Real estate fund structuring Presentation to the British Property Federation Regulatory Committee 21st January 2014 CONSULTING LLP A changed environment for fund structuring • Commercial changes • Regulatory changes • Tax changes CONSULTING LLP !2 Commercial changes http://www.johnforbesconsulting.co.uk/aref-report Improved governance Greater transparency Stronger controls environment More independent supervision Blurring of the boundaries between open-ended and closed-ended funds CONSULTING LLP A new style of fund !3 Commercial changes Example 2 New fund products Closed-ended funds becoming more open-ended Example 1 Open-ended becoming more closed-ended CONSULTING LLP A new style of fund !4 Regulatory changes http://www.johnforbesconsulting.co.uk/the-rock-of-sisyphus CONSULTING LLP !5 Regulatory changes • AIFMD • Solvency II / IORP CONSULTING LLP !6 AIFMD DIRECTIVE 2011/61/EU OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 8 June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010 Uu CONSULTING LLP !7 Impact of AIFMD on fund managers Do I manage AIFs? No Yes Yes Will I market AIFs in future? No Relax CONSULTING LLP Yes Authorisation needed Are they all grandfathered? No One year transition, then.. Impact of AIFMD on fund managers Marketing regime in the EU AIFMD requirements to be applied EU AIFM with EU AIF AIF passport Full AIFMD regime EU AIFM with non-EU AIF Private placement until 2018 Full AIFMD regime with reduced depository requirements Non-EU AIFM with Private placement EU or non-EU AIF until 2018 Transparency and disclosure requirements. NOTE: EU and non-EU AIFM may be able to opt or may be required to use the AIF passport after 2015 in which case the full AIFMD requirements will apply. CONSULTING LLP Impact of AIFMD on fund managers 2013 2014 EU AIFM, EU AIF CONSULTING LLP 2016 2017 2018 2019 Full compliance Non EU AIFM, EU Private placement AIF Non EU AIFM, non EU AIF 2015 Uncertain Private placement Uncertain Impact of AIFMD on fund managers Investors Fund Fund manager Fund Fund Holding company SPV SPV CONSULTING LLP SPV Key structural issues If you have a non EU fund manager, meeting substance requirements; If you have parallel partnerships, making sure the holding vehicle is not regarded as a fund; Carried interest and remuneration rules; SPV Decision making process, managing tax and AIFMD requirements; Anything else? Solvency II and IORP Solvency II A fundamental reform of the capital adequacy regime for the European insurance industry. It aims to establish a revised set of EU-wide capital requirements and risk management standards to reduce systemic risk in the insurance industry IORP Institutions for Occupational Retirement Provisions Directive - the equivalent provisions to Solvency II for pension funds. CONSULTING LLP Solvency II 2013 2014 2015 Transition period EU trilogue negotiations completed in November 2013, agreed compromise level 1 text. CONSULTING LLP EU Vote (11/3) Publication of full level 2 regulation Other clarification Transitional implementation Focus on ORSA !13 Approval of internal models Detailed implementation steps 2016 Full implementation The three pillars Pillar I: Quantitative aspects; Pillar II: Governance and risk management; Pillar III: Reporting and disclosure. West Wycombe House CONSULTING LLP The three pillars Pillar I: Quantitative aspects; Pillar II: Governance and risk management; Pillar III: Reporting and disclosure. Capital charges (Solvency Capital Requirement) West Wycombe House CONSULTING LLP The three pillars Pillar I: Quantitative aspects; Pillar II: Governance and risk management; Pillar III: Reporting and disclosure. Capital charges (Solvency Capital Requirement) Reporting requirements West Wycombe House CONSULTING LLP The three pillars Pillar I: Quantitative aspects; Pillar II: Governance and risk management; Pillar III: Reporting and disclosure. Capital charges (Solvency Capital Requirement) Reporting requirements Own Risk Solvency Assessment (ORSA) CONSULTING LLP West Wycombe House Solvency II SCR treatment of investments under standard model Real estate Real estate funds Equities SCR shock on net value of equity Original 25% SCR shock on treatment gross value of assets Listed: 39% Unlisted: 49% Real estate debt Originally used SCR RE shock for collateral but then switched to bond rating. +/- 10% dampener Current position CONSULTING LLP For equities held Default to transparent real estate treatment. prior to Solvency II, 7 year transition from Will there be another Not clear when opaque 22% SCR shock to consultation exercise? equities treatment is full equities SCR possible shock !18 Solvency II SCR treatment of investments under standard model Real estate Real estate funds Equities SCR shock on net value of equity Original 25% SCR shock on treatment gross value of assets Listed: 39% Unlisted: 49% Real estate debt Originally used SCR RE shock for collateral but then switched to bond rating. 10% dampener Long term investment+/asset proposals Current position CONSULTING LLP For equities held Default to transparent real estate treatment. prior to Solvency II, 7 year transition from Will there be another Not clear when opaque 22% SCR shock to consultation exercise? equities treatment is full equities SCR possible shock !19 Tax changes Base erosion and profit shifting OECD action plan targets: a) b) c) d) e) hybrids; Intra-group financing; Use of tax havens; Use to transfer-pricing; Tax avoidance generally. Double tax treaty changes Double tax treaties amended to prevent use of property SPVs to avoid taxation of disposal gains. Domestic law RE transfer tax and interest capping changes. EU anti-discrimination developments "The Commission will investigate whether the tax rules concerning cross-border investment returns of pension and life insurance providers, including their income from real estate and capital gains, present discriminatory tax obstacles to cross-border investments; where necessary, it will initiate infringement procedures” Tax advantages of cross border fund structures being eroded CONSULTING LLP !20 Tax changes Traditional European fund structure Fund of funds investing in tax efficient local funds Institutions investing directly . Investor Inve Investor Investor Fund Fund Holding company SPV SPV SPV SPV Fund Fund Fund Fund SPV Tax advantages of cross border fund structures being eroded CONSULTING LLP !21 SPV Two new fund vehicles EU Longterm Investment Funds http://www.johnforbesconsulting.co.uk/eltif UK Tax Transparent Funds http://www.johnforbesconsulting.co.uk/tax-transparent-funds CONSULTING LLP !22 UK authorised investment funds (for real estate investment) Legal form Tax regime Authorised Unit Trust Open-ended investment company Authorised Investment Fund Property Authorised Investment Fund Limited partnership Tax Transparent Fund Non UCITS retail scheme (NURS) Regulatory regime or Qualified investor scheme (QIS) CONSULTING LLP Co-ownership fund For further information General: http://www.johnforbesconsulting.co.uk/home Latest publication, forthcoming events etc: http://www.johnforbesconsulting.co.uk/insight All my publications: http://www.johnforbesconsulting.co.uk/recent-publications To sign up for my mailing list for updates: http://www.johnforbesconsulting.co.uk/mailing-list CONSULTING LLP !24 www.johnforbesconsulting.co.uk This presentation has been prepared for general guidance and does not constitute professional advice. You should not act upon the information contained in this presentation without obtaining professional advice. No representation or warranty is given as to the accuracy or completeness of the information contained in this presentation. To the extent permitted by law, John Forbes Consulting LLP and its members do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this presentation or for any decision based on it. © 2014 John Forbes Consulting LLP. CONSULTING LLP !25
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