The Bundesrat upper house of parliament has passed the new Fund Location Act (Fondsstandortgesetz – FoStoG), which is intended to make Germany a more attractive location for investment funds.
The act aims to amend the German Capital Investment Code (KAGB), in order to simplify the conception, management and financial reporting of open and closed-ended funds, including a further reduction in administrative requirements for funds, the abolition of a permanent data carrier for investors’ data (if not specifically required by EU law), and various written form requirements.
The new legislation is relevant for structuring real estate investments whenever these are indirectly acquired via property holding companies. Under a so-called two-tier structure, an option that investment funds sometimes use, a given fund owns a property company which in turn holds an interest in another property company. The actual property is owned by the latter. Such structures are usually chosen for tax reasons. Two-tier structures used to be permitted only for real estate located outside Germany. In future, they will also be permitted for real estate investments in Germany
The principal regulations included in the Fund Location Act are as follows, according to the Zentraler Immobilien Ausschuss (ZIA):
- In addition to the introduction of the new open-ended infrastructure special fund, closed-ended public AIFs may now invest in infrastructure project companies.
- The changes relating to open-ended special AIFs in the Capital Investment Code will now be taken-up by in the Investment Tax Act (InvStG), in particular the increase of the borrowing limit for real estate financing from 50% to 60%.
- Partial replacement of the written form requirement by a text-based format for investment terms & conditions, shareholder agreements and reporting.
- Deadline for the annual financial reporting for closed-ended public investment management companies to be set at 6 months.
- Greater flexibility in the structuring of open-ended real estate funds in connection with property companies.
- The new act is also intended to make the acquisition of company shares more attractive for employees of start-ups and other small companies via a series of tax breaks.
But reactions from the real estate sector indicate that opportunities have been missed. Jochen Schenk, Vice President of the ZIA, says that whilst the introduction of new fund concepts is a positive step, regulations to make this an attractive proposition are missing. The sector had hoped that the act would pave the way for the introduction of closed-ended special funds as a vehicle for public AIFs but that just didn’t happen.
Schenk said that the closed-ended special fund means an opportunity has been missed to create a new concept for private investors and thus to divert more private capital into urgently needed investments in infrastructure and sustainability. On the positive side, it should be emphasised that the exemption under accounting law from the obligation to provide consolidated financial statements for closed-ended investment funds issued as special AIFs has been included in the parliamentary debate, he said. At the same time, the investment tax law has not been sufficiently amended - so the new vehicle can only release part of its true potential, he said.
However, Michael Schneider, CEO at Hamburg-based Intreal, which launches and manages real estate funds for third-party fund initiators and asset managers, broadly welcomed the legislation, saying it increased the flexibility for investment funds. “The competition for good property stock is very intense at the moment, which makes it important for open-ended public real estate funds to be able to act swiftly and to have the right to acquire various structures”, he said.
The rules governing shareholder loans will also be relaxed further. Shareholder loans are granted by a given investment fund to its property holding companies. They are usually employed to optimise taxes and cashflows.
So far, the borrowing cap here has been 50% of the fair market value of the properties held by the respective property company. This limit will cease to apply in future if the respective fund owns 100% of the property company’s shares.
Another implied change is that it will becomes easier to merge investment funds. To move forward with a merger, the AIF management company will no longer need to submit a formal exchange offer but may simply merge the funds.
Schneider added: “The occasional merger of investment funds is nothing new. But AIFM companies have reason to welcome the new regulations because they reduce the red tape involved. From the investors’ point of view, however, the change means that they will have to look closely at what a planned merger will effectively mean for them, and that they may wish to exercise their termination rights.”
“But practically speaking, this aspect is probably more relevant for securities funds. The real estate funds currently offered on the market are comparatively diverse, which makes further mergers more or less unlikely at this time.”
