Investments in real estate and the Dutch Financial Supervision Act

For many years real estate has been an important asset class for investors. We regularly approached advise and assist clients with the (financial) structuring of investments in real estate. Tax is often leading in processes like this and the influence of the Dutch Financial Supervision Act (Wet op het financieel toezicht (FSA)) and the regulations promulgated thereunder on the structuring process are often underexposed or even forgotten.

Limited Partnership an investment fund

Nevertheless, the impact of the FSA on an investment structure can be significant. In particular in cases where the applicability of the FSA leads to a license obligation. The limited partnership (commanditaire vennootschap (CV)) is a vehicle often used in real estate investment structures. A group of investors brings together an amount of money, which will be used for making investments in real estate and the partners of the CV share in the profits realized with such investments. The CV is managed by the general partner, the manager. In the example used above, the CV qualifies as an investment fund within the meaning of article 1:1 FSA. Pursuant to article 2:65 FSA a license obligation applies to the manager of an investment fund.

Article 2:65 FSA stipulates that it is not permitted to manage investment funds without being granted a license by the Netherlands Authority for the Financial Markets (Autoriteit Financiele Market, (AFM)), or another competent regulator in another EU-Member State.

Article 2:66a FSA provides for the possibility for fund managers to benefit from a so-called light regime on the basis of which a manager may operate without having obtained a license. The manager then operates on the basis of a registration with the AFM. In order to benefit from the light regime certain conditions should be met:

• the total value of the assets under management may not exceed EUR 100,000,000 in case leveraged or EUR 500,000,000 unleveraged and without redemption or repayment rights (rechten tot inkoop of terugbetaling) which can be exercised in relation to the interest in the funds during a period of five years following the date of the acquisition of these interests; and
• interests may only be offered:
  • to less than 150 persons;
  • for a counter value of at least 100,000 per investor; or
  • for a nominal value of EUR 100,000 or (d) to professional investors.

Upon acceptance of the registration request by and assessment of the documentation submitted to the AFM, the fund manager will be registered in the public register maintained by the AFM. In addition, the manager needs to comply with, amongst others, certain obligations imposed by the Dutch Act on Prevention of Money Laundering and Terrorist Finance (Wet ter voorkoming van witwassen en financieren van terrorisme) and reporting obligations towards the Dutch Central Bank (De Nederlandsche Bank).

Currently, numerous investment structures are being used in the Netherlands that do not comply with the FSA. It is a matter of time before the AFM starts enforcement actions.

Bonds; prospectus required

Another investment structure we often come across in our practice is a bond structure (obligatiestructuur), whereby bonds are being issued to (retail) investors. The proceeds of such a bond program are used for investing in the acquisition or development of real estate projects. A bond qualifies as security within the meaning of article 1:1 FSA.

In order to be allowed to offer bonds to the public in the Netherlands, the issuer has to make a prospectus approved by the AFM (or another competent regulator in another EU-Member State) publicly available. Preparing a prospectus and having it approved by the AFM is a time and cost consuming exercise.

However, the FSA also provides for an exemption that allows offerors of e.g. bonds to offer bonds without having an approved prospectus being made available. This is possible in case of offerings with a value of less than EUR 5,000,000, calculated over a 12 months period. In order to benefit from this exemption, the offeror must notify the AFM about the offer and has to prepare an information memorandum in a format prescribed by the AFM. In most cases the FSA seems to be applicable to investment structures resulting in license or prospectus obligations.

Luckily, it is not always bad news: the FSA provides for a number of solutions that makes it easier to invest in real estate in a complied manner.

Are you concerned about whether or not your investment structure complies with the FSA, or are you planning to invest in real estate and have questions about the most optimal investment structure, please contact Matthijs Bolkenstein or +31646630866. Meijburg Legal likes to think along with you!