2015 Guide on How to Invest in Real Estate in:

Transcription

1 2015 Guide on How to Invest in Real Estate in: France Germany United Kingdom United States of America Mayer Brown... A truly global elite law firm The cornerstone of any great real estate deal Brick by brick, we make it happen... globally and locally

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3 Table of Content France 1. How are ownership rights organized? How to acquire real estate? What environmental and safety issues may arise? How can ownership rights be affected? How do commercial leases work? How is the 3% tax applied?...12 Real Estate practice in France Germany 1. What does the real estate investment market in Germany look like? What are the usual steps for purchasing and conveyancing real estate in Germany? What are the common forms of investment? What are the individual steps in purchasing a property? What is the safest way to acquire title to a property? What are the approximate incidental costs of a transaction? What are the legal principles governing tenancy agreements? How can the purchase of a property be financed? What are the benefits of a joint venture? What tax rules apply? How is the property managed? What are the land or building owner s responsibilities?...21 Real Estate practice in Germany...22 mayer brown 1

4 United Kindom 1. An introduction to the English legal system What is the English legal system?...24 What are the sources of English law? Restrictions to overseas investment Are there any legal restrictions on the acquisition of UK real estate by overseas investors?...24 What different types of investment structures can investors use in the UK?...24 Are there any exchange control or currency regulations when investing in the UK? Real estate interests and ownership What types of real estate interests and ownership are there in the UK? What is an easement? What is a restrictive covenant? Commercial leases What different types of commercial leases are there in the UK? What are the key terms of a commercial lease in the UK? What security does a tenant have under a commercial lease in the UK?...26 When can a landlord terminate a lease in the UK? Title Do you have to register your real estate interest in the UK?...26 What is a Report on Title? Can confidential information be protected from disclosure in the title register? Valuation How is real estate valued in the UK? Finance How is the acquisition of real estate financed in the UK? What are the most common forms of security granted over real estate in the UK?...28 what documentation is commonly used in a real estate finance transaction? Investment purchase procedure What is the procedure for purchasing real estate in the UK? Acquisition costs What taxes are payable when you purchase real estate in the UK?...29 Sdlt And Commercial Real Estate...30 Capital Gains Tax...30 are there any other acquisition costs payable on a purchase of real estate in the UK?...30 Are there any taxes payable on rental income for an overseas investor in the UK? Guide on How to Invest in Real Estate - Table of Content

5 10. Use Are there any restrictions on land use in the UK? Liabilities What types of liability does an owner of real estate in the uk face?...31 Are taxes payable on the occupation of commercial premises? Management How is real estate managed in the UK? Planning When is planning permission required in the UK?...31 How do you obtain planning permission in the UK? Environment Are there targets to reduce greenhouse gas emissions (GHG) from buildings in the UK? What is an energy performance certificate (EPC)? Corporate Vehicles What is an SPV? Flow Diagram: Typical investment purchase in England and Wales Key legislation in England and Wales...34 Table: Jurisdictional Comparison Real Estate practice in UK...43 United States 1. What makes the property market in the United States popular for investment? What is the process for a foreign investor to purchase property in the United States? When does a purchaser actually become the owner of the property? What type of ownership should an investor expect from property in the United States? In general, what is typically the most US tax efficient way for a non-us investor to invest in United States real estate? How can a purchaser protect its right to purchase a prospective property before the actual transfer of title? How can a purchaser protect his or her investment after the actual transfer of title?...47 mayer brown 3

6 8. Why are attorneys required for investing in the real property market of the United States? What legal body governs the sale of property and the rights of the respective parties? What risks does a purchaser of real property in the United States face with respect to chemicals found in soil or groundwater underneath the property? What is required from a purchaser who seeks to develop and construct a new project in the United States? What acquisition costs are involved in the purchase of real property and who must bear them? What taxes are imposed against property in the United States? What type of security interest must a borrower provide in order to receive financing? How are non-us persons taxed on income earned from investing in US real estate? What advantages can be derived from investing in a Real Estate Investment Trust (REIT) as opposed to direct investment? How are the distributions from a REIT taxable to non-us investors from a US Federal income tax perspective? What are the limitations and disclosure requirements that apply to the acquisition of shares in a publically traded REIT in the US? What are the advantages that can be derived from use of a Real Estate Mortgage Investment Conduit (REMIC) to finance real property? What benefits can be derived from leasing as a form of long-term financing of an investment in real property? US Federal and State Regulatory Issues...54 Real Estate practice in United States Guide on How to Invest in Real Estate - Table of Content

7 France Our Paris office brings together an intimate knowledge of the French corporate environment with the resources and knowledge of a major US law firm to provide highly focused advice on domestic and cross-border transactions of all kinds. This section outlines some of the issues involved regarding investing in real estate in France.

