLA Piper acted as legal advisor
28 | REAL ESTATE GAZETTE
BREAK OUT THE
SCHNAPPS AND
VODKA: NON-
PERFORMING
LOANS IN CEE
AND SEE
DENISE HAMER, LONDON AND VIENNA
Baskin Robbins, the American food chain, once boasted 31 flavours of ice cream. These days in Central and
Eastern Europe (CEE) and South Eastern
Europe (SEE) the dominant flavour of
transaction is non-performing loan sales
and acquisitions.
Deals are coming to market at
incredible speeds. The lounge at Ljubljana
airport has lately resembled a board
room more than a waiting room and
last summer virtually the entire loan
portfolio legal and financial advisory
community decamped not to the beach
but to Bucharest to work on the €3.6
billion Project Neptune.
What has happened?
For those of us in the CEE/ SEE loan and
loan portfolio market, this turn of events
has been a long time coming. The era of
“extend and pretend” in the banking sector
that followed the 2008 global financial crisis
was originally predicted to end as early
as 2011 with the introduction of Basel III.
Aggressive Tier 1 capital requirements were
intended to force banks to deleverage and
disgorge non-performing and non-core
assets, including loans and loan portfolios.
In 2013, we jubilantly declared the “official
end of extend and pretend” in CEE/ SEE.
And yet, there appeared few transactions
in the region and none of material volume
or value.
In 2015, however, there occurred a
perfect storm of economic, regulatory
and legal factors that propelled the CEE/
SEE loan and loan portfolio market.
Economically, the US had gradually
recovered, forcing loan and loan
portfolio investors to look to Europe for
well-priced assets. Western Europe, that
is, the beer and wine drinking countries,
had become a saturated target. European
real estate loan and loan portfolio sales
(primarily in the UK, Ireland and Spain)
reached a record breaking €80 billion
in 2014, exceeding 2013 volume by
250 per cent. With ten serious bidders
chasing every deal, investors now needed
to look to the schnapps and vodka
drinking countries for yield.
In terms of regulation, BASEL III was
followed by the European Central Bank’s
2014 Comprehensive Assessment,
including the Asset Quality Review
(AQR), of 130 Eurozone banks. The
failure of the AQR by 25 banks and the
discovery that aggregate bank assets
had been overvalued by at least €48
billion, further increased pressure on the
financial sector to sort out its balance
sheets. Amongst the over-leveraged and
under-capitalized financial institutions
were not only CEE/ SEE domiciled banks,
such as Oesterreichische Volksbanken
of Austria, Nova Ljubljanska Banka of
Slovenia and National Bank of Greece,
but also Western European banks with
“
In 2015, there
occurred a perfect
storm of economic,
regulatory and legal
factors that propelled
the CEE/ SEE loan
and loan portfolio
market ”
CENTRAL AND EASTERN EUROPE—OPPORTUNITIES FOR BARGAINS? | CEE/ SEE
ISSUE 23 • 2016 | 29
significant CEE/ SEE investments, such as
Belgium’s Dexia.
Legally, CEE/ SEE jurisdictions
had been incrementally addressing
systemic jurisprudential inadequacies
and uncertainties that had historically
deterred investors. From the
implementation of comprehensive
insolvency regimes to the creation of
enhanced enforcement procedures,
countries such as Poland, Romania,
Hungary and Slovenia materially reduced
legal risk. In fact, just this January, Ukraine
enacted legislation to permit the transfer
and assignment of cross-border loans,
finally enabling foreign lenders to sell
their exposures.
CEE/ SEE loan and loan portfolio sales
nearly quadrupled between 2014 and
2015. And the momentum shows no sign
of abating, with 2016 kicking off Projects
Triton and Rosemary in Romania, Project
Pine in Slovenia, Project Ivica in Croatia
and others in Poland, Hungary, Bulgaria,
Greece and throughout the region.
The dedicated DLA Piper Portfolio
Solutions team of over 600 lawyers
globally have been active on either the
seller or the buyer side of nearly every
CEE/ SEE loan portfolio transaction. In
future issues of the Real Estate Gazette,
we propose to examine specific legal
aspects of such transactions in CEE/ SEE.
30 | REAL ESTATE GAZETTE
A BREATH OF FRESH AIR FOR
CZECH MORTGAGE LAW
ZUZANA SLOVÁKOVÁ AND MAREK STRÁDAL, PRAGUE
The Czech Civil Code (Act No. 89/2012 Coll., referred to in this article as the “New Civil Code”) came into force on
1 January 2014, together with a number
of other new legislative provisions. This
represents the most significant amendment
to Czech private law in more than 20
years, and has substantially altered several
aspects of Czech property law, including
the law relating to mortgages. The New
Civil Code has now been in force for two
years and banks are making extensive use
of the new provisions.
What has changed?
The New Civil Code has significantly
changed the way in which mortgages
are regulated. Section 3073 of the New
Civil Code provides that rights arising
from security interests created under the
previous legislation remain unaffected but
contracting parties are free to agree that
their rights and obligations arising from
such security interests will be governed
by the New Civil Code. There has been
no change to the requirement that a
mortgage agreement must be in writing.
