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

21 documentation is no longer required if it is clear that the documents are part of one deed. They are not registered with any public authority, and will pass to a purchaser at registration of a transfer of title in the land register. If the tenant has not yet moved into the premises, special rules will apply. Entitlement to rent is assigned to the purchaser subject to the condition precedent of payment of the purchase price. At the same time the purchaser is entitled to receive all the necessary documents for managing the tenancies. Commercial leases commonly contain indexation clauses which automatically adjust the amount of the rent to changes of the German Consumer Price Index. In this context rent review clauses may be included under which the rent payable will be adjusted from time to time, for example on the basis of expert opinions obtained about the prevailing local rent for similar properties or about the market rent. As they are rather cumbersome to implement, these clauses are less common. Depending on the type of use, lease agreements generally run for five to ten years. The binding term in a lease agreement, during which the lease cannot be terminated by either party may not exceed 30 years. Normally, the lease agreements contain a unilateral extension option in favor of the lessee. Many commercial leases generally will be construed as standard terms and conditions, which have to comply with strict regulation to avoid their invalidity. In this context special attention should be given to clauses regarding decorative repairs of the property. Usually all operating, services/utilities and management costs are also allocated to the tenant. These clauses should also be reviewed carefully as to their completeness. Rent guarantees usually cover at least three months rent, plus payments on account of service charges and VAT, if any. Rent for retail premises is commonly agreed as turnover-based rent subject to a certain minimum rent. The tenant s obligation to repair and redecorate the rented premises, especially at the time of vacating the premises, differs from the statutory rules but is quite common, however, the so called triple net-tenancies are the exception. In these the tenant is responsible for repairs, even of the roof and structure. A large number of special rules under tenant protection laws apply to residential properties, especially limiting the landlord s right to terminate the tenancy. 8. How can the purchase of a property be financed? Real estate financing in Germany is provided by a wide range of institutions ranging from major private banks, state owned banks (Landesbanken), investment banks, local banks, to mortgage banks and specialised real estate banks, but also by insurance companies, all having different types of refinancing; balance sheet/securitisation/covered bonds (Pfandbriefe). The required loan to value (LTV) depends on the refinancing, e.g. banks issuing covered bonds could not exceed 60 percent LTV whereas other banks are more flexible. Classic German lenders loan agreements tend to be rather short, straight forward and covenant light (compared to Anglo-American standards). However, several lenders have adopted the German version of the UK Loan Market Association (LMA) loan documentation to comply with international standards, in particular in the case of refinancing via securitisation. On the security side the most prominent security is the land charge (a special type of German law mortgage), notarised by a German notary, and registered in the land registry of the property pur-chased. Land charges have a nominal amount usually reflecting the loan amount and receive a rank in the land registry depending on the date of registration (usually first ranking). Land charges can be assigned by the beneficiary and in the case of a certified land charge (Briefgrundschuld) a transfer does not even require registration with the land registry. Two or more properties may be charged jointly by one land charge allowing cross-collateralisation in rem, however, not across national borders. Land mayer brown 19

22 charges give creditors the right to apply for a court administered public auction of the property and to initiate receivership. However, a land charge does not grant any right in title but merely the right to obtain a certain amount of money out of the real property. In addition, the rental income will be assigned (usually not disclosed to the tenant until an event of default occurs), as well as rights resulting from (preferable German law) property insurance policies and the purchase agreements. Rent accounts are pledged in favor of the lender. A share pledge is common where single purpose vehicles as borrowers are concerned. Due to internationalisation, the English duty of care concept (a tripartite agreement between lender, borrower and property manager) has been partially adopted obliging the property manager to comply with the cash waterfall agreed in the loan agreement and allowing the lender to replace the property manager in case of an event of default. It is not uncommon that the loan agreement is governed by foreign law, whereas all property related security is governed by German law. The requirements of financing are usually well implemented into sale and purchase agreements allowing release of old security and implementation of new security against repayment of the existing loans in a structure administered by the notary and protecting the rights of old/new lender and seller/purchaser. 9. What are the benefits of a joint venture? Especially in the case of project developments, cooperation in a joint venture is common. One partner contributes to the property being developed or regenerated, and the other partner may contribute project development, planning and construction works and services. Most joint venture partners will be able to provide special know-how regarding the project development, including market knowledge, how to obtain the necessary legal advice, building permits, awarding project works and services and property innovation. The project is also financed jointly by the parties. A joint venture is advantageous because it enables both partners to optimise the combination of their resources and enables them to obtain external funds that would not be available to them individually. Moreover, the partners commit to a special degree to the success of the joint project. After the project has been completed, for example by selling the property, the partners will separate. 10. What tax rules apply? As mentioned above in Section 6, the acquisition of real property is subject to real property transfer tax at a rate currently between 3.5 and 6.5 percent of the consideration for the property purchase, also taking into account any nonmonetary consideration. The actual amount of real property transfer tax depends on where the real estate is located (e.g. 3.5 percent in Bavaria and 6 percent in the State of Hesse). Real property transfer tax also applies in the case of an indirect purchase of real property. An indirect purchase of real property is given if at least 95 percent of the shares in a company holding real property are acquired by one party or a group of related parties, or if at least 95 percent of the interest in a partnership holding real property is transferred within a period of five years. In general, the purchase of German real estate is exempt from VAT. However, under certain circumstances, the parties are entitled to opt for VAT on the purchase price for a building in order to enable the purchaser to claim for input VAT with regard to all expenses related to the building. Holding German real property leads to (limited) tax liability of the building owner in Germany with regard to the rental income and, as the case may be, capital gains. 20 Guide on How to Invest in Real Estate - Germany

23 Provided that a foreign investor does not maintain a permanent establishment in Germany the tax base for rental income is the excess of the gross rental income received over expenses and costs attributable to that income (e.g. interest payments) at a tax rate of percent for corporate investors, including solidarity surcharge (Solidaritätszuschlag). The tax rate for private individuals depends on the actual amount of taxable income whereas the highest tax rate currently amounts to percent, including solidarity surcharge (Solidaritätszuschlag). Capital gains are subject to the same tax rate whereas the tax base is the difference between the purchase price and the sales price, taking into consideration the costs of disposal. The depreciation deducted during the investment reduces the purchase costs and thus increases the taxable capital gain. Furthermore, the landlord is obliged to pay real property tax. Real property tax is a local tax levied on a specific tax value which is in general markedly below the open market value of the real property. The actual tax burden depends on the municipality in which the real property is located. Real property tax is deductible as a business expense from the income derived from the real property and is usually passed to the tenant. 11. How is the property managed? A growing number of service providers offer property-related services. These include technical and commercial property management, including the management of leases, as well as facility management and opportunities for developing the property and offering improvement strategies (asset management). The fees charged vary. Most common is a percentage of the total rental income. Management usually changes when a property is purchased, but it may be of benefit to keep the same managing agent in position. In the latter case the management contract will have to be assigned to the purchaser. Generally speaking these contracts will not pass to the purchaser by operation of the law in the case of an asset deal, in contrast to tenancy agreements, which automatically pass over to the purchaser (see section 7). 12. What are the land or building owner s responsibilities? Usually because title to the land and buildings goes together, one person will be responsible for liabilities relating to both. The land owner is also responsible for access to the property, and service conduits to and from the building. The land owner has a duty to keep the property safe for others and is responsible for maintaining the land; the owner is liable for environmental risks of the soil and groundwater. In the case of soil contamination, statutory liability is with the contaminator and on previous and current land owners and tenants, all of whom may be ordered to clean up the contamination by the authorities; in some cases this may result in high costs. The parties are free to make different contractual arrangements amongst themselves. The building owner is responsible inter alia for keeping the interior of the building safe, for maintaining the building and its structural integrity. This responsibility may extend to outside areas, e.g. parking lots. Legislation in Germany is focused upon energy saving and environmental matters, which means that major maintenance works, such as a roof refurbishment, may require comprehensive improvements to the quality of the property. Green building technology has become increasingly important in new developments, however, the German industrial standards (DIN) already provide for a high degree of sustainability. Insurance cover is available for many risks. If a building develops or contains a defect, remedies may be available against contractors, architects or experts employed in the construction. Only the contracting party will usually have these remedies; therefore, a purchaser should ensure that, where possible, these remedies are assigned to the purchaser by the seller. As and when the remedies are assigned, claims under the mayer brown 21

24 assignor s liability insurance will also pass to the purchaser. Real Estate practice in Germany Strong notarial practice, in addition to involvement in real estate transactions across a broad range of asset classes, with recent highlight portfolio deals in the logistics, retail and housing sectors. (...) Great at connecting people and presenting ideas. (client) Chambers Europe 2014 With 4 partners, 3 counsel and several associates in the Real Estate group in Frankfurt and Düsseldorf and about 20 finance lawyers, we offer all of the resources necessary to advise on real estate and real estate finance transactions through our German offices. Our services include: market standards and best practices and maintain a broad range of contacts to real estate players including investors, lenders, developers, technical advisors, environmental experts, etc. Our Real Estate group s close cooperation with our tax, corporate, litigation, environmental, project finance, public sector, construction, tax and other practice groups enables us to deliver comprehensive services for virtually every kind of real estate need a client might have. Lawyers have substantial experience in financing real estate projects. In addition to straight forward debt financing, our extensive experience includes closed and open-ended real estate funds, leasing (including sale-and-lease-back trans-actions) as well as a variety of securities. As a consultant of financial institutions we have assisted real estate financing (both for lenders and borrowers) in total exceeding EUR 5 billion originated by balance sheet and securitisation lenders. Acquisitions and Dispositions (assets and debts) Construction, Development and Land Use Corporate Services Cross Border Investment Distressed Real Estate Restructuring and Workouts Economic Development Incentives Financing Leasing and Sale-Leaseback Litigation Notarial services Regulatory and Licensing Real Estate Equity Investments and Joint Ventures Real Estate Fund Formation and Capital Markets Transfer Tax, Property Tax and Assessment Challenges Zoning We are widely recognised for our cross-border deals representing foreign investors in Germany. Asset classes we advise on include office, retail, residential, logistics, hotel, data centers, etc. in all parts of Germany. As long-term players in the German real estate market we are familiar with 22 Guide on How to Invest in Real Estate - Germany

25 United Kingdom Despite the difficulties in the current global real estate market, UK real estate continues to present attractive opportunities for investors was a stellar year for the UK property markets with around 60 billion in transactions, a record for UK property, with 9.1 billion spent by Asian investors; this is expected to grow throughout The UK real estate market is mature which means your ability to effectively invest is maximised. There are various types of investment property and ways to structure investment in the UK. We are experts in this area and can provide bespoke advice in order to help increase the opportunities available to you.

