Outside of speculative markets, investment in real estate bears comparatively low risk. Identifying and structuring profitable real estate investments, however, requires substantial market insight as well as substantial legal, commercial and technical know-how. Furthermore, liquidating real estate investments is relatively time consuming and costly. This will discourage certain investors. Real estate investment funds offer a suitable vehicle for investors who wish to profit from the comparatively lower risk of real estate investment but require higher flexibility of their investment. Where German real estate investments are concerned investors may first look into domestic law for corporate structuring. Fund structures available under German law, however, are somewhat rigid. Luxembourg vehicles such as the reserved alternative investment fund (RAIF) may offer an attractive alternative.
RAIFs are unregulated investment vehicles that are available to inter alia real estate investments. They were introduced in Luxembourg by the Law of 23 July 2016 on Reserved Alternative Investment Funds. As other alternative investment funds established under the laws of Luxembourg RAIFs may be set up without prior approval from Luxembourg’s financial regulator – the Commission de Surveillance du Secteur Financier. Their establishment merely has to be registered with the Luxembourg trade and companies register (Registre de Commerce et des Sociétés). Only the fund management company and the depositary bank of RAIFs are subject to supervision by the financial regulator. Thus, launching RAIFs remains relatively simple and takes comparatively little time.
RAIFs largely correspond with the familiar Luxembourg special investment funds:
• they are only open to “well-informed investors”;
• their minimum capital is EUR 1,250,000;
• they may take the legal form of a common fund or may be constituted as an investment company; and
• in Luxembourg, they are subject only to subscription tax.
Unlike special investment funds RAIFs can, however, be structured as umbrella funds with ring-fenced sub-funds (compartments). Furthermore, RAIFs must not be self-managed but rather managed by external authorized alternative investment fund managers.
The below overview seeks to provide the reader with an introduction to RAIFs as a new vehicle for unregulated investment and consider their applicability for real estate investment in Germany.
RAIFs are only open to “well-informed investors”; thus, investors who can properly assess the risks associated with the relevant investment. The term “well-informed investor” within the meaning of the RAIF Law includes institutional and professional investors as well as other investors who established that they are well informed. They may do so by confirming in writing that they adhere to the status of “well-informed investor” and either (i) invest a minimum of EUR 125,000 or (ii) obtain an assessment by a credit institution, an investment firm or a management company which certifies the investors’ ability to understand the risks associated with investing in the relevant RAIF.
The RAIF Law allows two choices of legal form for RAIFs: they may be organized in contractual form as a common fund (Fonds Commun de Placement), or incorporated as a company.
RAIFs structured as common funds do not have legal personality, but are regarded as co-proprietorships. Hence, RAIFs organized as common funds cannot themselves assume rights or obligations or make decision and thus have to be managed by a management company.
Alternatively, RAIFs may be established as a company. These companies can be incorporated either as an investment company with variable capital (Société d’Investissement à Capital Variable) or an investment company fixed capital (Société d’Investissement à Capital Fixe). These investment companies may take one of six possible legal forms:
• public limited company (Société Anonyme);
• private limited company (Société à Responsabilité Limitée);
• limited partnership (Société en Commandite Simple);
• partnership limited by shares (Société en Commandite par Actions);
• special limited partnership (Société en Commandite Spéciale); and
• cooperative company organized as a public limited company (Société Cooperative Organisée comme une Société Anonyme).
The special limited partnership was introduced by the Law of 12 July 2013 on Alternative Investment Fund Manager Law. Like the common funds it has no legal personality. However, it offers a high degree of contractual flexibility.
The different entities may be structured as single funds or as umbrella funds consisting of multiple compartments, each with a different investment policy and asset portfolio. Nonetheless, each compartment of an umbrella RAIF is free to invest in one or more other compartments of the same RAIF under certain conditions. The fund and compartments respectively may have an unlimited number of share classes. The structures may be open-ended or closed-ended, for both subscriptions and redemptions.
The net assets of RAIFs may not be less than EUR 1,250,000. Only 5% of the capital must be paid upon subscription. The minimum funding of EUR 1,250,000 must be procured within a period of twelve months following the authorization of the relevant RAIF.
Establishment and offering documents
RAIFs are established by notarial certification. This certification shall comprise the confirmation of the RAIF’s fund manager that the fund is created and must be published in the official gazette of Luxembourg (Mémorial). Thus, the fund’s constitutional documents do not have to be notarized. Upon their establishment RAIFs are to be entered in a list maintained by the Luxembourg trade and companies register.
For each RAIF an offering document must be prepared which indicates on its front page that the fund is not subject to supervision in Luxembourg. Under certain conditions, distinct offering documents can be prepared for compartments of umbrella RAIFs.