The mortgage becomes effective when it
is registered in the relevant public register,
which, in the case of real estate is generally
the Real Estate Cadastre. Mortgages over
property not registered with the Cadastre
must instead be registered in the Register
of Liens. The principle of good faith applies
to registration so that once the mortgage
is registered, it is not possible for a claimant
to submit that they had no knowledge of
its registration.
Future assets
The New Civil Code provides that a future
asset, that is, one which is not yet owned
by a mortgagor or which does not exist
at the time the mortgage agreement is
entered into, may be used as security. The
mortgage over property registered with
the Cadastre will be created when the
mortgagor becomes the owner of that
property, provided that future mortgage
has been registered with the Cadastre
in advance, with the agreement of the
current owner. Use of future mortgages
will, in practice, depend to a large extent
on the assessment by the lender of the
risk that the mortgagor will not, in the end,
become the owner of the property.
Prohibited terms
Unlike the previous legislation which
included an absolute ban on certain
conditions, the New Civil Code stipulates
that such restrictions only apply to
terms purported to be agreed prior to
the maturity of a secured debt. Once
the secured debts have matured, the
parties to the mortgage agreement may
agree that (i) the mortgagee will not
demand the foreclosure of the asset that
constitutes the security, (ii) the mortgagee
is entitled to sell the asset or keep it for
an arbitrary or pre-negotiated price, or
(iii) the mortgagee can receive the income
from the asset. Notwithstanding these
provisions, if the mortgagor is an individual
not acting in the course of business or
a small or medium-sized enterprise, the
covenant under (ii) is restricted even
after the maturity of the secured debt. If
the price for the asset is arbitrary or pre
negotiated, enforcement of the mortgage
through the mortgagee retaining the
property should be possible.
Restrictive covenants
Under the New Civil Code, parties to
a mortgage arrangement are permitted
to agree on various restrictive covenants
provided that agreement does not breach
good practice. Such covenants include, for
example, (i) a negative pledge covenant
(section 1761 of the New Civil Code)
restricting the mortgagor from disposing
of, or further encumbering property, which
has to be agreed upon as a right in rem,
for a limited time, and registered in the
Cadastre in order to be effective towards
third parties, and (ii) a prohibition on
creating a mortgage (section 1309(2) of
the New Civil Code) which also needs
to be registered in the Cadastre or in the
Register of Liens, unless a third party is
otherwise aware of the prohibition.
Ranking of mortgages
The New Civil Code allows for alteration
in the ranking of multiple mortgages over
a single property. This can be achieved by a
written agreement among the mortgagees
which becomes effective against third
CENTRAL AND EASTERN EUROPE—OPPORTUNITIES FOR BARGAINS? | CZECH REPUBLIC
parties by cadastral registration. The
priority for mortgagees who are not
party to the agreement is unaffected. In
refinancings, in particular, parties may elect
to replace the existing mortgage with a
new mortgage in order to preserve the
current ranking. The new secured debt
cannot exceed the original secured debt,
the mortgagor must ask for the mortgages
to be replaced and the old mortgage
ISSUE 23 • 2016 | 31
“The new regulation is more detailed
but parts of the law in this area remain
unclear ”
CENTRAL AND EASTERN EUROPE—OPPORTUNITIES FOR BARGAINS? | CZECH REPUBLIC
must be deleted from the Cadastre
within one year from the registration of
the new mortgage. If the debt secured
by a mortgage has been paid off but the
mortgage has not been deleted from the
Cadastre, the mortgage is “loose” and the
owner of the property may secure a new
debt by the mortgage, as long as the new
debt does not exceed the original secured
debt. Both replacement mortgages and
the use of loose mortgages in favour of
other secured lenders can be restricted
by parties in the mortgage agreement and
those restrictions must then be registered
in the Cadastre.
Insurance proceeds
Another practical benefit of the New
Civil Code is that the mortgagee will
automatically be entitled to receive any
insurance proceeds disbursed in connection
with the mortgaged and insured property
and to use such proceeds for the
repayment of secured debts, provided
that the insurer has been notified about
the mortgage by the mortgagor or the
borrower, or the mortgage is proven to the
insurer by the mortgagee well in advance
and such right of the mortgagee is not
excluded by a mortgage agreement.
Security agent
The New Civil Code has introduced
the concept of a security agent, which is
already known in other jurisdictions and
widely used in syndicated or other forms
of financing with a number of lenders. The
regulation of rights and obligations of the
security agent towards the lenders or the
security grantor is however very limited,
indeed, arguably insufficient and not robust
enough to be used. Therefore lenders tend
to stick to the practice which prevailed
prior to the introduction of the New Civil
Code where the security agent is jointly
and severally liable with other lenders
from the syndicate or, in the case of
foreign law governed facility agreements, a
parallel debt structure is implemented.
Enforcement
Lastly, since 1 January 2014, the methods
for enforcement of the mortgage available
to the mortgagee have been expanded.