26 1. An Introduction to the English legal system WHAT IS THE ENGLISH LEGAL SYSTEM? The English legal system has developed from a combination of statute and case law in which publicly decided cases (whether interpreting statute or building on previous case law) form part of a body of law, known as the common law. The structure of the English legal system offers many benefits to overseas real estate investors including a clear and established legal framework; certainty of law and title; a clean income (running costs payable by tenants); and a very competitive tax regime. WHAT ARE THE SOURCES OF ENGLISH LAW? The rules governing English law have evolved from three sources: Domestic legislation which includes statutes or Acts of Parliament. The interpretation of such legislation is for the judiciary when they hear cases in the courts. Common law made by the judiciary (as explained above). European Community law which is binding on the English legal system. If EC law conflicts with national law, the courts are required to apply EC law or interpret national law to fit in with EC law. 2. Restrictions to overseas investment ARE THERE ANY LEGAL RESTRICTIONS ON THE ACQUISITION OF UK REAL ESTATE BY OVERSEAS INVESTORS? There are no restrictions on overseas investors acquiring real estate in the UK. Real estate can be purchased, rented or leased by individuals or companies for their own use or as an investment. The only information that will be required is: Evidence of the purchaser s identity in accordance with statutory requirements; Credit and other checks on the purchaser s ability to fund and complete the transaction; and A legal opinion from an independent lawyer in the relevant jurisdiction of the purchaser, to ensure the enforceability of documentation and the validity of the transaction generally. WHAT DIFFERENT TYPES OF INVESTMENT STRUCTURES CAN INVESTORS USE IN THE UK? There are a number of different investment structures which can be used to acquire and hold real estate investments in the UK including: Partnership, when two or more persons carry on business together. A partnership is not a separate legal entity and partners generally have unlimited liability. Limited liability partnership (LLP), a hybrid form of business entity: it is neither a partnership nor a company. Like a company, an LLP is a body corporate and therefore a separate legal entity and an LLP member s liability is limited. However, like a partnership the relationship between LLP member s is governed by private agreement. An LLP does not have shareholders or directors and is taxed like a partnership. Joint ventures, describes a commercial arrangement between two or more economically independent entities that can take a number of forms for the purpose of executing a particular business undertaking. Property unit trusts, a unit trust scheme is constituted by a trust deed generally entered into between a trustee (typically a bank or insurance company) and the manager of the scheme who will be responsible for investing the assets of the unit trust in accordance with the terms of the trust deed. The investors are the beneficial owners of the trust property and their interests are represented by units in the unit trust scheme. REITs, an indirect investment vehicle in which you can buy shares or units in to invest in property. The choice of structure will depend on a number of factors, including tax, management, funding and exit routes. We can help you with this. ARE THERE ANY EXCHANGE CONTROL OR CURRENCY REGULATIONS WHEN 24 Guide on How to Invest in Real Estate -United Kingdom

27 INVESTING IN THE UK? The UK does not impose any exchange controls or currency regulations relating to inward or outward investment, the repatriation of income and capital or the holding of currency accounts. 3. Real estate interests and ownership WHAT TYPES OF REAL ESTATE INTERESTS AND OWNERSHIP ARE THERE IN THE UK? Since 1925, two main legal estates in land have existed, namely a freehold estate and a leasehold estate. A freehold interest provides the holder of the estate with absolute ownership, unlimited in time, of both the property and the land on which it stands. A leasehold interest provides the holder of the estate with rights of possession and use of land but not ownership. The interest is created by a document called a lease, which is granted by a freeholder for a fixed term, in exchange for a specified payment of rent. At the end of the term, the lease comes to an end and the property reverts to the freeholder. There are benefits to holding a leasehold interest however overall given the fact the investment market in the UK is built around rental income, we find real estate investors prefer to own a freehold interest for complete control over the property. WHAT IS AN EASEMENT? An easement is a right that the owner of one piece of land has over another piece of land. A common example of easements are rights of way over shared access ways and rights to run service pipes and cables. To establish if you have an easement over your land you should check the title register and title deeds as it will be explicitly recorded within them (see further below). Easements are an important factor to consider when investing in UK real estate as they can sometimes affect the value of your land. We can help you with this. WHAT IS A RESTRICTIVE COVENANT? A restrictive covenant is a promise by one person to another (such as a purchaser of land and a seller) not to do certain things with land or property. It binds the land and not an individual person. This means that the covenant continues even when the purchaser sells the land on to another person. The covenant will continue to have effect even though it may have been made many years ago and appears to be obsolete. It is possible to negotiate the release or variation of a restrictive covenant. We can help you with this. 4. Commercial leases WHAT DIFFERENT TYPES OF COMMERCIAL LEASES ARE THERE IN THE UK? There are commonly four types of commercial leases: occupational leases granted for a 25 year term or less. These should be full and repairing leases (i.e. FRI leases ). An FRI lease is a lease where the landlord receives a market rent and the tenant pays the costs associated with repairs, the provision of any services and insurance. The majority of com mercial leases will be of this type. long leases for a 99 year term or more. These leases are granted in return for a capital sum pay-ment, with a nominal rent payable throughout the rest of the term. geared leases for a 125 year term or more. These are usually granted in consideration of a significant premium to a developer or investor who goes on to construct buildings on the demised land and then grants rack rented leases to occupiers. In return for enhancing the value of the freeholder s interest in the demised land, the developer or investor does not pay a full market rent but instead a percentage of that rent. These are common in London. WHAT ARE THE KEY TERMS OF A COMMERCIAL LEASE IN THE UK? The terms of commercial leases are freely negotiable. The key terms to consider are: mayer brown 25

28 Rent levels and reviews. It is standard practice to review rent levels every five years and adjust rent to the higher of either the rent payable immediately before the review or the open market rent at the date of the review (commonly known as upwards-only review ). Length of term. The term of the lease is a matter for negotiation and depends on a number of factors, including the size, type and age of the premises. Commercial leases used to be granted for a term of twenty five years but because of the current eco-nomic climate, leases are now commonly granted for between five and ten years, although leases of larger office space may be larger. Restrictions on disposal. Typically a tenant can assign the lease with the consent of the landlord (whose consent cannot be withheld unreasonably). Landlords may be able to require a guarantee as a condition of assignment. Use of premises within a corporate group. Tenants can usually share premises with other group companies. The lease often provides that there is no need to obtain the landlord s consent but it is good practice for the landlord to be notified when sharing begins and terminates. Repair. Responsibility for repair depends on whether the lease is of the whole or of part of a building. Where the lease is of the whole of the building, it is normal for the tenant to be responsible for the repair of the whole (internal and external). For a lease of part only of a building, it is normal for the tenant to be responsible for internal repairs and the landlord to be responsible for external repairs, common areas and services (though the landlord often recovers repair costs from the tenants through service charges). Insurance. Responsibility for insuring the premises usually follows the responsibility for repair (see above). WHAT SECURITY DOES A TENANT HAVE UNDER A COMMERCIAL LEASE IN THE UK? A tenant has an automatic statutory right to renew its lease at the end of the term on substantially the same terms as the original lease. The landlord can object on certain limited grounds, such as if it requires occupation of the property for its own use or wants to redevelop the property. However, in some circumstances parties before they become contractually bound, agree to contract out, which means that the tenant will not have its automatic statutory right to remain in the property at the end of the term unless the landlord decides to offer a new lease. WHEN CAN A LANDLORD TERMINATE A LEASE IN THE UK? A landlord can terminate a lease where there has been either non-payment of rent or breach of an obligation by the tenant, the latter of which is regulated by statute. Before termination, the landlord must serve notice of the breach on the tenant and allow reasonable time for remedy. There is no statutory protection for tenants in the case of non-payment of rent. A tenant can only terminate the lease if there is an express right to do so in the lease (commonly called a tenant s break clause). 5. Title DO YOU HAVE TO REGISTER YOUR REAL ESTATE INTEREST IN THE UK? Yes. The Land Registry, a Government agency which runs the land registration system in England and Wales, maintains a public register of title to land (strictly, it is the title to land rather than the land itself that a seller sells to a purchaser). Each piece of land has a separate title number and so when an intending purchaser wants to check the title which he/she is purchasing, a quick search of the public register at the Land Registry will confirm the following information which he/she needs: The extent of the land concerned by reference to a plan; The owner s identity; The title (e.g. freehold / leasehold); Benefits enjoyed by the land (e.g. rights of way 26 Guide on How to Invest in Real Estate -United Kingdom

29 over neighbouring land); Burdens attached to the land (e.g. restrictive covenants); Financial charges affecting the property; and Leases to which the property is subject (e.g. duration, tenant and rent). We would expect most investment properties in the UK to be registered at the Land Registry with what is known as absolute title. This means that the title to the land is completely safe and cannot be challenged. To the extent that there are any defects with the title, any risks can be mitigated by obtaining appropriate insurance (albeit at a cost). There is also a state guarantee of title. This means that if a registration error is made or a forged disposition is registered, the register may be rectified and there is a statutory compensation scheme to protect any party who suffers loss as a result of the rectification. WHAT IS A REPORT ON TITLE? A Report on Title is carried out by the purchaser s solicitor and is a written analysis of the status of the title of the property to be acquired and identifies any matters of material concern. We can help you with this. It can be relied upon by you and any third party lender or co-investor in respect of the purchase. It will broadly include the following matters: A description of the property to be acquired (e.g. the type of property interest, the address and the quality of title); The names of the title holders; Rights to which the property has the benefit (e.g. rights of way) and burdens to which the property is subject (e.g. restrictions on use or obligations to make payments); Enquiries and information received from the seller; Enquiries and information available from public and other agencies as to matters affecting the property (e.g. local authority); The current use of the property which is permitted for planning purposes; Any third party occupational interests to which the property is subject; and The tax rate of the transaction (e.g. the purchaser price may be subject to Value Added Tax of 20% or Stamp Duty Land Tax may be payable to the UK tax authorities) (see below). CAN CONFIDENTIAL INFORMATION BE PROTECTED FROM DISCLOSURE IN THE TITLE REGISTER? The register of title is a public document and anyone can inspect or make copies of it or any documents referred to on it. However, the Land Registry has a discretion to allow documents that contain prejudicial information to be exempt from this general right of inspection, for example, certain commercial information can be excluded if appropriate. 6. Valuation HOW IS REAL ESTATE VALUED IN THE UK? A valuer (also known as a property surveyor) who is regulated by the Royal Institute of Chartered Surveyors, will value the property. Valuers follow a number of rules to regulate how their valuations are calculated. These include referring to sales of similar property in the local or comparable areas. We can help by liaising with the valuer to ensure he/she is aware of any material matters arising from the legal due diligence (see below) that directly affects the property and in turn might affect the property s valuation. 7. Finance HOW IS THE ACQUISITION OF REAL ESTATE FINANCED IN THE UK? The most common way of raising finance in the UK is to borrow from a bank or building society. The bank or building society will lend a proportion of the purchase price, which in the current economic climate, will be between 50% to 60% for premier properties (previously much higher deals were being seen of up to 90%). There have been club deals where a number of banks mayer brown 27