8 1. How are ownership rights organised? Ownership rights are principally organised as follows: 1.1 FREEHOLD (PLEINE PROPRIÉTÉ) Full ownership of real estate (freehold) 1 gives the owner 2 the possibility of using the property (usus), collecting any proceeds thereof ( fructus) and disposing thereof as he/she sees fit (abusus). Practically, it entitles the owner to sell the property, grant lease agreements, grant easements over it, mortgage it. 1.2 OWNERSHIP ORGANISED IN VOLUMES The division in volumes of real estate is a legal technique which consists in dividing the ownership of a building into different fractions at different levels, which can be located above as well as below the natural ground. Every fraction is located within the volumes defined geometrically in three dimensions, in reference to plans and quotations, without any common ownership existing between the various volumes. In most cases, a specific entity known as an ASL or an AFUL governs the relationships between the various owners of lots. The division in volumes is generally used for large real estate structures. It may also be used to deal with specific smaller structures, for example, where regulations need to apply both to public buildings (3.4) and private premises. 1.3 BUILDING LEASE (BAIL À CONSTRUCTION) The building lease is a lease whereby the tenant has an obligation to build on the land, and to maintain/operate such construction. It grants the tenant a right in rem over the construction, which may be freely transferred or mortgaged. It is a long term contract (minimum 18-year term), which may not be tacitly renewed. Upon expiry of the lease the land as well as the building revert to the owner. 1.4 LONG TERM LEASE (BAIL EMPHYTHÉOTIQUE) The long term lease is a lease relating to land or property whereby the tenant has the obligation to improve such land/property and pay an annual rent. The main difference with the building lease is that the tenant has no obligation to build but only the possibility to do so. As the building lease, it grants the lessee a right in rem, which may be freely transferred or mortgaged. 1.5 CO-OWNERSHIP (COPROPRIÉTÉ) Co-ownership is the organisation of the ownership of a building consisting of lots owned by different persons. Each co-owner is thus the owner of (i) a private element (such as an apartment) of the building, and (ii) a share of the common ownership over the common parts thereof (such as the roof, walls, staircases, etc.) such share being usually referred to as a percentage of ownership over the common parts of the building. Any building whose ownership is organised as described above is subject to the co-ownership regime governed by the law dated July 10, Under this law, co-owners must appoint a manager (known as a syndic), whose rights and obligations are strictly regulated. 2. How to acquire real estate? In France, to be binding on/enforceable against third parties, the sale of real estate must be registered at the Land Registry (Conservation des hypothèques), and signed before a French notaire (notary). 2.1 THE PURPOSE OF THE NOTAIRE (NOTARY) The notary is a public officer (officier ministériel) under the authority of the Minister of Justice (Ministère de la Justice) and is appointed by decree (décret). The notary s role is to carry out searches on the property to be sold (e.g., with respect to zoning 1 Freehold rights cover what is beneath the ground and the space above it. 2 The person or the company whose interests in the property are fully owned. It is possible for various persons to own the same property. They are said to be en indivision. Such situation often occurs as a result of succession/estate planning. 6 Guide on How to Invest in Real Estate - France

9 law, potential encumbrances including easements, mortgages, etc.), and on the ownership rights of the seller (to ensure the validity of such ownership over a 30-year period, which is the legal statute of limitations to acquire ownership over real estate by possession), before drafting the deed of sale. Every notary has the obligation to obtain professional civil liability insurance, to cover the financial costs necessary to make good any damage caused by a notary to his or her client. 2.2 ACQUISITION PROCESS At the outset of negotiations and once the parties have agreed on the price and the subject matter of the sale, they generally enter into a preliminary agreement (2.3), which is usually subject to various conditions. Under French law, this preliminary agreement is a binding sale and purchase agreement between the parties, unless the parties intend otherwise. For this reason, each party should be properly advised by legal counsel from the outset of any discussions. Generally, once the conditions precedent to the preliminary agreement are satisfied (if any), the parties complete the sale process by signing a deed of sale, which is witnessed by the notary (2.4) and subject to payment of acquisition costs (2.5). 2.3 PRELIMINARY AGREEMENT The preliminary agreement may, under French law, take the form of a unilateral option to sell (promesse unilatérale de vente) or a bilateral agreement to sell (promesse synallagmatique de vente). They often contain conditions precedent which should be satisfied before the transaction is completed The unilateral option to purchase The seller undertakes to sell, and grants to the other party (i.e., the purchaser, if he decides to exercise his option to purchase) of that unilateral agreement an option to purchase, the property within a specified period of time. The signing of this option usually triggers payment of a 10% down payment, based on the purchase price, which is consideration for keeping the property off the market and available to the purchaser during the option period (indemnité d immobilisation). This deposit is credited against the purchase price but is not refundable to the purchaser in the event it fails to complete the sale (assuming the conditions precedent are met). This unilateral option must be executed either before a notary or as a private agreement registered with the French tax authorities within 10 days from the date on which the option has been accepted by the beneficiary, failing which it automatically lapses The bilateral agreement of sale The seller undertakes to sell and the purchaser undertakes to purchase the property. The signing of this agreement usually triggers the payment by the purchaser of a 10% down payment, based on the purchase price. There is no requirement to execute this agreement before a notary (although this is often the case) nor to register it with the French tax authorities. Preliminary agreements are generally subject to conditions precedent or subsequent. The standard conditions are: The ability of the purchaser to obtain the necessary financing (if any); The provision by the seller of a mortgage registry abstract evidencing a clear and unencumbered title to the property; The expiration of the 2-month municipality preemption period: oo The municipality, of the territory on which a property is located, may be entitled to exercise a pre-emption right in relation to the sale of said property (DPU). In such a case, the notary sends a declaration of intent to sell (DIA) to the municipality which has two months to inform the seller that it intends or not to exercise such pre-emption right. When the municipality exercises this right, the municipality becomes the purchaser. The obtaining of building permits (if necessary); The obtaining of certificates from the authorities confirming that the premises are properly zoned for the intended use. mayer brown 7