Under the New Civil Code, in addition
to a public auction or order for the sale
of the asset by a court, the mortgagee
may agree (in writing) with the mortgagor
(or the obligor whose debts are secured
by the mortgage) that the mortgagee
is allowed to use other methods. This
has paved the way for agreements for a
private sale of the property. If that method
is agreed, the mortgagee must undertake
the sale with due care, both to protect
its own interests and also those of the
mortgagor. The mortgagee must use its
best efforts to sell the security for the
price that similar assets would generally be
expected to achieve. The mortgagor will
be able to claim damages if the mortgagee
breaches these obligations. The mortgagee
is not allowed to proceed with the sale
or other method of enforcement of
the mortgage earlier than 30 days after
notifying the mortgagor, and registration
of commencement of the enforcement in
the Cadastre.
Ownership of mortgaged
buildings and land
Parties to existing mortgages may also feel
the effects of another significant change to
the law governing Czech real estate: the
reintroduction of the “superficies solo cedit”
principle, meaning that a building forms a
part of the land on which it is built, after
decades of legal separation between land
and building. However the law does not
operate retroactively, and applies only
to buildings constructed after 1 January
2014. For buildings constructed on plots
of land owned by another person or
legal entity prior to 1 January 2014, both
landowner and building owner are granted
a statutory pre-emption right (a right of
first refusal). In respect of a mortgage
created over a building or a plot of land
only, the “superficies solo cedit” principle is
ruled out by the nature of the mortgage
itself. Therefore, ownership of a mortgaged
building and land will remain separate
unless there is a legally identical mortgage
over both the land and the building.
What can we expect?
The New Civil Code has been in force
for two years but we will need to wait
for case law and academic commentary
before we can assess the real effect of its
provisions. The new regulation is more
detailed but still, parts of the law in this
area remain unclear. It is important that
a proper balance be struck between
the rights of all the parties to mortgage
agreements. Whether the new legislation
meets its aim of allowing parties to
restructure mortgages and take advantage
of new opportunities, remains to be seen.
32 | REAL ESTATE GAZETTE
CORPORATE INCOME TAX
EXEMPTION FOR FOREIGN
INVESTMENT FUNDS—NEW
DEVELOPMENTS
ALEKSANDRA KOZŁOWSKA, WARSAW
IntroductionPoland is a key market for investment funds interested in the real estate sector. Moreover, from
the Polish perspective, foreign investment
funds are important players on the real
estate investment market.
Polish investment funds have enjoyed
income tax exemptions for many years, and
on 1 January 2011 these exemptions were
extended to include foreign investment funds.
This was achieved by introducing a new
provision to the Polish Act on Corporate
Income Tax (referred to in this article as
the CIT Act) which expressly provides that
neither Polish nor EU-/ EEA-based foreign
investment funds are liable to income tax
on revenues generated in Poland (eg rental
income or capital gains from the sale of real
estate located in Poland). This exemption
gives foreign investment funds a significant
opportunity to recover the CIT paid on
their Polish investments, or even to avoid tax
liability entirely.
CIT exemption for foreign
investment funds
The amendment was introduced
following a number of judgments in
the Polish administrative courts, and in
response to the position of the European
Commission, and was aimed at ending
the discriminatory taxation of foreign
investment funds based in EU and EEA
countries. Nonetheless, under Article 6.1
point 10a, CIT exemption is dependent on
all of the following conditions being met:
CENTRAL AND EASTERN EUROPE—OPPORTUNITIES FOR BARGAINS? | POLAND
ISSUE 23 • 2016 | 33
• The entire income of the fund being
subject to CIT taxation in its home
country, regardless of the source of
that income.
• The fund’s business activity being
limited to the collective investment
of funds gathered by means of public
or non-public offerings of securities,
money market instruments and other
property rights.
• The fund’s activity being permitted
by the competent authorities of the
EU/EEA member state in which it is
registered, or where it has its head
office.
• The fund being subject to supervision
by the competent authorities of that
EU/EEA member state.
• The fund’s assets being entrusted to a
depositary for safe-keeping.
In addition, there should also be a
provision in a double taxation treaty or
other international document ratified
by Poland that gives the relevant Polish
tax authority the right to obtain tax
information from the tax authorities
of the country in which the fund is
registered or has its head office.
The Polish tax authorities’
restrictive approach
In practice, the application of the CIT
exemption to foreign investment funds
(including those in the Polish real estate
market) has long been a controversial
topic. Hesitation on the part of the
Polish tax authorities to grant the
exemption has been mainly due to the
diversity of organizational forms used by
foreign investment funds. The legal form
and structure of EU- and EEA-based
investment funds often differ substantially
from Polish investment funds—in
particular, the latter have a separate legal
personality but they are not set up as
companies). Even when a foreign fund
has official documentation confirming
that it meets the requirements stipulated
in the CIT Act, the tax authorities often
refuse to apply the CIT exemption,
claiming that it is not possible to treat
a given investment institution as being
comparable to a Polish investment fund.
The view of the courts
Foreign investment funds that are refused
CIT exemption often take the matter to
the Polish administrative courts and in
many cases succeed. In general, the courts
take the view that foreign funds are not
required to operate on terms identical
to those of domestic investment funds
in order to qualify for CIT exemption.