30 underwrite a deal, but the limited number of banks currently lending means that these deals are becoming increasingly difficult to put together. There are exceptions, but they are generally driven by a very strong corporate relationship with a particular bank. The junior or mezzanine market has generally collapsed as banks have moved out of this area. There are signs, however, that equity funds are filling the gap, attracted by the relatively low risk and the potential for substantial returns. To facilitate the disposal of property and the restructuring of distressed debt, there has been a significant increase in the amount of stapled debt being made available (that is, the property is sold with the benefit of the existing funding, but restructured to re-set financial covenants and reduce gearing). WHAT ARE THE MOST COMMON FORMS OF SECURITY GRANTED OVER REAL ESTATE IN THE UK? Prior to the release of funds, the lender will generally want security from the purchaser by way of one or more of the following: A charge by way of a legal mortgage; An assignment of any rental income generated by the property; A fixed charge over any plant and machinery which is not affixed to the property; A charge over shares; A charge over all relevant contracts including leases, insurance polices and construction documentation; or A floating charge over all the assets to cover any-thing not specifically charged by the security above. The lender will require first ranking security over the property, which must be registered at the Land Registry to ensure the lender has priority over any subsequent dealings relating to the title. It is also not uncommon for the lender to require a restriction is also registered against the title at the Land Registry to ensure the borrower does not make a disposition without its consent. Notices of charges over banks accounts must be given to the relevant bank and notice of security over other contracts must be given to the counterparty to the contract. In addition, if the borrower is a company registered in England and Wales, the lender s security must also be registered at Companies House. If the security is not registered at Companies House it will be invalid against any liquidator, administrator and third party creditors of the borrower. WHAT DOCUMENTATION IS COMMONLY USED IN A REAL ESTATE FINANCE TRANSACTION? If investment finance is raised by borrowing from a bank or other funder, a number of key documents will be used in the real estate transaction including: Facility agreement (also known as a loan or credit facility agreement or facility letter or funding agreement). This is an agreement in which the lender sets out the terms and conditions on which it is prepared to make a loan facility available to a borrower. Borrower debenture. If the borrower is a special purpose vehicle (SPV) (see section 15 below), the lender will usually take a debenture. This is a document that is executed in favour of the lender with a covenant to pay the lender and which grants security by way of fixed or floating charges over all the borrower s assets and undertaking. Parent guarantee. If the borrower is an SPV (and so has no trading history), the lender may require the parent (or a holding company in the group of sufficient financial standing) to guarantee the borrower s obligations under the facility agreement. Charge over borrower s shares. Under this document, the parent will grant the lender a charge over the borrower s entire issued share capital. This enables the lender to realise its security over the property by selling the shares in the borrower (which may have tax advantages over selling the property itself). Subordination agreement. If the parent (or 28 Guide on How to Invest in Real Estate -United Kingdom

31 other sponsor behind the investment) makes a loan to the borrower, this agreement should be entered into between the lender, the parent and the borrower regulating payments of interest and principal to the parent. Management agreement and duty of care agreement. If the property is let to multiple tenants, the borrower will usually appoint a management agent under a management agreement to collect and administer the rent and service charges in relation to the property. The lender will want to review the management agreement to ensure that the management agent s obligations are adequate and the managing agent has suitable professional indemnity insurance. It will usually also require the managing agent to enter into a duty of care agreement, whereby the managing agent agrees to owe a duty of care to the lender in relation to its obligations. We can help advise and negotiate in regard to all of these and other related documentation. 8. Investment purchase procedure WHAT IS THE PROCEDURE FOR PURCHASING REAL ESTATE IN THE UK? The procedure for purchasing property in England and Wales is broadly: To submit a bid or offer for the property which is accepted by the seller. This is not legally binding; To agree heads of terms, setting out the key commercial terms of the purchase with the seller, such as price, timing and finance arrangements. This is not legally binding; To undertake full legal due diligence on the property (the general rule is that the buyer needs to satisfy itself as to matters affecting land to be acquired). We will do this for you; To carry out a full inspection and survey of the property; To negotiate the terms of the sale contract (in line with the heads of terms agreed at the outset) and transfer document (by which title is transferred to a purchaser). These may need further thought depending on what the full legal due diligence process reveals (the outcome of the due diligence process will be set out in a report on title, which will be issued before exchange of contracts). We can help you with this. The purchaser shall also need to negotiate the banking documents with the lending bank (see above); To sign and exchange the agreed form of sale contract with the seller (paying a deposit of usually 10%). This is the point at which the parties become contractually bound to sell and purchase the property; To undertake pre-completion checks/ searches, satisfy the conditions precedent for the bank loan to be paid by the lending bank on completion, satisfy any pre-conditions required prior to concluding the sale; To obtain insurance for the purchase. At completion the seller will cancel its insurance policy and so the purchaser will need to put insurance in place; To complete the purchase, by paying over the balance of the price (usually 90%), receiving evidence of the discharge of any existing security affecting the property, and dating the transfer deed (to be signed in advance of completion by the seller/purchaser). There is no standard period between exchanging contracts and completing a purchase; the two events can follow each other on the same day (i.e. a simultaneous exchange and completion, or a period of days/ weeks can intervene (14-28 days is common)); Post-completion requirements include perfecting the purchaser s title at the Land Registry and paying Stamp Duty Land Tax (see below). An overseas investor will also need to register as a non-resident landlord to ensure that rental income payable in relation to the property is paid gross rather than net. We can deal with this for you. 9. Acquisition costs WHAT TAXES ARE PAYABLE WHEN YOU PURCHASE REAL ESTATE IN THE UK? There are two taxes which are relevant to acquiring property in England and Wales, namely Stamp Duty Land Tax ( SDLT ) and Value Added Tax ( VAT ). SDLT is charged on land and property transactions in the UK. The tax is charged at different mayer brown 29

32 rates and has different thresholds for different types of property and different values of transaction. Almost all land transactions will be subject to SDLT, which is payable within 30 days of the date of purchase. SDLT AND COMMERCIAL REAL ESTATE The current SDLT commercial property rates and thresholds are: 0%, where the amount payable is 150,000 or less; 1%, where the amount payable is between 150, ,000; 3%, where the amount payable is between 250, ,000; 4%, where the amount payable is 500,001 or more. Where the property is owned by a company (or other vehicle), the purchaser may be able to acquire the company, rather than take a direct transfer of the land. As a result, a corporate acquisition could avoid the high rates of SDLT that would be paid on a transfer of the land itself. However, the UK tax authorities seem to view corporate acquisitions negatively where the company owns real estate and where SDLT avoidance is a material motive. For this reason, careful consideration should be given as to how to structure deals to ensure no adverse tax consequences. We can help you with this. VAT is a tax that is charged on most goods and services that VAT registered businesses supply in the UK. Generally the supply of land is exempt for VAT purposes. However, an owner of commercial property can opt to tax the property so as to treat any supplies it makes in relation to the property subject to VAT at the standard rate (currently 20%). If the option is made, any sale is normally subject to VAT. Most owners of commercial property opt to tax. The acquisition of an income generating investment property should ordinarily be treated as a going concern and therefore no VAT should be payable. All the purchaser needs to do is ensure it complies with certain administrative requirements to ensure the property transaction is treated as a going concern. We can help you with this. CAPITAL GAINS TAX There is no tax payable on gains of a non-uk purchasing entity. ARE THERE ANY OTHER ACQUISITION COSTS PAYABLE ON A PURCHASE OF REAL ESTATE IN THE UK? Yes. Other acquisition costs payable on a purchase include: Search fees, carried out as part of the legal due diligence process; Land Register fees, for the registration of a transfer to the purchaser (the maximum for properties worth over 1m is ); Building surveyor s fees, if the purchaser and/or the bank commission a building survey to establish the precise condition and state of the property; Legal fees, each party usually bears its own legal costs. You should however expect to pay the bank s legal fees if you purchase with the benefit of bank finance; Valuation fees, payable in relation to the valuation obtained by the purchaser and/or the bank, as to the value of the property to be purchased; Investment surveyor s fees, These are often subject to negotiation by reference to the purchase price; Bank fees, if the property is acquired with the benefit of finance; and Companies House fees, if the property is acquired with the assistance of a loan. ARE THERE ANY TAXES PAYABLE ON RENTAL INCOME FOR AN OVERSEAS INVESTOR IN THE UK? Yes. If rental income is received by an overseas investor, this income is subject to income tax at the rate of 20%. The amount of income tax payable on rental income will reduce if deductable expenses exist. The main deductions which may be made on the rental income include, capital allowances and interest on a loan taken out to acquire the property. The application of these deductions can be complex. We can help you with this. 30 Guide on How to Invest in Real Estate -United Kingdom