Unlike special investment funds, which may be self-managed provided that they are established as an investment company, all RAIFs – whether structured as common funds or investment companies – must be managed externally, by alternative investment fund managers authorized by the Commission de Surveillance du Secteur Financier. Hence, while RAIFs themselves remain unregulated, their management is regulated. Alternative investment fund managers of RAIFs established as investment companies may be domiciled outside of Luxembourg in another European Union member state. Thus, for example, a German alternative investment fund management company can manage a Luxembourg RAIF, provided that the relevant RAIF is organized in corporate form. For RAIFs set up as common funds, however, cross-border management is not permissible.
RAIFs established as common funds have no legal personality. Therefore, they have to be managed by management companies. The individuals who effectively conduct the business of such management companies shall be of good repute and be sufficiently experienced in the type of RAIFs to be managed. The share capital of a management company must be at least EUR 125,000.
Authorized alternative investment fund managers can – subject to certain formalities – market shares of RAIFs to investors domiciled in other European Economic Area member countries. Whether shares of Luxembourg RAIFs may be marketed outside of the European Economic Area will depend on the laws of the jurisdictions where shares shall be offered.
Eligible assets and risk diversification
The RAIF Law does not limit the asset classes RAIFs may invest in. How the investment is structured is, however, somewhat restricted.
RAIFs are subject to the principle of risk-spreading. Consequently, investment in RAIFs has to comply with regulations for risk diversification comprised in the RAIF Law. Where a relevant matter is not regulated in detail in the RAIF Law, the provisions on risk-spreading for special investment funds apply; in particular, Commission de Surveillance du Secteur Financier Circular 07/309 on Special Investment Funds.
In line with these provisions RAIFs may not be structured as a single asset fund. For example, RAIFs cannot be used for investment in a single property, since such investment would not comply with the applicable risk-spreading provisions. There is, however, an exception for RAIFs that invest exclusively in risk capital. For these the principle of risk-spreading does not apply.
Every Luxembourg RAIF must appoint a depositary bank. The depository is responsible for both the safekeeping of assets and the supervision of the fund. Where applicable, the depositary is also responsible for supervising the RAIF’s management company. The individuals who represent the depositary bank must be of good repute and have sufficient and relevant experience.
In terms of tax RAIFs are treated like special investment funds. They are subject to subscription tax (taxe d’abonnement) in the amount 0.01% of their net asset. Tax exemptions are available for certain money market, pension and microfinance funds and funds investing in other funds already subject to subscription tax.
Furthermore, unless they are organized as common funds, RAIFs that – in line with their constitutional documents – invest exclusively in risk capital may opt to be taxed as risk capital companies. This requires that the relevant fund’s auditor confirm that the RAIF is in fact invested exclusively in risk capital.
All compartments of the same umbrella fund are subject to the same tax regime. Hence, it is not permissible to set up within the same umbrella fund compartments subject to subscription tax as well as compartments subject to the risk capital companies tax regime.
Luxembourg RAIFs as vehicles for real estate investment in Germany
Luxembourg RAIFs offer significant advantages over the available German investment funds. German special investment funds are considerably more restricted and do not offer the same flexibility in structuring as RAIFs. The German Investment Code (Kapitalanlagegesetzbuch) does not allow for an unregulated alternative investment fund or an unregulated alternative investment fund umbrella structure.
In addition, due to the rather straightforward implementation procedure for RAIFs, RAIFs are favorable to German special investment funds under time to market considerations as well. While RAIFs may be established without prior approval of the Commission de Surveillance du Secteur Financier, German special investment funds are much more regulated. In particular, their investment requirements as well as any material amendments thereto must be submitted to the German financial regulatory authority (Bundesanstalt für Finanzdienstleistungsaufsicht) before issuing units or shares.
Considering that German alternative investment fund management companies (Kapitalverwaltungsgesellschaft) are, in principle, free to manage Luxembourg RAIFs and units or shares of RAIFs may be marketed in Germany, Luxembourg RAIFs are an attractive alternative to investment vehicles under German law.
In respect to German taxation Luxembourg RAIFs will be treated different depending on whether they are established as common funds, partnerships or corporations. Therefore, when investing in German real estate properties through Luxembourg RAIFs the funds’ legal form should be considered under tax aspects. For an overview of taxation of real estate investments in German please refer to our earlier LinkedIn Post Real Estate Investment in Germany – Taxation.
For legal advice on real estate investment in Germany as well as corporate deal and tax structuring of real estate transactions please feel free to contact Dr. Nicolas Bremer, attorney and partner of the law firm Alexander & Partner Rechtsanwälte.