What is more, in April 2014, the European
Court of Justice directly confirmed that a
US-based investment fund was entitled to
CIT exemption in Poland.
Judgment of the Polish
Supreme Administrative
Court of 8 October 2015
On 8 October 2015, Poland’s Supreme
Administrative Court (SAC) issued a
judgment concerning the application of
CIT exemption to foreign investment
funds in the case of a German investment
fund operating in the Polish real estate
market. In particular, the SAC confirmed
that, for the purpose of determining
whether the CIT exemption conditions
have been met, the treatment of a foreign
investment fund as a Polish taxpayer
should not be decisive. Since Polish tax
provisions were presumed to conform
with European law, the tax authorities
were required to consider the taxation
status of the fund in its home country.
In this case, the Polish tax authorities
considered that the German fund did
not qualify for the CIT exemption,
on the basis that it could not be
considered a taxable person under
the Polish CIT provisions. However,
both the Administrative Court at first
instance and the SAC disagreed with
the approach of the tax authorities.
Whilst the SAC agreed that the
German investment fund should not be
treated as a taxable person under CIT
provisions, it stated that the company
managing the fund should be deemed
a Polish taxable person to the extent
that that company represents the fund.
This means that the CIT exemption may
also be applied to revenues generated
in Poland by German investment
funds, provided that all the conditions
stipulated in the CIT Act are met.
Practical implications
Although the Polish tax authorities
have interpreted the CIT exemption
conditions very strictly and have not
taken into account the specific legal
regulations in the foreign funds’ countries
of origin, recent case law from the
administrative courts (which has been
better for these taxpayers) suggests
that a more liberal approach may be
expected. On the basis of the SAC
judgment mentioned above, among
others, foreign investment funds have a
significant chance of a positive outcome,
that is, recovering the CIT paid on Polish
investments. It should be noted too that
the CIT exemption may be applied to
both Polish tax on capital gains earned
by a fund (eg from the sale of real estate
in Poland) and to Polish tax paid on the
operational income (eg rental income).
“In general, the courts take the view
that foreign funds are not required to
operate on terms identical to those of
domestic investment funds in order to
qualify for CIT exemption ”
CENTRAL AND EASTERN EUROPE—OPPORTUNITIES FOR BARGAINS? | POLAND
34 | REAL ESTATE GAZETTE
IntroductionHistorically, it has only been possible for pension funds and insurance companies to invest in
real estate under quite strict conditions
in order to limit risks for their clients.
However, a recent amendment to the
Danish Financial Business Act has now
made it possible for pension funds to
make further investments in the Danish
real estate market. Additionally, the
change means increased opportunities
for developers to obtain funding for
their development projects. This article
examines these changes.
The old permanent
placement rule
Under Danish law, pension funds and
insurance companies are subject to a
relatively strict set of rules regarding
the investment of their assets under
management. This regulation aims to
ensure that their funds are at all times
adequate to satisfy their commitments.
Until July 2015, the Danish Financial
Business Act stated that pension funds
and other insurance companies could
build, own and manage real estate
as long as this was for “permanent
placement of assets”. Consequently,
pension funds and insurance companies’
investments in real estate were always
long-term and the regulation ruled out
investment in high-risk development
projects.
In the spring of 2015, the Danish
Parliament passed a bill which made
it possible for pension funds and
insurance companies to invest in real
estate on a short term basis and at
the same time increased the scope
of potential investments to include
infrastructure. The bill became Law
in July 2015 and pension funds have
already been taking advantage of the
new opportunities.
NORTHERN EUROPE AND SCANDINAVIA—SAFE HAVENS WITH A FUTURE? | DENMARK
THE
IMPORTANCE OF
PENSION FUNDS
IN THE DANISH
INVESTMENT
MARKET
MICHAEL NEUMANN, HORTEN, COPENHAGEN
ISSUE 23 • 2016 | 35
Pension funds’ new
investment options
The departure from the “permanent
placement rule” is of particular interest
to pension funds, since Denmark has
one of the highest rates of private
savings for retirement, totalling more
than an estimated €400 billion, which is
equivalent to 160 per cent of the Danish
GNP. At the same time, the low interest
rate makes investment in real estate even
more attractive for pension funds, since it
offers a better return on investment than
other classes that deliver fixed rates of
interest.
For many years, it seems to have been
the unofficial aim of pension funds to
allocate around 5–10 per cent of their
funds in the real estate sector with a
focus on residential and office buildings.
However, this trend could be set to
change with the increased range of
investment opportunities in other kinds
of projects. A recent survey of pension
funds also shows that many plan to
increase their real estate portfolio by
50 per cent in the next few years. After
a couple of years’ slowdown in the
construction sector, this represents a
much-needed boost.
In addition, the option for pension
funds and insurance companies to invest
in infrastructure may also result in a
shift in their investment targets, since
investments in infrastructure are low risk
while offering relatively steady returns.
Risky business?
The “permanent placement rule” was
rooted in the assumption that the
development of real estate with the
prospect of sale was more risky than
the development of real estate for
the purpose of permanent ownership.
