When structuring a non-listed real estate vehicle, fiscal efficiency, liquidity mechanism and recognizable structure for investors are key considerations. Furthermore, the type and size of investors, the intended duration of the vehicle and the desired leverage level play a role in the structuring process. Under Dutch law, there are several main investment vehicles for non-listed real estate funds. The vehicles can be legally structured as a CV (limited partnership), an NV (public limited company) or FGR (Fund for Joint Account). Fiscally, these legal structures can qualify as FBI (Fiscal Investment Institution). Since the direct real estate investments, managed by a.s.r. real estate, shifted to non-listed real estate vehicles, the manager selected the best suiting investment product for the specific markets, assets and investor base.
In general, FBIs are subject to 15% dividend withholding taxes (DWT). In some instances, non-Dutch investors may not be waived for the dividend withholding taxes, if the fiscal policy in the country of origin does not compensate for Dutch dividend withholding taxes. This creates inefficiency and uncertainty for foreign investors. Another downside for a fiscal FBI structure was the requirement for the a.s.r. managed vehicles (with the manager’s AIFMD license) to have an investor base of at least 75% tax exempt institutional investors. This limits the amount insurance companies and banking corporations could hold in the vehicle, such as several entities within the anchor investor. FBIs and FGRs, provided that they are investment vehicles according to article 1:1 of the Dutch Act on Financial Supervision (WFT), are not subject to real estate transfer taxes (RETT), provided that each of the investors, and entities connected to the investor, will hold an interest less than 1/3 of the fund size. The possibility of RETT could therefore not be avoided by either vehicle type.
An important downside for the FGRs is the limit on the transfer of units to outside investors (secondary trading) and the manager (buy-in of shares). The manager has worked extensively on optimizing the liquidity mechanism of its funds. From a Dutch tax perspective, there are two types of FGRs, a “closed” and “open” FGR. The FGR is subject to dividend withholding taxes (DWT) when structured as an open FGR. Closed FGRs should meet certain criteria and are not subject to CIT (Corporate Income Taxes) and/or DWT, as they are tax transparent and the ultimate beneficiary owners are taxed according to their tax status. The main criteria are a transferability of the participations via the redemption facility of the Fund to the FGR (buy-in) or with consent of all participants to other parties. Open FGRs are subject to CIT and/or DWT, but can opt for the status of a FBI, provided the conditions under FBI are met. This would expose the funds to the same downside effects as FBIs. Furthermore, the government expressed the intention to no longer allow direct investments (within this article, FBIs would also qualify as holding direct investments) in real estate by non-transparent FBIs in the coalition agreement on 10 October 2017.
The a.s.r. non-listed real estate vehicles are structured as FGRs, the ASR Dutch Prime Retail Fund being first in 2011, followed by the ASR Dutch Core Residential Fund in 2013 and the ASR Dutch Mobility Office Fund in 2016. This has enabled the anchor investors to transfer properties from the fund’s predecessors to the funds, in line with the ASR Dutch Prime Retail Fund and ASR Dutch Core Residential Fund.
The FGR with the hybrid buy-in and secondary trading option was created by the tax department of ASR Nederland N.V. and the fund’s tax counsel PwC, providing an innovative mechanism in the Dutch non-listed fund universe. This mechanism provides a six month (for ASR DPRF) or twelve month (ASR DMOF and ASR DCRF) period allowing the Manager to match the redemption with new issue requests or forward commitments. After the matching period, the redeeming investor is able to sell its stake on the secondary market. Lastly, the liquidity mechanism adds a premium or discount mechanism for issuing or redeeming investors. This creates the level-playing field for the redemption facility (buy-in or secondary market trading) where discounts and premiums can be settled among investors for investments in non-listed real estate vehicles. This has led to the tailor-made FGR, as used by a.s.r. real estate since 2011, which enabled and continuous to enable investors liquidity and fiscal efficiency in a non-listed real estate vehicle product. For more information on the a.s.r. real estate sector funds and fiscal structuring, please contact Luc Joosten.