33 10.Use ARE THERE ANY RESTRICTIONS ON LAND USE IN THE UK? If there are any restrictions on the use of the land, these will be identified in the Report on Title (see above). For example, in some cases the land may be subject to restrictions on the type of building which is permitted to be constructed or there may be rights identified in favour of adjoining land such as an access to light or third party rights. These rights usually bind not only the original parties who create them but also those who purchase the land subsequently. Please see (13) below. 11. Liabilities WHAT TYPES OF LIABILITY DOES AN OWNER OF REAL ESTATE IN THE UK FACE? If the owner of the property is also the occupier, then he/ she will be under a statutory duty to keep the property in a good state of repair. This will require compliance with various health and safety and environmental matters as well as owing a duty of care to all visitors to the property. If, however, the property is acquired for investment purposes only, the cost of complying with these obligations should ordinarily be passed to the tenant(s) (see FRI lease above). ARE TAXES PAYABLE ON THE OCCUPATION OF COMMERCIAL PREMISES? Yes. Business rates are payable by occupiers of commercial buildings, broadly based on their notional rental value. There are exemptions but these are limited to between three to six months after becoming vacant, after which empty rates are payable at the same level as occupied rates. 12. Management HOW IS REAL ESTATE MANAGED IN THE UK? Property owners tend to retain professional management agents to manage their property/ properties. For a fee, the managing agent will carry out such activities as rent collection, the provision of services, arranging insurance and so. 13. Planning WHEN IS PLANNING PERMISSION REQUIRED IN THE UK? Planning permission is required for the carrying out of any development of land (that is carrying out of building, engineering, mining or other operations in, on, over or under the land) or a material change of use of land. HOW DO YOU OBTAIN PLANNING PERMISSION IN THE UK? The relevant local planning authority (LPA) usually the district or borough council is responsible for deciding whether a proposed development should be allowed to go ahead. The LPA determines applications by reference to its development plan, unless material considerations indicate otherwise. The LPA will be able to tell you how you can view its development plan. Once an application has been registered, the LPA will then publicise and consult on it. This gives the public an opportunity to comment on the application. The LPA will then assess the relevance of any comments and, in light of them, may suggest minor changes to the application to overcome any difficulties. Most planning applications are decided within eight weeks unless they are unusually large and complex, in which case the time limit is extended to thirteen weeks. If permission is granted, you have three years from the date it is granted to begin the development. If the LPA refuses permission or allows it, but only subject to unacceptable conditions, you can appeal and have the matter resolved by the Planning Inspector. Very occasionally, the Secretary of State will take the decision. mayer brown 31

34 14. Environment ARE THERE TARGETS TO REDUCE GREENHOUSE GAS EMISSIONS (GHG) FROM BUILDINGS IN THE UK? The Climate Change Act 2008 made the UK the first country in the world to have a legally binding, long term framework to cut GHG emissions. The target is at least an 80% reduction of GHG emissions by The Carbon Reduction Commitment (CRC) Energy Efficiency Scheme is the UK s mandatory scheme to monitor and reduce energy usage by large organisations. The Scheme features an annual performance table that ranks participants on energy efficiency performance. Together, with reputational considerations, the aim of the scheme is to encourage organisations to develop energy management strategies that promote better energy usage. The Scheme is complex and has been contentious in the UK real estate sector. To help simplify matters, the Government introduced legislation in 2013 which implemented changes to streamline the CRC Scheme. a specific purpose, in this case, to hold real estate. Efficient structures can be created to maximise tax efficiency and minimise cost and risk. It is therefore common for investors to incorporate or acquire an SPV to hold real estate in the UK. An SPV enables investors to deal, in one entity, with all aspects of real estate. This approach has the advantage of eliminating any SDLT. However, the purchase of an SPV does require much more due diligence. We can help you with this and help you negotiate the form of your SPV sale and purchase agreement together with other related documentation. The comments in this Guide are not matter specific and should not be relied upon without taking further detailed legal advice. WHAT IS AN ENERGY PERFORMANCE CERTIFICATE (EPC)? An EPC provides information about the energy efficiency of a building. It is prepared by an accredited assessor and the building is given an asset rating from A to G, measuring its construction and services (by examining its insulation, radiators, glazing etc). It also includes a recommendation report for energy efficiency improvement. An EPC must be supplied at the construction, sale or rental of any property. From April 2018, it will be unlawful to let residential or commercial properties which have an EPC rating of F or G (the lowest two energy efficiency ratings). 15. Corporate Vehicles WHAT IS AN SPV? A special purpose vehicle (SPV) is an entity (whether a company, unit trust, limited partnership or other legal entity) established for 32 Guide on How to Invest in Real Estate -United Kingdom

35 Flow Diagram: Typical investment purchase in England and Wales Stage Timeline Stage 1 Agree heads of terms Tax and finance advice of purchase 1-4 weeks Stage 2 Valuation advice Due diligence searches and enquiries Surveying/ environmental due diligence Investigate title Bank/third party finance terms 2-4 weeks Stage 3 Legal advice/instructions Draft documentation Contract negotiations Finance negotiations 2-4 weeks Stage 4 Purchase contract finalised 4 weeks Stage 5 Exchange of contracts 4 weeks Completion This timeline relates to the legal system in England and Wales. The legal system in Scotland is different. Timescales may differ significantly depending on the particular circumstances of each purchase. mayer brown 33

36 Key legislation in England and Wales General property legislation Leasehold Planning The Law of Property Act This Act created the current estate system of two legal estates in land (freehold and leasehold). The Law of Property (Miscellaneous Provisions) Act This Act provides for certain formalities for the creation of land contracts. Land Registration Act This Act modernised land registration law and practice. Landlord and Tenant Act This Act established a security of tenure regime for tenants of business premises. Landlord and Tenant (Covenants) Act This Act applies to all leases granted on or after 1 January Town and Country Planning Act This Act sets out the main framework for planning control. Planning (Listed Buildings and Conservation Areas Act) This Act imposes a regime for the alteration or demolition of buildings of historic or architectural interest. Environmental Tax Environmental Protection Act This Act sets up the regime for the clean-up of land contamination which poses a risk to the environment or human health. Control of Asbestos Regulations These regulations impose a duty on those with responsibility for the maintenance or repair of non-domestic premises to identify whether asbestos is present and to manage it if it is identified. Finance Act 2003 (as amended). This Act introduced stamp duty land tax. 34 Guide on How to Invest in Real Estate -United Kingdom

37 Table: Jurisdictional Comparison Asia United Kingdom Investment structures Real estate Registration of title REITs Property companies Joint ventures Limited liability partnerships Special Purpose Vehicles ( SPVs ) China Land is owned by the State or by collectives, depending on location. Land use rights of state-owned land can be granted through compensatory grants to individuals, enterprises or organisations. Land use rights of stateowned land (together with any property erected upon it) can be bought, sold, mortgaged or disposed of as the owner sees fit. Japan Real estate consists of land and anything attached to land. Korea Real estate consists of land and anything attached to land. A building is also a separate legal estate from the land on which a building is located. China Title is registered in different ways depending on locality. In Shanghai, the register for the titles of the land use right and the buildings are unified but in Beijing, the registers for the titles of the land use right and the buildings are kept separately. Japan Title for land and buildings are registered separately, because they are considered distinct types of real estate which can be owned independently from one another. Korea Korea maintains the official registry system by the government available online for land and building in Korea. Title for land and buildings are registered separately, because they are considered distinct types of real estate which can be owned independently from one another. Property unit trusts Trusts of land REITs Property companies Joint ventures Limited liability partnerships Real estate includes land and any buildings or other structures on or over it. It also includes the subsoil below and the airspace above the land to a height necessary for ordinary use and enjoyment of the land. Where title to land is registered, all component parts are registered together under the same title. mayer brown 35

38 Jurisdictional Comparison Asia United Kingdom State guarantee of title Tenure China No state guarantee of title. Japan No state guarantee of title. Korea No state guarantee of title. China The terms of land use rights of state-owned land depends on the way land is used. For example: residential land up to 70 years. industrial, educational, technology, hospital and sports land up to 50 years. commercial, tourism and entertainment land- up to 40 years. mixed use land up to 50 years. Japan Freehold or under a TBI. A TBI is where the seller entrusts the property to a Japanese trust bank who in return issues the TBI to the seller. The TBI holders are entitled to certain rights in the trust, including the right to receive distributions. Korea Freehold or leasehold. State guarantee of title for registered land. Freehold and leasehold. 36 Guide on How to Invest in Real Estate -United Kingdom

39 Jurisdictional Comparison Asia United Kingdom Purchaser costs VAT (or equivalent) China agent s fees appraisal fees taxes (stamp duty and deed tax) registration fees Japan consumption tax (see below) stamp duty tax acquisition tax appraisal fees broker s fees legal fees Korea VAT acquisition tax (including the local education surtax and the agricultural and fishery surtax) appraisal fees broker s fees legal fees China Payable on the sale of real estate by the seller. Japan Consumption tax is payable on the sale of real estate by the seller. The seller usually passes the consumption tax to the purchaser to adding it to the purchase price. Korea VAT is imposed on the sale of buildings by the seller. The transactions involving land are not subject to the VAT. The purchaser can deduct the input VAT on the purchase of buildings in its VAT returns. legal fees surveyor s or other investigation fees agent s fees valuer s fees stamp duty tax registration fees Not payable on the sale (or purchase) of real estate. mayer brown 37

40 Jurisdictional Comparison Asia United Kingdom Stamp duty land tax (or equivalent) Environmental targets China Payable on the sale and purchase agreement by both parties. Buyer liable for deed tax on sale of real estate too. Japan Payable on the sale contract by both parties. Buyer liable for acquisition and registration tax too. Korea Payable upon acquisition of the real property by the purchaser. The purchaser is liable for the acquisition tax including the local education surtax and the agricultural and fishery surtax China No specific targets however the Energy Construction Design Standards for Civil Buildings (Heated Residential Buildings) stipulates a minimum energy efficiency criterion for certain buildings. Japan Kyoto Protocol aims to reduce target of 6% from 1990 levels. No targets under national legislation but the Tokyo Metropolitan Government have imposed reduction obligations on certain buildings through local regulations. Korea With respect to air pollution-emitting facilities (the Facility ), Korean government prescribes the permissible emission levels of air pollutants and the Facility is allowed to emit air pollutants up to the prescribed permissible emission level and the Facility is required to pay i) basic emission charges regardless of whether the Facility is in compliance with the prescribed permission emission level and ii) additional emission charges in the event the Facility emits greater amount of air pollutants than the prescribed permissible emission level. With respect to the buildings or other facilities which directly cause environmental pollution through the discharge of vast amounts of environmental pollutants, the owners or occupants of such buildings or other facilities are liable for environmental improvement charges. For the construction of certain types of buildings (so-called green buildings), energy saving design standard implemented by the relevant governmental authority should be complied with respect to certain facilities such as electronic facility and machinery facility. Payable by the purchaser. Climate Change Act 2008 has imposed a legally binding target to reduce emissions by 80% by The Government has identified improving the energy efficiency of existing and new buildings as one of the principal means of meeting this target. 38 Guide on How to Invest in Real Estate -United Kingdom