However, this approach was subject to
criticism for not giving the investor the
chance to get the best possible return
on the investment. At the same time, the
objective of keeping risk to a minimum
was already covered by other parts of
the legislation requiring pension funds and
insurance companies to act prudently and
in their clients’ best interest. In addition, EU
legislation has confirmed that placement
rules are now outdated.
The EU’s Solvency II directive from
2009 concerning risk allocation was
implemented in Denmark in January
2016. The directive ensures a standard
legal framework for the insurance
business, eliminating obstacles for the
free investment of insurance companies
across borders. National obligations
concerning risk spreading and placement
rules have been replaced by less
mechanical standards and the directive
has instead introduced risk-based
solvency-capital demands.
Although there are now undoubtedly
fewer restrictions for pension funds and
insurance companies investing in real
estate, they still have to comply with
the requirements to maintain significant
capital reserves and the requirement that
they are able at any time to fulfill their
financial obligations. It is therefore highly
unlikely that the new found investment
freedom for pension funds and insurance
companies will result in an uncontrollable
increase in high-risk development projects.
Possibilities for developers
Although the high solvency-capital
demands may restrict pension funds’
involvement in the most high-risk
projects, they are now able to participate
in a much wider range of real estate
development projects. This is good news
for developers who are seeking funding
outside the traditional financial sector.
Developers and pension funds may also
choose to manage their joint interests
by engaging in a mutual partnership
where the pension fund contributes
most of the funding and the developer
is in charge of developing the site. This
type of collaboration is on the increase.
For example, a large Danish pension
fund recently collaborated with a
Danish developer in the development
of 1,200 homes in three cities in Jutland.
Unlike previously, the pension fund in
this project is not limited to renting the
buildings out, but can choose to sell them
on straight away. This freedom to invest
may well prove to be very fruitful for the
real estate sector, and it is fair to assume
that this partnership will not be the last
of its kind in the coming years.
Horten is DLA Piper’s focus firm in
Denmark.
“It is highly unlikely
that the new
found investment
freedom for
pension funds
and insurance
companies will
result in an
uncontrollable
increase in high-
risk development
projects ”
NORTHERN EUROPE AND SCANDINAVIA—SAFE HAVENS WITH A FUTURE? | DENMARK
36 | REAL ESTATE GAZETTE
CAN BUYING NORWEGIAN
COMMERCIAL PROPERTY
TRIGGER NORWEGIAN
FINANCIAL REGULATION?
CAMILLA WOLLAN, OSLO
Introduction The Norwegian real estate market has seen an increasing trend in cross-border activity
in recent years and in 2015, it was
one of the fastest growing real estate
markets in Europe. Commercial real
estate is usually acquired through the
purchase of the entity which owns the
property. The purpose of this article
is to consider whether establishing
a Norwegian corporate structure to
acquire the company which owns the
property, triggers any additional legal
requirements. This was prompted by
new legislation governing the managers
of alternative investment funds (AIFs).
There is no general investment
restriction on foreign investors in
Norway. Nor is there a general
requirement, subject to a few important
exceptions, for a public agreement
to own shares in a Norwegian
incorporated company. Previously a
group of investors could establish an
investment company without being
regulated. However, the legal position
has become less clear due to the new
EU regime for managers of AIFs. Under
this regime, a real estate company with
a commercial purpose is distinguished
from a real estate AIF.
Scope of the Alternative
Fund Managers Directive
The scope of the Alternative Fund
Managers Directive of 2011/66/EU
(AIFMD) is broad, and, with a few
exceptions, covers the management,
administration and marketing of AIFs.
(Readers are directed to Issue 19 of the
Gazette which provides a snapshot of
the efforts of national governments to
implement the measures introduced by
the AIFMD.) The directive is aimed at
undertakings managing one or several
AIFs on a regular basis and its focus
is on regulating the managers rather
than the AIFs. An AIF is, subject to a
NORTHERN EUROPE AND SCANDINAVIA—SAFE HAVENS WITH A FUTURE? | NORWAY
ISSUE 23 • 2016 | 37
few exemptions, subject to either a
permit or registration requirement,
depending on certain thresholds relating
to assets under management and debt
leverage. It is important to define AIFs
and understand which investment
companies and funds are covered by the
AIFM regime. Single asset structures, in
particular, may be challenging to place.
Definition of an AIF
An AIF is a collective investment
undertaking that is not subject to the
Undertakings for Collective Investment
in Transferable Securities (UCITS)
regime and includes hedge funds, private
equity funds, investment companies and
real estate funds, among others. The
legal form of the undertaking is of no
relevance.
The AIF is defined in Article 4(1)(a)
of the AIFMD, which is incorporated
into the Norwegian Act, section
1-2(a). Detailed guidelines on “the key
concepts of the AIFMD” are provided
by the European Securities and Markets
Authority (ESMA). The Norwegian
Financial Supervisory Authority (NOR
FSA) has stated that it will conform with
the EU interpretation of the directive
and the ESMA guidelines and adopt
the practice of regulating AIFs which
develops in the EU.