10 2.4 DEED OF SALE Once the conditions to the preliminary agreement are satisfied, the deed of sale, which is a reiteration of the preliminary agreement, is drawn up by a notary (in an authenticated form) and signed by the parties, at which time the balance of the purchase price is paid. The use of a notary and the registration of the deed of sale at the competent Land Registry make the sale of the property enforceable against third parties, as explained above. 2.5 ACQUISITION COSTS NOTARY S FEES / REGISTRATION DUTIES / VAT Acquisition costs The acquisition costs consist of a set of (i) taxes/ registration duties that the notary collects to cover administrative costs, (ii) disbursements incurred by the notary in relation to the acquisition process, and (iii) the notary s fees per se (emoluments du notaire). The acquisition costs vary according to the type of acquisition (e.g., acquisition of land, or of a building, old or new, etc.). More precisely the acquisition costs applying to the sale of a property are the following: Nature of the applicable tax/ cost basis rate Registration tax Price amount 5.09% Salary of land registrar Price amount 0.1% Notaire s fees Price amount 0.825% (excl. VAT) VAT on Notaire s fees Notaire s fees 19.6% Disbursments Fixed amount of 1,500 (approx.) Notary s fees The notary s fees, which are included in the global acquisition costs mentioned above, are strictly regulated, and are proportional fees, the amount of which is determined by the public authorities 3. Price EUR 0 to EUR 6,500 Over EUR 6,500 up to EUR 17,000 Over EUR 17,000up to EUR 60,000 Note: Over EUR 60,000 Percentage applicable to determine the notary s fees 4 % (excl. VAT) 1.65 % (excl. VAT) 1.10 % (excl. VAT) % (excl. VAT) The amount of notary s fees is generally known as being 0,825% (excl. VAT) as such rate applies to almost all the price (i.e., to the portion of the price exceeding 60,000) ; The VAT amount applying to the notary s fees is 19,6% Salary of the land registar (Conservateur) Acquisition costs will also entail the payment of the salary of the Conservateur, i.e. 0.10% of the purchase price Registration duties The registration duties (droits de mutation) due when acquiring an old building (i.e. built more than five years ago) are of 5.09% of the purchase price VAT As regards the acquisition of a new building (i.e., inter alia completed less than five years ago), since the price already includes the VAT (at the rate of 19.6%) payable by the purchaser, only the reduced rate of registration tax (taxe de publicité foncière) of 0.715% of the price, VAT excluded, will apply and be payable by the purchaser. VAT also applies to the purchase of development land when the purchaser undertakes to build on the land within a five-year period. In such a case there will be a full exemption of registration tax and only a fixed rate of will apply. 3 See the Decree (décret) No dated March 8, 1978, as amended inter alia on February 20, Guide on How to Invest in Real Estate - France