41 Jurisdictional Comparison Asia United Kingdom Restrictions China Only foreign individuals working or studying in China for more than one year can purchase one residential property for personal use. All foreign companies or individuals seeking to purchase real estate must establish a company in the People s Republic of China to carry out investment activities. Japan No restrictions on foreign ownership or occupation of real estate. Korea Restrictions on foreign ownership of land are as follows: In the event a foreigner purchases land located in certain zones such as protection zone of military installations or cultural properties protection zone, such foreigner is required to obtain approval from respective governmental authority prior to the execution of the land sale and purchase agreement. No restrictions on foreign ownership or occupation of real estate. In the event a foreigner acquires the land other than the land located in certain zones such as protection zone of military installations or cultural properties protection zone, the foreigner is required to make a report regarding such acquisition to the relevant governmental authority within 60 days from the day on which the land sale and purchase agreement is entered into. In addition, in the event a foreigner acquires a real property located in Korea or other rights attached thereto (e.g. a lease right or a mortgage right), the foreigner is required to make a foreign exchange report to a relevant foreign exchange authority. mayer brown 39

42 Jurisdictional Comparison Asia United Kingdom Security Lease negotiation Rent levels and review China Mortgages are commonly used collateral in raising finance for real estate investments. Rental and sale proceeds can also be pledged to a lender to secure financing. Both mortgage and pledge must be registered at the local land registry or with the credit reference centre of the central bank. Japan Mortgages are commonly used collateral in raising finance for real estate investments. The mortgage must also be registered at the local legal affairs bureau. Korea Mortgages are commonly used collateral in raising finance for real estate investments. The mortgage must also be registered at the official registry system. China Lease terms are freely negotiable unless provisions are provided for by law. For example, the maximum duration of a lease. Japan Lease terms are freely negotiable. However, the Land and Building Lease Law applies certain mandatory terms in certain leases to benefit tenants. Korea Lease terms are freely negotiable. However, the certain mandatory terms provided in the Lease Protection Act are applied in certain leases in order to protect and provide benefits to tenants. China No restrictions on rent level or when reviewed. Japan Each party can request a rent review if economic conditions dictate (save for fixed term building leases) Korea No restrictions on rent level or when reviewed. As to certain lease to which the Lease Protection Act applies, each party can request a rent review if economic conditions dictate; provided that the increase is limited to a certain level. Mortgage Charge over rents Charge over bank accounts Charge over all relevant contracts including leases, agreements for lease, insurance policies and construction documentation Lease terms are freely negotiable. Rents reviewed every five years and adjusted to a rent which is either the higher of the rent payable immediately before the review or the open market rent at the date of the review. 40 Guide on How to Invest in Real Estate -United Kingdom

43 Jurisdictional Comparison Asia United Kingdom Term length Restrictions on disposal Use of premises within a corporate group China Term length cannot exceed 20 years. Japan Ordinary land lease 30 year term. Ordinary building lease agreed term. Commercial fixed term lease maximum 50 year term. Korea Land lease the object of which is to own a building or any other structure or is for planting or collecting salt agreed term. Ordinary land or building lease maximum 20 year term (provided that the lease term may be renewed up to 10 years from the date on which the lease is renewed). Lease for the residential building minimum 2 years / Lease for certain small sized retail buildings minimum 1 year. China Tenant has no right to assign or sublet without the landlord s express consent (unless there are provisions to do so in the lease). Japan Tenant has no right to assign or sublet without the landlord s express consent (unless there are provisions to do so in the lease). Korea Tenant has no right to assign or sublet without the landlord s express consent (unless there are provisions to do so in the lease). China Tenant prohibited from sharing premises with companies in the same group without landlord s consent. Japan Tenant prohibited from sharing premises with companies in the same group without landlord s consent. Korea Tenant prohibited from sharing premises with companies in the same group without landlord s consent. To be negotiated between the parties but in the current climate the average lease term is between 5 to 10 years. Tenant has no right to assign or sublet without the landlord s express consent, which cannot be withheld unreasonably, (unless there are provisions to do so in the lease). Usually a tenant can share premises with a group company. mayer brown 41

44 Jurisdictional Comparison Asia United Kingdom Repair Insurance Termination China Landlord is responsible for keeping premises in good repair (unless lease provides otherwise). Japan Landlord is responsible for keeping premises in good repair (unless lease provides otherwise) Korea Landlord is responsible for keeping premises in good repair (unless lease provides otherwise) China Landlord usually insures the building and structure and the tenant insures the installed fixtures and movables. Japan Tenant usually responsible for insurance. Korea Landlord usually insures the building and structure and the tenant insures the installed fixtures and movables. China Landlord can terminate a lease for non-payment or rent, for breach of an obligation by the tenant and if the tenant unilaterally changes the main structure of the building. A tenant can terminate if the leased premises are damaged or become too dangerous for health and safety reasons. The parties can also agree other circumstances which trigger termination in the lease. Japan Landlord must have justifiable grounds to terminate a lease. Tenants may terminate at any time subject to paying an amount equal to rent for the remaining lease period. Korea Landlord can terminate a lease for non-payment of rent and for breach of an obligation by the tenant. A tenant can terminate if the leased premises are damaged or become too dangerous for health and safety reasons. The parties can also agree other circumstances which trigger termination in the lease. Where lease is of the whole of the building, usually the tenant will be responsible for repair of the whole. Where lease is part only of a building, it is usual for the tenant to repair the internal parts of the premises and for the landlord to repair the external parts of the premises, common areas and services. Responsibility for insurance usually follows responsibility for repair. Landlord can terminate a lease for non-payment of rent or for breach of an obligation by the tenant. A tenant can only terminate a lease if the lease gives the tenant an express right to do so. 42 Guide on How to Invest in Real Estate -United Kingdom

45 Real Estate practice in UK Acting for both domestic and overseas investors, Mayer Brown s real estate investment team has a deep and substantial understanding and experience in all forms of direct and indirect investment into real estate assets. automatically resorting to the court, provides our clients with commercially focused choices designed to compliment their commercial objectives and needs. Our transactional experience includes: Single and portfolio asset transactions; Using and/or acquiring corporate and other structured investment vehicles, such as property unit trusts and other schemes designed to mitigate against tax liabilities; The formation and implementation of joint ventures and other investment platforms; Forward purchase and forward funding of assets being developed; Project managing cross border and multijurisdictional investment transactions; and Debt acquisitions. Rarely are investment transactions purely about the real estate; there are many more facets, all of which need to be managed without compromise, for instance, the transfer of employees and appointing agents to deal with rent collection, rent reviews and agreeing terms of new lettings. Our commitment, not only to the detail but also the bigger picture allows us to highlight issues as they arise. We work with our clients to develop commercial and creative solutions so that the potential of the investment may be maximised. We believe this adds real value to the transaction and gives our clients the knowledge and tools to effectively run their investments from day one. Acting regularly for landowners as well as occupiers gives us a significant platform from which to add value to the ongoing day to day management of our clients assets. That management role may take many forms but often includes strategic advice on lease restructuring and redevelopment projects, handling flagship lettings to prestigious occupiers, as well as efficiently dealing with high volume lettings and other day to day management tasks. Being creative and solution led in the way in which we handle any dispute between parties, without mayer brown 43

46 United States The United States is a magnet for international real estate investors because of its high per capita GDP, land availability around major metropolitan areas, and developed infrastructure. This paper outlines some of the issues related to foreign investment in United States real estate.

47 1. What makes the property market in the United States popular for investment? The United States has an estimated population of 314 million people spread over 3.5 million square miles. The gross domestic product in 2011 exceeded USD 15 trillion with a per capita gross domestic product of USD 48,223. The United States real property market is enhanced by the states of New York, Illinois, California, Florida and Texas, which make up about 39% of the gross domestic product for the nation. These statistics, along with excellent infrastructure such as the federal interstate highway system make the United States a very attractive place for foreign investment. In 2012, the favorite American cities for investment were New York City, San Francisco, Washington, DC, Houston, and Boston. Multifamily properties were the favorite form of investment in 2012, with industrial properties second, retail third, office fourth and hotels fifth. 2. What is the process for a foreign investor to purchase property in the United States? Generally, a seller and a purchaser execute a purchase contract. The terms of the contract are freely negotiable, and often limit the seller s responsibility after the sale for defects in the property s size, quality and condition. Contracts generally require a down payment of 3%-5% of the purchase price at the time that the contract is executed by the parties to secure performance by the purchaser (although the down payment is usually greater than 5% for properties with a lower purchase price) and a portion of it may or may not be refundable at the end of the due diligence period described below. A purchase contract typically grants the buyer an investigation period during which it conducts its due diligence. Purchasers are expected to conduct their own investigation of the property in order to determine deficiencies before the sale is completed, although sellers may provide representations about title, encumbrances affecting the property, leases in place and matters affecting such leases. The scope of the representations as well as the time period for their survival are the subject of negotiation. After the investigation period, the buyer has the right to terminate the contract or proceed to closing. If the buyer elects to close but then fails to pay the balance of the purchase price in accordance with the contract of sale, the buyer will forfeit the down payment as liquidated damages to the seller. Typically, the seller retains the down payment as its sole source of damages if the buyer breaches the contract. Generally, the rule of caveat emptor applies to most real estate purchases; it is the buyer s responsibility to satisfy itself regarding the real estate purchase. In addition, since September 2001, the federal government has enacted laws that seek to identify terrorist groups and individuals in commercial transactions in the United States. Buyers may be required to provide disclosures under those laws. 3. When does a purchaser actually become the owner of the property? The buyer becomes the owner of the property upon payment of the purchase price in exchange for title to the property. Representations by the seller regarding the status of title appear in the deed, the instrument conveying title, although it is customary for the seller s title representations to be limited due to the popularity of title insur-ance (described below). The most used deed is a special (or limited) warranty deed in which the seller warrants that it has not done anything to impair title to the property but does not warrant title against actions by its predecessors or other third parties. Less common is a general warranty deed, where the seller warrants that nothing has ever been done by any party to impair the title. Also less common is a quitclaim deed in which the seller provides no representations whatsoever concerning the title to the property. Whatever the form of deed, it must be recorded in the proper recording office in order to provide constructive notice to all parties that the transfer of the property has been made. In many jurisdictions, state, county and local transfer taxes are imposed and payable at the time the deed is recorded. Some of these transfer taxes can be significant. mayer brown 45