The following characteristics, if all of
the elements in the definition are met,
are likely to lead to an undertaking
being considered an AIF and falling
within the scope of the regulation:
Collective investment scheme
Collective investment scheme where (i)
the undertaking does not have a general
commercial or industrial purpose, (ii)
it pools together capital raised from its
investors for the purpose of investments
with a view to generating pooled
returns to the same investors, and (iii)
the holders of units/ shares have no
day-to-day discretion or control. The
legal form of the undertaking does not
matter. UCITS funds fall outside the
scope of the directive.
Raising capital
Activity of taking direct or indirect
steps by an entity or a person which
procures the transfer or commitment of
capital by one or more investors to the
entity for the purpose of investing it in
accordance with a defined investment
policy. It is not significant whether the
capital raising activity takes place once,
on several occasions or on an ongoing
basis, or if the transfer of commitment
of capital takes the form of subscription
in cash or in kind.
Investment of private wealth by a
member of a pre-existing group (ie a
group of family members where the
sole ultimate beneficiaries of the legal
structure are family members) is likely
not to be within the scope of “raising
capital”.
Number of investors
An entity which is not prevented by
law, the rules of incorporation or any
other provision of binding legal effect,
from raising capital from more than
one investor should be regarded as an
undertaking which raises capital from a
“numbers of investors”. This should even
be the case if there is in fact only one
investor.
Defined investment policy
Policy which refers to how the pooled
capital in the undertaking is to be
managed to generate a pooled return.
An investment policy is fixed and often
part of the rules of incorporation. It
often specifies the investment guidelines
and criteria as well as being legally
binding on the manager.
It is up to each undertaking and its
owners to assess whether they fall
within the scope of the application of
the AIFMD/ Norwegian AIF Act. An
analysis of the undertaking must be
performed based on the structure,
ownership, business, commercial
purpose, governance structure,
constitutional documents, sales material,
and stakeholders, etc.
Next, we will consider whether a
particular element points to a corporate
structure being an AIF or not. It should
be underlined that this is a specific
assessment which must be based on the
facts of each case.
A real estate company may hold
a general commercial purpose and
strategy. Management is involved
in the day-to-day running of the
company through actively operated
property portfolios, acquiring real
estate, developing property projects
and managing tenancy relationships.
There are several stakeholders in
the management of the real estate
company and a commercial purpose
and substance which indicates that it is
not an AIF.
On the other hand, a real estate
company, especially a single asset
structure, may be deemed to be a
vehicle for a financial investment where
the goal of the investors is to obtain
the cash flow and the rise in value. At
the same time, in our view, it is possible
to argue that rental business may be
assumed to be a commercial purpose
in itself, especially if the owners are
involved in the day-to-day management.
A single asset structure where all
services are outsourced to an external
asset manager, may indicate that the
corporate structure is an AIF.
Further, it will be significant whether
the undertaking is viewed as a collective
investment scheme or not. As set
out above, the definition of an AIF
presupposes that there will be “pooling
of capital” in the undertaking to create
a “pooled return” to the group of
investors. Apart from that, the guidance
on “collective investment schemes”
is limited. In our view, it would be
natural to look to the characteristics
of a regulated securities fund (ie
capital contribution rules, mechanism
for pricing, redemption rules, pre-
determined time for the investments,
etc), even if it is not comparable in
all aspects. It may be submitted that
a wholly owned company in a single
asset structure lacks the element
of a collective investment scheme.
At the same time, as set out in their
guidelines, ESMA does not rule out
the possibility of there being only one
investor in the AIF, provided that there
is no legal restriction on the pooling of
capital. We believe that starting point
presupposes that the undertaking
is viewed as a collective investment
scheme. On the other hand, where an
investment company or a single asset
structure is established on the basis of
(public) capital raising in the market and
marketed as an investment opportunity,
this will point the corporate structure in
the direction of being an AIF.
Another element is the requirement
for a “defined investment policy”. The
constitutional documents and the
prospectus usually show whether a
company operates in line with a defined
investment policy or not. In our view,
the requirement for an investment
policy may be viewed differently in a
single asset structure where the strategy
is already “given”, than in an investment
company which aims to invest in several
asset classes and with a mandate.
Finally, in the event that a foreign
fund or regulated entity acquires the
company which owns the property
without establishing a Norwegian
holding structure, it will most likely be
viewed as a direct investment and not as
a separate Norwegian AIF.
Most managers registered in Norway
are structured either as private limited
liability companies or national funds/
special funds.
NORTHERN EUROPE AND SCANDINAVIA—SAFE HAVENS WITH A FUTURE? | NORWAY
38 | REAL ESTATE GAZETTE
GERMANY VERSUS UK—WILL SECONDARY LOCATIONS EVER REALLY MAKE IT? | GERMANY
Due to increasing rents and property prices in Germany, investors’ interest in the commercial and residential
real estate market continues to be strong.
Most investors tend to focus on the seven
prime locations of Frankfurt, Hamburg,
Munich, Cologne, Berlin, Düsseldorf and
Stuttgart. Recent studies have shown,
however, that secondary locations are
shedding their image as forgotten cities
and may well offer excellent opportunities
for investors.