11 2.6 OTHER ACQUISITION TECHNIQUES Sale of real estate in the course of construction (VEFA) The sale of real estate in the course of construction is a mechanism whereby the purchaser progressively becomes the owner of real estate which is being developed, as said real estate is being built. Usually, the purchaser pays for and acquires the bare land, and then, following an agreed schedule of payments, makes stage payments as the building works progress. It is often used in urban zones to build housing premises, and in that case (i.e., housing premises), mandatory rules apply, which aim at protecting the purchasers Finance lease A finance lease 4 is an agreement whereby the owner of real property grants the use thereof, for business purposes, to an operating company that has an option to acquire it at the end of an irrevocable lease term, in consideration of a fixed price agreed at the time the agreement is made and that takes into consideration the rent applicable during the lease term. The lease term theoretically reflects the useful life of the asset for tax depreciation purposes. Upon expiration of the lease term, the operating company will have three options: Buy the asset for its agreed residual value; Surrender it to the finance lessor; With the finance lessor s agreement, begin a new lease term (through a normal lease agreement). In effect, this is a method frequently used to finance a real estate acquisition at a higher level of leverage than may otherwise be available through normal mortgage financing. A finance lease may also be used in a sale and lease-back transaction, under which a company sells a property to a financial leasing company, which then immediately leases it back to the user under a finance lease. The purpose, from the user company s point of view, is to obtain liquidity whilst retaining the use of the asset Sale of shares of a company owning real estate The advantages of the acquisition of shares of a company owning real estate are the following: The sale process does not require the intervention of a notary. The absence of the pre-emption right for the municipality, except in the case of a civil real estate company (SCI) where the municipality has voted the extension of its pre-emption right. Lower registration fees, 3% of the purchase price of the shares (the indebtedness and the working capital can be deducted from the enterprise value and thus allowing a lower tax basis) capped at EUR 5,000 for the sale of shares of an SA or SAS but 5% of the purchase price when the target company is a real estate company i.e., more than 50% in value of its assets are real estate assets. The drawbacks of such technique: The purchaser will inherit all the liabilities of the target company and therefore should carry out an in-depth due diligence. If the company has more than 50 employees, no sale can be agreed without the receipt of an opinion (positive or negative) of the works council. 3. What environmental and safety issues may arise? 3.1 SOIL POLLUTION The risk of soil being polluted may arise in acquisitions of industrial sites on which a potentially polluting activity is carried out. Hence, when contemplating the purchase of such a site and even though the seller has the obligation to inform the purchaser on the environmental history/issues of the site, it is advisable that the purchaser carries out its own environmental due diligence to ensure the site is not polluted, and if it is, to help determine (i) its potential obligation to remove said pollution from the site, and (ii) the costs and potential financial impact of such removal. 4 Finance leases were recognised by Law n dated 2 July 1966, codified in Articles L et seq. of the Monetary and Financial Code ( MFC ) (Code monétaire et financier). These provisions were supplemented by Decree-Law (Ordonnance) dated 28 September 1967 and Articles R to R of the MFC mayer brown 9

12 3.2 ASBESTOS Real estate owners have an obligation to carry out asbestos searches to confirm the absence of asbestos in their premises, or on the contrary to identify the location and condition of any asbestos in their premises, in order to later ensure the monitoring or removal of said asbestos, depending on its location and condition. Hence, before any investment, and even though the seller has the obligation to inform the purchaser on the presence of asbestos on the site, it is advisable that the purchaser carries out its own technical survey with respect to asbestos, as the removal of asbestos (in particular) can be quite costly. 3.3 OTHER RISKS / INFORMATION Depending on the nature of the premises, their use, and the date they were built, certain risks and information shall be provided to the purchaser. These risks and information may relate, amongst other things to: The presence of lead, The location of the premises in a zone where the potential presence of termites has been identified, The energetic performance diagnosis (DPE), The compliance of the gas and electric appliances, The presence of radon, The presence of legionella, BUILDINGS INTENDED TO RECEIVE THE PUBLIC Every building intended to receive the public (ERP) must comply with the applicable firefighting safety standards. Such buildings include, for example, hotels, retirement homes, boarding schools and summer camps. Prior to their opening to the public, the competent safety commission will visit the premises and either (i) deliver a favorable recommendation for opening the premises to the public, or (ii) provide a list of requirements to comply with in order to proceed with opening to the public. 4. How can ownership rights be affected? 4.1 MORTGAGE A mortgage (hypothèque) is a property-based charge whose aim is to secure the payment of a debt. It may, under French law, result either from a contract (hypothèque conventionnelle), a legal provision (hypothèque légale) or a judicial decision (hypothèque judiciaire). As with the deed of sale, a mortgage must, to be binding on third parties, be published at the land registry. The rank applying to different mortgages burdening a property generally derives from their date of publication taken chronologically. 4.2 LENDER S LIEN A lender s lien (privilège de prêteur de deniers) is a legal lien to the benefit of the bank which grants the purchaser a loan for the purpose of acquiring real estate. 4.3 SELLER S LIEN A seller s lien is a legal lien to benefit the seller to secure all or part of the price which remains to be paid. 4.4 EASEMENTS A number of easements (servitudes) may exist in France in relation to real estate. They may result from the law, regulations or contractual agreements. The purchaser s notary should therefore collect information on the potential existence of such easements by inter alia contacting the Land Registry and the local administrative authorities. 5. How do commercial leases work? French law provides for a specific set of rules 5 with respect to leases relating to commercial premises. The French commercial leases regime 5 French law on commercial leases is governed by the decree (décret) dated September 30, 1953, which has been codified as part of the French Commercial code (Code de commerce), at articles L et seq. 10 Guide on How to Invest in Real Estate - France