48 4. What type of ownership should an investor expect from property in the United States? The most common form of ownership interest is fee simple absolute, which passes to the buyer the entire bundle of rights to possess and dispose of the land. Commercial transactions typically involve this form of ownership although acquisitions are sometimes structured as long as term ground leases. In these ground lease transactions, the buyer acquires fee title to the improvements for the term of the ground lease but only gets a possessory interest in the land through the term of the ground lease, usually for a period exceeding 50 years. The improvements revert to the owner of the real estate, the ground lessor, upon expiration or earlier termination of the ground lease. Other forms of ownership interests, more prevalent in the residential context, include condominium ownership, which allows fee ownership of a self-contained unit within a building with non-exclusive rights to common areas of the building with other condominium owners, and cooperative ownership. In a cooperative ownership, a not-for-profit corporation is established to hold title to the real property and the residents of the building own shares in the corporation (not the underlying real estate) and the corporation enters into a proprietary lease permitting possession of the applicable unit. If the shareholder/owner wishes to dispose of the unit, the shares and the proprietary lease are assigned by the shareholder/owner to the purchaser of the shares and such purchaser assumes all obligations under the proprietary lease. 5. In general, what is typically the most US tax efficient way, from a US federal income tax perspective, for a non-us investor to invest in United States real estate? The most common structure these days for a non-us investor to hold US real estate is through a US partnership or limited liability company (the Flow-Through Entity ) that invests in a US entity that is treated as a real estate investment trust (a REIT ) for US federal income tax purposes (which in turn owns the real estate). A REIT is a special type of entity for US federal income tax purposes that does not pay tax if it distributes all of its income to its shareholders and certain other requirements are met. A REIT is subject to a variety of rules regarding the type of income it can earn and the type of assets that it can own. Most US real estate assets can be owned by a REIT. However, a REIT cannot own development property and assets such as nursing homes and hotels have to be structured carefully to comply with these rules. Note that in the case of certain non US investors, such as Korean investors, it may prove most beneficial from a US tax standpoint to have the Korean investor invest directly in the REIT rather than a US partnership or limited liability company. Other types of structures may be used depending on the unique facts and circumstances of an investor. Note that REIT structures can also be beneficial in reducing state income taxes, at least in those state that follow the US federal tax treatment of REITs and that have not passed captive REIT legislation or similar limiting legislation. 6. How can a purchaser protect its right to purchase a prospective property before the actual transfer of title? Although very rarely utilised, in most states, after signing the purchase contract, the purchaser is entitled to record such contract or a short-form memorandum of such contract. Without such record notice of the pending sale, it is possible for a seller to breach the contract and sell to another party that may be willing to pay a higher price. If that third party was not aware of the existing purchase contract, such third party may be classified as a bona fide purchaser that is protected against claims brought by the initial contract purchaser. Recording the contract, or a memorandum thereof, puts other potential buyers on constructive notice that the property is under contract and that the initial contract purchaser has rights in the property and a subsequent purchaser would lose the bona fide purchaser protections. Sellers, however, generally prohibit the recordation of the contract and therefore it is not customary for US real estate contracts to be recorded. 46 Guide on How to Invest in Real Estate - United States

49 7. How can a purchaser protect his or her investment after the actual transfer of title? In the United States, it is customary to purchase title insurance, which is insurance against undisclosed encumbrances and defects in the chain of title of the particular parcel of property. The title insurer will conduct an independent title search and provide an insurance policy that insures the purchaser s interest in the property subject only to the liens and encumbrances discovered by the title insurer during the title search. Generally, a title insurer will insure title conveyed by a special (or limited) warranty deed (as well as quit claim deed) mentioned above, thereby making it less critical for a purchaser to obtain a general warranty deed from the seller. While some states regulate the cost of title insurance and related endorsements (endorsements are special provisions that increase the coverage provided by a base title insurance policy), the cost of title insurance is not dependent on the type of deed delivered by the seller. Title insurers also insure the lien priority of a lender s security interest in a property. As between a buyer and a seller, the costs paid for the title insurance, as well as the cost of any special endorsements to the insurance policy that increase such policy s scope of coverage, generally follow a local market custom but are subject to negotiation between seller and buyer. 8. Why are attorneys required for investing in the real property market of the United States? Commercial property transactions are often quite complex. In addition to negotiating the contract of sale, the attorney must examine title to the property to ensure conformity with the contract of sale, confirm compliance with applicable zoning laws, building codes, rent regulations and other legal requirements, review leases and negotiate financing documents. On the day that title is conveyed to the purchaser, multiple parties gather, including the seller, the purchaser, the title insurance company and the lenders. All parties are represented by counsel to protect their respective interests. 9. What legal body governs the sale of property and the rights of the respective parties? Real estate transactions in the United States are governed in large part by the laws of the state and locality where the property is located, although certain federal laws (such as environmental laws) are applicable as well. Purchases of commercial real estate in most states are governed by the doctrine of caveat emptor, meaning that a purchaser acquires property at his or her own risk. Purchasers of residential property, however, are protected in many states by legislation imposing upon sellers the obligation to disclose certain information related to the property. 10. 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? Under US environmental laws, the owner or operator (for example, a ground lessee) of real property can be required to clean up hazardous chemicals found on or underneath the property. The owner or operator can be liable even if the chemicals were placed on the property before the owner acquired it (or operator began operating it). Therefore, potential purchasers of property customarily hire consultants to investigate for evidence of environmental conditions prior to acquisition. Continuing liability for environmental issues is a part of the negotiation between seller and buyers in purchase contracts and between ground lessors and ground lessees in ground leases. 11. What is required from a purchaser who seeks to develop and construct a new project in the United States? There are two main categories of regulations that impact development zoning codes and building codes. Zoning Codes. Zoning codes regulate what uses are permitted in a particular zoning district: for mayer brown 47

50 instance, residential, office, retail or industrial uses. Zoning codes also include various bulk regulations that apply to development in a zoning district, such as restrictions on height, lot size, building size and landscaped areas. If a project requires a change in the zoning district or relief from a particular regulation that applies in a district, the developer must request such change or relief in a process involving public hearings before one or more boards or councils of elected or appointed local officials. Such zoning review bodies have a great deal of discretion in deciding whether to approve the request. The hearing process can be time-consuming. For major projects, zoning hearings can take several months or even more than a year. Even if a development complies with zoning regulations, it must also comply with building codes. Building Codes. Building codes are health and safety regulations that dictate construction details such as electrical and plumbing components and protections from fire, earthquake or other casualty events. Local authorities require that developers obtain building permits for all construction projects (even interior construction involving tenant build-out within an already completed building). The local authority will issue such building permit only if the construction plans comply with building codes. Building code reviews are typically done by a specialist employee or consultant and are usually completed in a few months. The party conducting a building code review has much less discretion than the boards or councils involved in zoning review, though questions of interpretation sometimes arise. Requests for relief from building code requirements or from decisions of building permit officials are handled by elected or appointed review boards, and such requests can add to the building permit time frame. 12. What acquisition costs are involved in the purchase of real property and who must bear them? Brokerage Fees. Generally, the owner of the property engages a broker who represents the seller in the sale of real property. Legally, as is the case in New York, brokers earn their fee when they produce a purchaser who is ready, willing and able to purchase the offered property. Customarily, the broker agreement provides that no commission is earned, however, until the property is actually conveyed. Brokerage commissions typically range from 2 to 6% of the sale price and are paid to the broker with whom the property is listed. Brokerage commissions may be shared with cooperating brokers. Transfer Taxes. In many US localities, state, and in some cases, county and city transfer taxes are imposed upon transfers of real property or transfers of interests in entities that own real property. For example, property transfers (including transfers of interests in entities that own property and transfers of leasehold interests) in New York City, are subject to a city transfer tax ranging from 1.425% to 2.625% of the property purchase price and the tax is typically paid by the seller. Washington D.C. has both a transfer tax (1.45% of consideration) and a recordation tax (1.45% of consideration), for a total transfer/recordation tax of 2.9% of the purchase price. Although subject to negotiation in Washington D.C., the payment obligation is customarily split evenly between the seller and the buyer. In many California counties, documentary transfer taxes of USD 1.10 per USD 1,000 of the purchase price are imposed. Certain California counties in northern and southern California impose higher transfer taxes. For example, in Los Angeles, transfer taxes of USD 4.50 per USD 1,000 of the purchase price are imposed and in San Francisco, the documentary transfer tax rate is 2.5% of the paid consideration. California transfer taxes are a joint and several obligation of buyer and seller customarily split 50/50 by the parties. In Chicago, the aggregate state, county and city transfer tax rate amounts to 1.2% of the consideration paid. The seller is obligated to pay 37.5% of the tax; the buyer is legally obligated to pay the remaining 62.5%. However, by custom and practice, the parties in Chicago typically split the transfer tax liability 50/50. While tax payment obligations are often dictated by state and local law, many locations simply state that the parties are jointly and severally liable, which allows parties to either follow custom and practice (if any) or negotiate the transfer tax payment obligation between the parties. 48 Guide on How to Invest in Real Estate - United States