In Germany, secondary locations are
defined as cities with more than 100,000
inhabitants that do not fall within the top
seven locations (for example, Nuremberg,
Bremen and Dortmund). A 2015 study
by the real estate company, Corpus Sireo,
has shown that in 2014, commercial rents
in secondary locations increased by 3
per cent while in the top seven cities,
commercial rents increased by only 1.8
per cent. In Mannheim, one of Germany’s
sub-prime locations, commercial rents
increased by an astonishing 10 per cent
in 2014 whilst in the same period, office
rents in the prime location of Cologne
decreased by 1 per cent.
One of the reasons for the burgeoning
real estate market in secondary locations
is that investors who still consider real
estate in Germany to be a safe bet
are encountering growing difficulties in
obtaining adequate yields in the prime
locations. Due to a lack of core properties
and high prices, rents in prime locations
do not increase at the same rate as the
investment capital, encouraging investors
to look at secondary cities.
In order to make a rewarding investment
in a secondary location, certain factors
should be taken into account:
1. Demographic developments should
be borne in mind when investing
in a secondary location. While the
population in the top seven locations is
expected to remain stable or to grow
in the future, many other regions in
Germany are expected to suffer from
population decline and ageing. Especially
in Eastern Germany and in the Ruhr
area, many cities are shrinking and it is
by no means certain that the current
HEINER FELDHAUS, COLOGNE
HIDDEN PROSPECTS—
INVESTING IN SECONDARY
LOCATIONS IN GERMANY
influx of refugees can reverse this trend.
However, other cities in secondary
locations like Ingolstadt and Kassel
have experienced rent increases of
30 per cent in the last five years due
to a growing population as a result of
excellent economic development in
these areas.
2. From a legal perspective, investments
in secondary locations should
generally meet the same criteria as
investments in prime locations. Buyers
of properties in any location should
undertake a careful review of leases,
service contracts, warranties, building
permits, public law requirements, etc
before investing. However, particular
characteristics of secondary locations
should be taken into account. A study
by Colliers International Deutschland
showed, for example, that commercial
lease terms in secondary locations are
statistically shorter than those in prime
locations. Also, real estate investors
in less advantageous locations should
evaluate their target property very
carefully, given that any deficiencies in a
property in a secondary location tend
to have a stronger negative impact than
deficiencies in a property in a prime
location, which can often be offset by
the excellent location.
3. When investing in residential real
estate, recent developments in
German tenancy law should be
borne in mind. In 2015, the German
Bundestag introduced a rental cap
(Mietpreisbremse), which is designed to
cap the amount by which residential
rents are permitted to rise in urban
areas which are threatened by soaring
rents levels. The law allows a maximum
of a 10 per cent increase in rent on a
new lease contract over an agreed rent
table or index for the relevant district.
Germany’s federal states have the
power to designate areas within their
jurisdiction which fall into this category.
However, while the Mietpreisbremse
has already been implemented in
prime locations like Berlin, Munich and
Cologne, many secondary locations
like Hanover, Dortmund or Essen are
not yet covered by any rental cap. This
offers a further advantage for investors
who can plan their investment in
secondary locations without having to
consider rent restrictions.
4. Another advantage may be the
willingness of the local administration
to cooperate. As it is more difficult
for secondary locations to attract real
estate investors, their administrations
tend to be more willing to compromise
when it comes to the question of
compliance with public building law
requirements such as zoning plans or
the protection of historic buildings and
buildings of cultural value. Therefore,
the local administration in secondary
cities is often willing to meet the
individual needs of investors in order
to attract them to their city.
In summary, it is fair to say that Germany’s
secondary locations offer interesting
investment possibilities, combining the
advantages of the stable German real
estate market with affordable prices and
attractive yields.