13 is tenant-friendly in that it aims to protect the stability of on-going businesses ( fonds de commerce) by giving the tenant the right to renewal of its lease, which, if it is refused will give rise to an obligation on the landlord to pay an indemnity to the tenant to compensate for the harm suffered by the tenant. 5.1 TERM The minimum term of a commercial lease is nine years; it may consequently be entered into for longer terms (10, 12 years, etc.). The French Commercial code provides that the tenant is entitled to terminate the lease every three years 6, but the parties remain free to provide otherwise, e.g., by providing for a fixed term (i.e., a nine-year fixed term, or a nine-year lease with a six-year fixed term). As for the landlord, apart from very limited and specific cases listed in the French Commercial code 7, it may only terminate the lease in case of contractual breach by the tenant (enforcement of the forfeiture clause - clause résolutoire ). 5.2 RENT The parties to a commercial lease agreement may determine the rent freely, which for example can be a fixed rent, or a rent with two components 8, i.e., a fixed component (guaranteed minimum rent) and a variable component consisting of a percentage of the tenant s turnover. The lease agreement may include an indexation clause whereby the fixed component of the rent shall be annually adjusted according to the evolution of the French Construction cost index (known as the ICC 9 ). In addition, the rent can be revised upwards or downwards in case of legal revision inter alia in the following cases: Either party (whether the agreement provides for this possibility or not) has the right to request, every three years from the effective date of the lease, a revision of the rent to be set at the market rental value, being however capped by the evolution of the applicable index; Either party is entitled to request that the rent be set at the market value should the local commercial factors be subject to a change resulting in an increase of the market value by 10% (the above mentioned cap rule not being applicable); Either party is entitled to request that the rent be set at the market value, if, in the presence of an indexation clause, as a result of the application of such clause, the rent is increased or decreased by more than 25% of the rent as previously determined (i.e., contractually or following a judicial decision) (the above mentioned cap rule not being applicable). 5.3 RENEWAL As mentioned above, the French commercial leases regime grants the tenant a right of renewal of its lease. Should the landlord refuse to grant the tenant such right, the landlord shall pay an eviction indemnity compensating for the harm suffered and costs incurred by the tenant as a result of having to relocate its on-going business. The lease, once its renewal has been accepted by the landlord, shall be renewed on the same terms and conditions, except for the rent. Indeed, the rent of the renewed lease shall be set at the market rental value, subject to the above mentioned cap rule. Some exemptions to the cap rule exist, among which some relating to: The term of the lease (e.g., if the lease subject to renewal was entered into for a term exceeding nine years, or if, as a result of a tacit extension, the lease term was extended to exceed 12 years, then the cap rule shall not apply), or The type of rented premises (e.g., the rent of a renewed lease relating to premises with an exclusive use (office, hotel,...) shall not be subject to the cap rule. 6 By delivering by process server a six-month prior notice. 7 Article L , 2 of the French Commercial code. 8 This type of two-component rent is frequently used for premises located in commercial centers. 9 The parties may choose another legal index known as the ILC, which was created as more tenant-friendly. mayer brown 11

14 5.4 ASSIGNMENT/SUB-LETTING Assignment Assignment of the lease by the tenant may be forbidden by the landlord, but the tenant in any case remains entitled to assign the lease within the framework of the transfer of its on-going business. Generally, the lease agreements provide for the tenant to remain the guarantor of its assignee for the remaining term of the lease Sub-letting Sub-letting is only possible if it is specifically provided for in the lease agreement. 5.5 RENTAL CHARGES / TAXES / REPAIRS Usually, lease agreements provide for the tenant to bear the rental charges relating to the rented premises. As for the taxes payable by the landlord, although they are to be borne by the landlord, it can be contractually agreed that they will be reimbursed by the tenant 10. The same applies as regards to repair works. Usually, major repair (a definition of which is provided in the French Civil code (Code civil)) are to be borne by the landlord, whereas rental repair work stays with the tenant. However, it can be agreed in a lease that all repair (major and rental) shall be borne by the tenant. This shall result from a specific contractual provision, as for the transfer of asbestos removal work and/ or compliance works (travaux de mise en conformité) (which should be borne by the landlord) to the tenant. 5.6 MANDATORY SCHEDULE ON NATURAL OR TECHNOLOGICAL RISKS When the premises are located in a zone where the existence of natural or technological risks has been identified, the landlord has the obligation to provide a document known as ERNT, which, based on the information made available by the public authorities, describes the existing risks. Such ERNT shall be attached to the lease agreement, failing which the tenant shall be entitled either to terminate the lease or to request a decrease of the rent. 6. How is the 3% tax applied? 6.1 CONCERNED ENTITIES French and foreign entities (corporate bodies, organisations, trusts and comparable institutions), which, on January 1 of each year, own directly or indirectly one or more real estate properties located in France, or holding rights in rem (droits réels) real estate properties and right in rem ( Taxable Assets ) relating to such properties must pay a 3% annual tax computed on the market value of such properties or rights 11. Individuals are outside the scope of the tax. This tax is payable in relation to Taxable Assets owned on January 1 of the year of taxation. Legal entities liable to the 3% tax must file a return at the latest by May 15 of each year indicating the location, composition and market value of the Taxable Assets owned as of January 1 of the year of taxation. The return must be accompanied by the tax payment. When French real estate property is owned through a chain of entities, the first legal entity in the chain of ownership (from the entity owning the property to the entity owning the entity which is the owner of that property) that does not benefit from an exemption (see below) or that does not comply with certain filing requirements necessary to be exempt is liable for the 3% tax. Each entity interposed in the chain between the real property and the person subject to tax is jointly and severally liable for the possible payment of the 3% tax due by that person. 6.2 EXEMPTIONS Legal entities may be exempted from the tax under certain conditions, among which are 12 : International organisations, sovereign States and their political and territorial subdivisions; 10 This is the case in triple net rent leases. 11 Article 990 D of the French General tax code (Code général des impôts). 12 Article 990 E, 1, 2, 3 of the French General tax code. 12 Guide on How to Invest in Real Estate - France