51 Mortgage Recordation Taxes. Finally, some states such as New York and Florida impose a tax upon the recording of a mortgage based upon the principal amount of the indebtedness being secured (the tax rate may be as much as 2.8%). The costs of acquiring and financing US property can be significant and legal counsel should be consulted to help devise ways of minimising acquisition costs. 13. What taxes are imposed against property in the United States? Real Property Taxes. Real property taxes (or ad valorem taxes ) are generally imposed in most US localities. Although real property tax schemes vary greatly from state to state and county to county, generally, real property taxes are calculated based upon the estimated fair market value of the property. Factors such as the size, age and location of the property; the improvements located on the property; the use of the property (e.g., residential versus commercial); and whether the property generates income, all impact the value of the property. In some cities, such as New York City, it is customary for the property taxes to be annually reassessed. In other parts of the United States, local governments may reassess every few years. In California, property is reassessed only upon transfer or new construction. Property taxes can be minimised through a comprehensive tax management strategy. It is therefore very important to team with attorneys who are knowledgeable in the property tax appeal process. Real Property Tax Lien/Foreclosure. In addition to a robust tax minimisation program, it is critical to implement the proper practices to insure timely, annual payment. Property taxes are a prior and superior lien to most property liens and even prime valid, recorded mortgages. If not timely paid, hefty penalties can accrue, the delinquent taxes could be sold, and title to the property could be lost (and existing mortgages extinguished) through the issuance of a tax deed. Such tax deeds are typically issued free and clear of all other liens and ownership claims. 14. What type of security interest must a borrower provide in order to receive financing? Most property financings in the United States are done on a non-recourse basis, where the lender only has recourse to the property (not the borrower) if the loan is not repaid. Generally, lenders will secure loans by obtaining a lien on the real property. This is usually accomplished through the recordation of a mortgage (or a deed of trust) against the particular property. The borrower still owns the property during the term of the loan but the borrower, through the mortgage (or deed of trust), grants the lender a security interest in its ownership interest in the property and typically agrees to restrictions on the borrower s ability to transfer (or further lien) the property as well as on the borrower s ability to lease the property, alter the property or even rebuild the property in the event of a fire or casualty. If the loan is not timely paid, the lender can take steps to foreclose the mortgage or deed of trust and acquire ownership of the property. Financing structures can be very complicated, especially if the debt is to be securitised, and take the form of one or more mortgages on the property and mezzanine financing secured by a pledge of ownership interests in the title holding entity. 15. How are non-us persons taxed for US Federal income tax purposes on income earned from investing in US real estate? The United States taxes foreign persons in either of two ways. If a foreign person is engaged in a US trade or business, then the foreign person is subject to US income tax at rates applicable to US persons on income that is effectively connected with the conduct of that US trade or business (such income commonly being referred to as ECI). In the case of a foreign person that is organised under a treaty, there generally is an additional requirement that the foreign person will not be subject to tax on ECI unless the foreign person has a permanent establishment (a PE) in the United States and the income is attributable to that PE. If a foreign person is a partner in a partnership that has a PE in the mayer brown 49

52 United States, then the foreign person is treated as having a PE in the United States. There is not a precise test to determine whether a foreign person is engaged in a US trade or business for tax purposes. Instead it is a question of fact based on the type of activities performed in the United States. However, a special set of rules applies to sales of real estate located in the United States. Gain from the sale of a US real property interest is automatically treated as ECI under a set of rules known as FIRPTA (so called because they were enacted in the Foreign Investment in Real Property Tax Act of 1980). FIRPTA does not apply to income from US real estate other than gain, so rental income must be tested under the normal US trade or business rules. In most cases the rental activities will give rise to ECI. A US real property interest not only includes direct (or indirect through a subsidiary) ownership of US real estate but also investments in certain US entities (including most real estate funds) that own US real estate. In the case of a foreign corporation, ECI (including FIRPTA income) is taxed at a maximum federal income tax rate of 35% regardless of whether such income is ordinary income or capital gain. In addition, foreign corporations are subject to a branch profits tax equal to 30% of after-tax income that is not reinvested in the United States. The branch profits tax generally is reduced under tax treaties with the United States. A foreign corporation that is engaged in a US trade or business is required to file a US income tax return on IRS Form 1120F. Depending on where the property is located, state income taxes also may be imposed. Foreign individuals are taxed at a 39.6% maximum tax rate on ECI from rent but are taxed at a 20% (15% for individuals with incomes below certain levels) rate on long term capital gains. If a foreign person is not engaged in a US trade or business, then the foreign person will be subject to a 30% withholding tax on dividends, certain interest and other fixed or determinable annual or periodical income (FDAP) from US sources. A foreign person whose only income is subject to US withholding tax is not required to file a US income tax return. How a foreign person is taxed will depend in large part on how the investment is structured. Investing directly or through partnership vehicles (including limited liability companies) will likely implicate the ECI rules. Investing through a US corporation can produce other results. A tax professional should be consulted to optimise the tax structure. 16. What advantages can be derived from investing in a Real Estate Investment Trust (REIT) as opposed to direct investment? A REIT is a company that owns and operates income producing real estate, such as apartment buildings, office buildings, shopping centers, hotels and the like. Some REITs invest in distressed property. REITs may be publicly traded (in which case they are subject to laws governing the offering and sale of securities) or privately held. REITs pay out their earnings as dividends. REITs are permitted to deduct the dividends paid out to investors and owe no corporate tax. The taxes are paid by the shareholders on the dividends received and on any capital gains made. The investor in a REIT enjoys the economic benefits of owning real estate while the ownership and operation of the property are with the REIT managers. Foreign persons are subject to a 30% withholding tax on ordinary dividends paid by a REIT (unless reduced by treaty) and capital gain dividends are treated as ECI unless the REIT invests in mortgages or, in some cases, the REIT is publicly traded. Some states have enacted Captive REIT legislation or combined or unitary reporting regimes which may limit the dividends paid deduction for state income tax purposes that REITs otherwise receive on a US federal income tax level. 17. How are the distributions from a REIT taxable to non-us investors from a US Federal income tax perspective? A REIT will produce three sources of income ordinary dividends, capital gain dividends and, if the REIT is sold or liquidated, gain from the sale of shares in the REIT. Such types of income 50 Guide on How to Invest in Real Estate - United States

53 are discussed below. For purposes herein, it is assumed that the Flow-Through Entity is a partnership for US federal income tax purposes. Special rules may also apply to non-us governmental investors that may reduce the US federal income tax rate to 0% with respect to REIT ordinary dividends and sales of REIT shares. Ordinary Dividends Paid by a REIT and Other Income. Distributions made by a REIT that are (i) allocable to non-us investors and (ii) neither attributable to gain from sales or exchanges by a REIT of US real property interests ( USRPIs ) (as defined under the US Internal Revenue Code) nor designated by a REIT as capital gains dividends will be treated as dividends of ordinary income to the extent that they are made out of a REIT s current or accumulated earnings and profits ( ordinary dividends ) and will not be treated as income effectively connected with the conduct of a US trade or business ( effectively connected income or ECI ). These distributions ordinarily will be subject to US federal income tax on a gross basis at a rate of 30% or a lower rate as permitted under an applicable income tax treaty. Under the US-Chinese income tax treaty (the US-Chinese Treaty ), the withholding tax rate on ordinary dividends paid by a REIT to Chinese investors is reduced to 10%. Please note that the US Chinese Treaty does not apply to Hong Kong residents. Under the US-Korean income tax treaty (the US-Korean Treaty ), the withholding tax rate on ordinary dividends paid by a REIT to Korean investors is reduced to (i) 10% for Korean corporations, if (A) during the part of the paying corporation s taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any), at least 10% of the outstanding shares of the voting stock of the paying corporation was owned by the recipient corporation, and (B) not more than 25% of the gross income of the paying corporation for such prior taxable year (if any) consists of interest or dividends (other than interest derived from the conduct of a banking, insurance, or financing business and dividends or interest received from subsidiary corporations, 50% or more of the outstanding shares of the voting stock of which is owned by the paying corporation at the time such dividends or interest is received); or (ii) 15% otherwise. Distributions in excess of a REIT s current and accumulated earnings and profits that do not exceed the adjusted basis of a REIT s stock allocable to a non-us investor will reduce the Flow-Through Entity s adjusted basis in a REIT s stock and will not be subject to US federal income tax. Distributions in excess of current and accumulated earnings and profits that do exceed the adjusted basis of a REIT s stock will be treated as gain from the sale of such shares of stock, the tax treatment of which is described below. REIT distributions attributable to gain from sale of USRPIs (e.g., capital gain dividends paid by a REIT). Distributions that are attributable to gain from sales or exchanges by a REIT of USRPIs, whether or not designated as a capital gain dividend, will be treated as gain that is ECI. Non-US investors will be taxed on this gain at the same rates applicable to US holders, subject to a special alternative minimum tax in the case of nonresident alien individuals. Also, this gain may be subject to a 30% (or lower applicable treaty rate) branch profits tax in the hands of a non-us investor that is a corporation. Under each of the US-Chinese Treaty and US-Korean Treaty, the branch profits tax rate is reduced to 0%. The Flow-Through Entity will withhold and pay over to the US tax authorities a percentage of the proceeds equal to the highest applicable US income tax rate (currently 35% for corporate non-us investors and 20%, 25% or 39.6% for non-corporate non-us investors depending on the character of the income) of each non-us investor s allocable share of any distributions made by a REIT that are designated as capital gain dividends. Distributions can be designated as capital gains to the extent of a REIT s net capital gain for the taxable year of the distribution. Any tax withheld by the Flow-Through Entity (which may exceed the actual tax liability) will be allowed as a credit against the amount of US tax owed by the non-us investor. To the extent that a non-us investor receives any ECI, it will be required to file US federal income tax returns. Taxation of Dispositions of an Interest in a REIT. If a non-us investor sells its interest in the Flow-Through Entity, and if a REIT is treated as a domestically controlled qualified investment entity, such non-us investor should generally not be treated as engaged in a US trade or business with respect to its interest in such REIT, in which mayer brown 51