ISSUE 23 • 2016 | 39
OMAN
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T: +968 2464 7700 | F: +968 2464 7701
POLAND
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Warsaw PL-00-113
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QATAR
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West Bay, Doha
T: + 974 4420 6100 | F: + 974 4420 1500
ROMANIA
Metropolis Center 89-97 Grigore Alexandrescu
Str. East Wing, 1st Floor Sector 1, 010624,
Bucharest
T: +40 372 155 800 | F: +40 372 155 810
RUSSIA
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T: +7 (495) 221 4400 | F: +7 (495) 221 4401
Nevsky pr., 28, bld. A (Zinger house),
St. Petersburg 191186
T: +7 (812) 448 7200 | F: +7 (812) 448 7201
SAUDI ARABIA
Level 20, Kingdom Tower
PO Box 57774
11584 Riyadh
T: +966 11 201 8900 | F: +966 11 201 8901
SLOVAK REPUBLIC
Suche myto 1 SK-811 03, Bratislava
T: +421 2 5920 2122 | F: +421 2 5443 4585
SOUTH AFRICA
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Sandton, Johannesburg 2196
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SPAIN
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SWEDEN
Stockholm
Advokatfirma DLA Piper Sweden KB
Kungsgatan 9 PO Box 7315, SE – 103 90,
Stockholm
T: +46 8 701 78 00 | F: +46 8 701 78 99
UAE
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Abu Dhabi
T: +971 2 494 1500 | F: +971 2 494 1501
Level 9, Standard Chartered Tower, Emaar Square,
Dubai
T: +971 4 438 6100 | F: +971 4 438 6101
UKRAINE
77A Chervonoarmiyska Str., Kyiv 03150
T: +380 (44) 490 95 75 | F: +380 (44) 490 95 77
UNITED KINGDOM
Victoria Square House , Victoria Square,
Birmingham B2 4DL
T: +44 (0) 8700 111 111 | F: +44 (0) 121 262 5794
Rutland Square, Edinburgh EH1 2AA
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India Buildings , Water Street, Liverpool L2 0NH
T: +44 (0) 8700 111 111 | F: +44 (0) 151 236 9208
3 Noble Street, London EC2V 7EE
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1 St Paul’s Place, Sheffield S1 2JX
T: +44 (0) 8700 111 111 | F: +44 (0) 114 270 0568
AUSTRIA
Schottenring 14 A-1010, Vienna
T: +43 1 531 78 0 | F: +43 1 533 52 52
BAHRAIN
Trust Tower Suite 410 Diplomatic Area PO Box
65137, Manama
T: +973 1650 0513 | F: +973 1650 0501
BELGIUM
Brusselstraat 59, 2018, Antwerp
T: +32 (0) 3 287 2828 | F: +32 (0) 3 230 4221
106 Avenue Louise, Brussels B-1050
T: + 32 (0) 2 500 1500 | F: + 32 (0) 2 500 1600
CZECH REPUBLIC
Perlová 5 CZ-11000, Prague 1
T: +420 222 817 111 | F: +420 222 246 065
FINLAND
Asianajotoimisto DLA Piper Finland Oy,
Fabianinkatu
23, Helsinki, FI-00130
T: +358 9 4176 030 | F: +358 9 4176 0417
FRANCE
27 rue Laffitte, 75009 Paris
T: +33 1 40 15 24 00 | F: +33 1 40 15 24 01
GEORGIA
Melikishvili street # 10, Tbilisi 0179
T: +995 32 2509 300 | F: +995 32 2509 301
GERMANY
Joachimstaler Str. 12, Berlin D-10719
T: +49 (0)30 300 13 14 0
F: +49 (0)30 300 13 14 40
Hohenzollernring 72, Cologne D-50672
T: +49 (0)221 277 277 0
F: +49 (0)221 277 277 10
Westhafenplatz 1, Frankfurt D-60327
T: +49 (0)69 27133 0 | F: +49 (0)69 27133 100
Jungfernstieg 7, Hamburg D-20354
T: +49 (0) 40 1 88 88 0
F: +49 (0) 40 1 88 88 111
Isartorplatz 1, Munich D-80331
T: +49 (0)89 23 23 72 0
F: +49 (0)89 23 23 72 100
HUNGARY
MOMentum Office Building
Csörsz u. 49-51. Budapest H-1124
T: +36 1 510 1100 | F: +36 1 510 1101
ITALY
Via Gabrio Casati 1 (Piazza Cordusio) – 20123
Milan
T: +39 02 80 61 81 | F: +39 02 80 61 82 01
Via dei Due Macelli 66 – 00187
Rome
T: +39 06 68 88 01 | F: +39 06 68 88 02 01
KUWAIT
Suad Commercial Complex 3rd Floor, Block A
PO Box 22833, Safat 13089, Kuwait City
T: +965 2291 5800 | F: +965 2291 5801
MOROCCO
Business Center, Tour Crystal 1
10th floor
Boulevard des Almohades
Casablanca
20000
NETHERLANDS
Gebouw Meerparc Amstelveenseweg 638
1081 JJ Amsterdam
T: +31 (0)20 541 98 88 | F: +31 (0)20 541 99 99
NORWAY
Advokatfirma DLA Piper Norway DA
Bryggegata 6 PO Box 1364, Vika, 0114 Oslo
T: + 47 24 13 15 00 | info.norway@dlapiper.com
Image credits: Shutterstock
KEY CONTACTS
EMEA
Olaf Schmidt
Co-chair, Global Real Estate Practice
Head of International Real Estate
Milan, Italy
T +39 02 80 618 504 | F +39 02 80 618 201
olaf.schmidt@dlapiper.com
US
Jay Epstien
Co-Chair, Global Real Estate Group
Washington, DC
T +1 202 799 4100 | F +1 202 799 5100
jay.epstien@dlapiper.com
ASIA
Susheela Rivers
Head of Asia-Pacific Real Estate
Hong Kong, People’s Republic of China
T +852 2103 0760 | F +852 2810 1345
susheela.rivers@dlapiper.com
AUSTRALIA
Les Koltai
Head of Australia Real Estate
Melbourne
T +61 2 9286 8544 | F +61 3 9274 5111
les.koltai@dlapiper.com
UK
Ian Brierley
Head of UK Real Estate
London
T +44 207 796 6232 | F +44 207 796 6666
ian.brierley@dlapiper.com
GERMANY
Carsten Loll
Head of Real Estate Germany
Munich
T +49 (0)89 232 372 150
carsten.loll@dlapiper.com
DLA PIPER OFFICES
www.dlapiperrealworld.com
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