15 Listed entities; Entities whose French assets are not predominantly real estate assets (i.e., an entity holding directly or indirectly French real estate assets is exempt from the 3% tax if the fair market value of its real estate assets located in France held directly or indirectly represents less than 50% of its French assets. For the computation of the 50% threshold, French real properties that are used by a company in order to carry out its own business activity (other than real estate business) are not taken into account); or To the extent that the entity is located in France, or in the European Union, or in a country that has signed with France a tax treaty containing an administrative assistance clause, or in a country that has signed with France a tax treaty containing a nodiscrimination clause, the following exemptions are also available: Entities holding real properties with a limited value (entities whose share in French real properties is lower than EUR 100,000 or represents less than 5% of the market value of such properties); Entities (including trusts and comparable arrangements) that are established in order to manage retirement and pension plans and non-profit entities or entities recognised as providing a community service, provided their activity or their financing justifies the ownership of real property; Certain collective investment vehicles allowed to invest in real estate properties (e.g., French «Fonds de Placement Immobilier»); Entities which satisfy certain filing requirements. These entities must either: oo File an annual 2746 tax return with the French tax authorities, or The information to be disclosed on such return is as follows: location, nature and fair market value of their French real properties held on January 1, identity and address of their shareholders which own more than 1% of the shares or units of the entity, and number of shares or units held by each such shareholders. Note: It should be noted that some French real estate companies have to file specific tax returns (e.g., form 2072 or form 2038), in which the above-mentioned information is already disclosed. As a consequence, these companies do not have to file a 2746 return or to take the abovementioned commitment in order to benefit from the 3% exemption. oo Take a commitment (within two months of the purchase of the real property) to provide, upon request from the French tax authorities, such a 2746 return. mayer brown 13

16 Real Estate practice in France The Paris Real Estate team is recognised as one of the leading teams in the French market. The Paris Real Estate practice regularly advises international investors in connection with major transactions involving a large range of assets. The team has experience covering all real estate aspects, including construction and planning, environmental, sales of properties and, more generally, complex or structured real estate transactions such as sales/leasing, forward sales, real estate development and all types of leases (commercial, building lease, etc.). In the acquisi tion of real estate assets or investment companies, the Real Estate team also carries out the legal due diligence process. The team has experience advising real estate developers and real estate investment funds particularly with regard to catering companies, hotels and other types of accommodation (leisure residences, senior care residences, etc.). In cooperation with the Tax group, the Paris Real Estate practice regularly participates in landmark transactions, representing major French and foreign financial institutions in real estate structured finance projects via ad hoc special purpose vehicles and securitisation projects. The group also has extensive experience in implementing complex security arrangements in the context of cross-border transactions. The Paris office of Mayer Brown brings together an intimate knowledge of the French corporate environment with the resources and extensive experience of a major international law firm to provide highly focused advice on domestic and cross-border transactions of all kinds. With more than 70 lawyers, including 24 partners, Mayer Brown Paris provides its French and international clients with a full range of services in such key legal areas as: Fund Creation and Structuring International Arbitration Employment and Benefits Litigation Management Package Mergers and Acquisitions Public-Private Partnership Real Estate Tax Being part of a leading global firm enables us to assist our clients wherever needed. Our lawyers have a broad mix of professional and cultural backgrounds, and are equally comfortable advising on cross-border deals as they are on French transactions. In fact, several of our lawyers are also admitted to practice in other jurisdictions, including the United States. This international outlook and broad range of practi cal experience provides our clients with a depth of insight and versatility in this jurisdiction. In 2010, Décideurs Stratégie Finance Droit awarded Mayer Brown the LBO Upper Mid & Large Cap Gold Trophy. Mayer Brown Paris has received in 2007 and 2009 the prestigious Law Firm of the Year award by the French publication Private Equity Magazine for being the most proactive capital investment professionals operating within France and the rest of Europe during the preceding year. The Firm is regularly ranked among the top-tier firms in Private Equity by Legal 500 Paris and Chambers. Antitrust and Competition Aviation Capital Markets Finance 14 Guide on How to Invest in Real Estate - France