54 case a non-us investor should not be subject to US federal income tax on the portion of the sale proceeds of its interest in the Flow-Through Entity allocable to such REIT. However, to the extent a REIT is not treated as a domestically controlled qualified investment entity, a non-us investor would be subject to US federal income taxation and income tax reporting with respect to the portion of sale proceeds of its interest in the Flow-Through Entity allocable to such REIT, and a transferee of an interest in the Flow-Through Entity would be required to deduct and withhold a tax equal to 10% of the gross amount of such proceeds. Any amount so withheld could be applied as a credit against the US federal income tax liability of the non-us investor and can be recovered as a refund to the extent such withholding results in an overpayment of taxes. 18. What are the limitations and disclosure requirements that apply to the acquisition of shares in a publically traded REIT in the US? Investments by non-us and US stockholders raise a variety of US securities and tax law issues regarding the amount of stock a stockholder may purchase without triggering certain approval or disclosure requirements. The following touches upon a few of these legal issues that stockholders should take into consideration when investing in publicly traded companies, including REITs. FIRTPA. Pursuant to the Foreign Investment in Real Property Tax Act, which is commonly referred to as FIRPTA, distributions to a non-us stockholder with respect to any publicly traded REIT in the US is not subject to FIRPTA, and therefore, not subject to 35% US withholding tax, if the non-us stockholder does not own more than 5% of such stock. Instead, such distributions are treated as ordinary dividend distributions. Additionally, non-us stockholders holding less than 5% of such stock are exempt from paying taxes on their realised gains under FIRPTA. However, once ownership is over 5%, then the realised gain on the entire investment, including the 5% ownership portion, is taxable. Even if ownership drops below 5%, the non-us stockholder s realised gain on the entire investment will continue to be taxable for a period of five years following such drop. Ownership Waivers. Publicly traded REITs in the US must satisfy certain requirements under the Internal Revenue Code to qualify as a REIT. In consideration of these requirements, the organisational documents of REITs typically contain limits on non-us and US stockholder ownership (e.g., no stockholder can hold in excess of 9.8% of the stock). However, in certain circumstances, the board of directors of such REITs may waive such self imposed ownership limits, with respect to a particular stockholder if they determine that such ownership will not jeopardize such company s status as a REIT. Tender Offers. Unlike in certain Asian countries, there are no mandatory offer requirements in the US. Non-US and US stockholders should be aware that certain types of accumulation of stock of publicly traded companies, including REITs, in the US can require compliance with tender offer rules under US securities laws. These tender offer rules are cumbersome and impose significant procedural and substantive requirements. Although what a tender offer is not specifically defined under US securities laws, the US Securities and Exchange Commission (the SEC ) interprets the term broadly to apply to various accumulations of stock, such as where bids are too large to be filled in the regular auction market or purchases are made through widespread solicitations. Schedule 13D or 13G Filings. Under US securities, non-us and US stockholders must file a Schedule 13D with the SEC within 10 days of acquiring more than 5% of stock of a publicly traded company, including a REIT, in the US and thereafter report any material changes in ownership. Schedule 13D filings require disclosure of, among other things, the identity of the stockholder, its directors and executive officers, the source and amount of funds used to make the acquisition, the purpose and any plans of the stockholder regarding such company. However, a shorter and less cumbersome Schedule 13G may be filed in lieu of Schedule 13D by passive stockholders owning less than 20% and that can certify that the investment is made in the ordinary course of business without any control purpose or effect. If the stockholder acquires more than 20% or is no longer passive, it must file a Schedule 13D within 10 days. 52 Guide on How to Invest in Real Estate - United States

55 Section 16 Implications. If a non-us or US stockholder acquires more than 10% of stock of a publicly traded company, including a REIT, in the US, then it will be subject to the same rules and regulations under Section 16 of the US Securities Exchange Act that apply to every officer and director of such company. These rules require, among other things, that the 10% holder publicly disclose their ownership and changes in ownership of such stock on Form 4s and Form 5s with SEC. Also, the 10% holder must comply with restrictions on short selling and short-swing transactions. 19. What are the advantages that can be derived from use of a Real Estate Mortgage Investment Conduit (REMIC) to finance real property? Historically, REMICs have been the primary approach through which Collateralised Mortgage Backed Securities are formed. REMICs are not used to finance real estate directly, but rather to pool existing or newly originated real estate mortgage loans to create certificates which may be sold and traded in the secondary mortgage market. Certificates may be issued in public offerings or private placements (including United States Rule 144A offerings). A REMIC is not a vehicle, but rather a tax classification under the United States federal income tax code. A vehicle satisfying the REMIC requirements and electing REMIC classification is treated as a pass-through entity for United States federal income tax purposes and thus, not subject to entity level tax. Thus, REMICs have been the preferred method of securitising United States real estate mortgage loans. Typically, mortgage loans would be pooled into a trust which would issue one or more tranches (or series) of certificates. If only one series of certificates is to be issued, the trust would typically be a simple pass-through trust which would not be subject to entity level tax and thus, would not typically be required to satisfy the REMIC requirements and elect REMIC status. Generally, if more than one series of certificates are to be issued, the trust would be structured to satisfy the REMIC requirements and elect REMIC status in order to avoid the trust being taxable for United States federal income tax purposes. If a transaction to which the REMIC requirements were applicable failed to satisfy those requirements, the entity (whatever its legal form) would be taxable for United States federal income tax purposes, thus incurring entity-level tax. By virtue of REMIC status, one class of certificates (the residual certificates issued by the REMIC) would be treated as the equity of the trust, and the other, more senior classes of certificates would be treated as debt for US federal income tax purposes. From the perspective of a property owner, the existence of the secondary mortgage market has expanded the availability of real estate mortgage financing and the parties offering such financing. The commercial mortgage market in the United States has generally structured mortgage loans which would be acceptable for inclusion in a REMIC transaction, whether the loan originator is contemplating such a REMIC transaction or not. As the origination and servicing of a mortgage loan held in a REMIC must satisfy the applicable tax requirements for REMICs, counsel experienced in those requirements should be consulted to make sure that the terms of the mortgage loan will satisfy both the needs of the property owner and the REMIC rules. Foreign persons should not be taxed on income earned from owning a regular interest in a REMIC. 20.What benefits can be derived from leasing as a form of long-term financing of an investment in real property? One method of financing real estate and facilities is through lease finance. This method of financing can be used for acquisition or construction financings and for refinancings. A lease finance transaction in the United States can be structured as a long-term leveraged lease or as a shorter-term synthetic lease. A long-term lease financing typically has a base term of 15 to 25 years, and various extension options. It can provide the benefits of long-term, most often fixed-rate, financing of real property assets. Typically, such transactions are structured as true leases for US federal income tax purposes. Thus, the tax benefits of ownership of the asset are held by the equity investor, and the lessee has mayer brown 53

56 effectively realised a portion of the value of such tax benefits in the effective lease rate. In a shorter-term synthetic lease financing, the transaction is commonly structured with shortterm, floating rate debt, usually based upon LIBOR. The term of the financing is usually between five and ten years. In these transactions, the transaction is intended to satisfy US GAAP requirements to be treated as an operating (off-balance sheet) lease, while for US federal income tax purposes, the transaction would typically be treated as a financing, with the lessee retaining the tax benefits of ownership. 21. US Federal and State Regulatory Issues Although beyond the scope of this investment guide, please note that there are various US federal as well as state laws and regulations that can be triggered by an investment in US real estate. Examples of such laws and regulations include the Bank Holding Company Act, the Dodd-Frank Wall Street Reform Act, the Volcker Rule, FATCA, the reporting requirements of the Bureau of Economic Analysis as well as various state doing business laws. The applicability of these laws and regulations is highly fact specific and advice regarding their applicability should be reviewed on a consistent basis, as not only can the laws and regulations change over time, but so too can an investor s ownership structure and investment strategy (either globally or in the US), all of which can impact previously provided advice. 54 Guide on How to Invest in Real Estate - United States

57 Real Estate Practice in United States With over 60 real estate attorneys in the United State and over 190 real estate attorneys in our offices around the world, Mayer Brown s real estate practice is large, varied and international in its capability. In the United States, we routinely advise on transactions throughout the country and have real estate lawyers physically located in California, Illinois, New York, North Carolina, Texas and Washington DC. Chambers USA remarked that the group is a wonderful, responsive and technically strong team that always provides a high level of professionalism. We offer a broad and comprehensive range of services as part of our Real Estate practice including: Acquisitions and Dispositions (assets and debt) Construction, Development and Land Use Corporate Services Cross Border Investment Distressed Real Estate Restructuring and Workouts Economic Development Incentives Financing Leasing and Sale-Leaseback Litigation Regulatory and Licensing Real Estate Equity Investments and Joint Ventures Real Estate Fund Formation and Capital Markets Transfer Tax, Property Tax and Assessment Zoning We also have vast experience in the acquisition, disposition, financing, leasing and operation of a variety of asset classes including: Apartments and multi-family developments Casinos and Gaming Cinemas Condominiums (including Interstate Land Sales Disclosure Act) Data Centers and Technical Real Estate Energy Facilities Golf courses Healthcare Homebuilding and Master Planned Communities Hospitality and Leisure Industrial, including warehousing and distribution facilities Infrastructure Mixed-use projects and vertical subdivisions Office Parking Renewable Energy Projects Restaurants and Nightclubs Retail Sports Facilities Time Shares Our Real Estate group s close cooperation with our real estate litigation, environmental, project finance, public sector, construction, federal and state income tax, real property tax, federal regulatory and other practice groups enables us to deliver comprehensive services for virtually every kind of real estate need a client might have. For more information on our firm and our practice, please visit mayer brown 55

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59 About Mayer Brown JSM Mayer Brown JSM is part of Mayer Brown, a global legal services provider, advising clients across the Americas, Asia and Europe. Our geographic strength means we can offer local market knowledge combined with global reach. We are noted for our commitment to client service and our ability to assist clients with their most complex and demanding legal and business challenges worldwide. We serve many of the world s largest companies, including a significant proportion of the Fortune 100, FTSE 100, DAX and Hang Seng Index companies and more than half of the world s largest banks. We provide legal services in areas such as banking and finance; corporate and securities; litigation and dispute resolution; antitrust and competition; employment and benefi ts; environmental; financial services regulatory and enforcement; government and global trade; intellectual property; real estate; tax; restructuring, bankruptcy and insolvency; and wealth management. Please visit for comprehensive contact information for all our offices. This publication provides information and comments on legal issues and developments of interest to our clients and friends. The foregoing is intended to provide a general guide to the subject matter and is not intended to provide legal advice or be a substitute for specific advice concerning individual situations. Readers should seek legal advice before taking any action with respect to the matters discussed herein. Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the Mayer Brown Practices ). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe-Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC ); Mayer Brown, a SELAS established in France; Mayer Brown Mexico, S.C., a sociedad civil formed under the laws of the State of Durango, Mexico; Mayer Brown JSM, a Hong Kong partnership and its associated legal practices in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. Mayer Brown Consulting (Singapore) Pte. Ltd and its subsidiary, which are affiliated with Mayer Brown, provide customs and trade advisory and consultancy services, not legal services. Mayer Brown and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions The Mayer Brown Practices. All rights reserved.

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