17 Germany As one of the largest economies worldwide with a stable real estate market, Germany is an interesting place for investments. The German economy overcame the hurdles of the global financial crisis comparatively quickly which led to a sought-after real estate market. This section gives an overview of issues that international investors should have in mind when entering the German real estate market.

18 1. What does the real estate investment market in Germany look like? The German core property market has proved to be a safe haven in the aftermath of the global financial crisis. Cash-rich institutional investors, like insurance companies and pension funds, have taken advantage of the situation and heavily invested in German real estate. The overall transaction volume in 2014 has approached the 40 billion Euro-mark, a level not seen since International investors played a key role and had a market share of some 45 percent. The investments focus regionally on the major commercial centers Frankfurt am Main, Munich, Berlin, Hamburg, Cologne, Düsseldorf and Stuttgart. These cities remain of interest to investors looking for investments in the highly priced office and retail sector. However, so-called secondary cities like Bremen, Essen, Hanover and Leipzig also benefited from the ongoing real estate boom. Transaction volumes are rising, in particular as investors (and lenders) are now spreading their interest from core into other areas like core plus or specific types of properties, such as logistic centers, hotel & leisure and manufacturing sites in other regions. A sustainable growth is what investors are expecting and getting in the German market. In view of foreseeable general conditions, activity on the German investment market is expected to remain buoyant in the coming months. Opportunistic investors are also looking into Germany as there is a sufficient number of properties in need of refurbishment and repositioning in the market allowing for more creativity and higher returns. The refinancing of large CMBS loans has been identified as a challenge early on and currently market participants are working on solutions, in particular for larger residential portfolios. Consortiums consisting of German lenders and insurers are usually the main players in this area breaking down large loans in digestible sizes. The global debt crisis is affecting business confidence which had surged back to previous levels. As German banks seem to have less exposure in Greece than some of their European competitors confidence and underlying basics are better than expected. On the real estate financing side, modern forms of financing aimed at the capital market have developed over recent years including corporate bonds or IPOs of certain real estate companies. In the public sector, infrastructure projects are increasingly brought forward hand-in-hand with private capital investors and service providers (public private partnership). 2. What are the usual steps for purchasing and conveyancing real estate in Germany? Most sales of commercial real estate in Germany take place with the help of one of the major inter-national investment consultancy firms, less commonly through smaller real estate agents operating at a regional level. Sales, in which major real estate portfolios are offered by way of public tender, follow rules of their own to some extent. Usually the most significant details which are material to anyone wishing to purchase real estate are presented in an Information Memorandum. On the basis of this information all prospective purchasers provide their offer in a letter of intent. Under this letter of intent the parties also agree to carry out a due diligence procedure for the property and commit to treating their negotiations as exclusive for an agreed period. Following the due diligence, in which all available information about the property is evaluated from the legal, tax, technical and commercial points of view, the purchaser communicates its decision whether or not it wishes to go ahead with the investment. At the same time or immediately afterwards, a real property sale and purchase agreement is negotiated; notarisation of the purchase agreement is mandatory by law (see Section 4). There are no purchase restrictions regarding foreign entities, however, to ease the registration 16 Guide on How to Invest in Real Estate - Germany

19 process with the land register, German and European types of entities are commonly utilised. 3. What are the common forms of investment? The selection of the investment form in each case depends on a number of criteria. There are suitable solutions for many individual requirements. The most common form of investment is direct investment per asset deal, i.e. purchasing the land together with the buildings on it. As a general rule, title to buildings and title to land is not legally separate, except in special circumstances: for example in apartment ownership (Wohnungseigentum) and hereditary building rights (Erbbaurechte). In apartment ownership, the title is for specific, legally separate premises together with a co-ownership share in communal areas and installations. In hereditary building rights, the buildings are constructed and remain legally separate for the agreed duration of the right so that the buildings can be sold independently. As an alternative, real property can also be purchased indirectly per share deal: for example, a purchaser may acquire all or a majority of the shares or interests in the company that owns the property (in most cases a special purpose vehicle). Investments in this form are particularly popular in project developments for reasons of saving real property transfer tax. An indirect purchase follows rules of its own, but careful evaluation of the property is of vital importance. 4. What are the individual steps in purchasing a property? The terms of the purchase and all the material content of the contract, such as the description of the land/buildings, the purchase price, the payment terms etc. are set down in the real property sale and purchase agreement. This purchase agreement will create obligations to transfer title and to pay the purchase price and the declaration of conveyance. By law, this agreement must be entered into before a notary and read out and recorded in its entirety by the notary. The parties are free to appoint the notary. If the notarial form requirement is not observed, the agreement will not become binding. The notarial requirements may also extend to other agreements, for example a building contract, or, in the case of a sale and leaseback, a lease, as all agreements legally connected with the real property sale and purchase agreement, must be notarised. The lack of notarial correct form can be cured by the registration of the transaction in the land register (Grundbuch). Title to the property does not pass when the agreement is made, but only once the purchaser has been registered as owner in the land register. Registration is obtained through a procedure that is dealt with by the notary s office. In the five East German states this notarial agreement in certain cases still requires special permission from the public authorities, even after notarisation, because properties there may be subject to unresolved restitution matters. The purchase price falls due only after certain purchase price payment conditions agreed by the parties in the purchase contract have been met. Usually, the minimum requirements for the maturity of payment are that (i) a priority notice of conveyance (Eigen-tumsvormerkung) has been registered in the land register, (ii) that any necessary official permits have been obtained, and (iii) that documents required for the cancellation of the encumbrances not assumed by the purchaser have been obtained. Usually, statutory liability for property and con-struction defects will be excluded in the purchase agreement. The purchaser is responsible for obtaining information about possible damage to the property and about the overall legal position by carrying out careful due diligence. Sellers are responsible for disclosing any damage known to them which is not easily ascertainable, and will be deemed to have acted fraudulently if they fail to do so. Sellers are fully liable for defects in title; this liability cannot be limited or excluded. mayer brown 17

20 Upon payment of the purchase price, as between the parties, the right to occupy the property and the right to the rents and profits, as well as the obligation to take over its burdens, pass onto the purchaser. Usually, the purchaser shall be entitled to collect the rents already. This means that economic ownership is transferred to the purchaser but not yet legal title. The legal transfer of title occurs only upon registration of the purchaser in the land register. If, for example, surveys of the soil or of certain parts of the building remain outstanding, or certain repairs are demanded, the parties commonly arrange for reasonable amounts to be retained from the purchase price. The purchase and the payment of the purchase price may be subject to certain notification requirements under tax law and banking law. 5. What is the safest way to acquire title to a property? By requiring notarisation and by the responsibilities assigned to the land registry office, German property and conveyancing law offers a high degree of reliability for the purchaser to obtain title. The seller s title, as well as existing encumbrances on the property can be verified by inspecting current land register excerpts. The land register is a public register which is kept at the local courts. There is a presumption that the land register is correct. Any party acting in good faith can rely on the information entered in the land register even in the case such information were not accurate. Thus, the concept of title insurance is not customary in Germany. The same goes for encumbrances such as mortgages and charges, for which registration on the land register is also mandatory. If for any reason the seller is unable to transfer title as described in the purchase agreement, then the purchaser can rescind the agreement and claim repayment of the money. The purchaser is able to gain security against new encumbrances created after the sale and purchase agreement is notarised by having a priority notice of conveyance (Eigentumsvormerkung) registered on the real property in the land register. 6. What are the approximate incidental costs of a transaction? The cost of the due diligence procedure will depend on the complexity of the examination, and the cost related to the sale and purchase agreement will depend on the intensity of the negotiations and of the amount of the purchase price. Technical advisors will often work on a flat-rate fee basis. Amongst lawyers, individual fee schemes usually take into consideration hourly rates. The cost of the investment consulting firm will range between 3 5 percent of the purchase price, plus VAT, depending on the amount of the purchase price. Notary costs and court fees are fixed by law and are based on the value of the property. Finally, real property transfer tax applies (at a rate of around percent, see Section 10 below). Non-cash consideration will also be taken into account in determining the basis for taxation. Usually the purchaser pays the notary s cost and the court fees and the real property transfer tax, whereas the seller bears the costs incurred to delete existing encumbrances. Each party pays its own advisors and other costs, for example those of certifying powers of attorney or obtaining an apostille or legalisation. 7. What are the legal principles governing tenancy agreements? Tenancy agreements for a term exceeding one year must be made in writing. If this form requirement is not observed, the tenancy agreement is deemed to be entered for an indefinite period of time instead of a fixed term. Consequence of a defect of form is that each of the parties to the contract may give notice of termination in accordance with the statutory provisions without cause. According to recent judgments of the Federal Supreme Court (Bundesgerichtshof ) permanent physical connection of the contractual 18 Guide on How to Invest in Real Estate - Germany