What are the main features of the constitution of each type of corporate vehicle used to invest in real estate?
A limited partnership consists of (usually a single) general partner and one or more limited partners. A limited partner who invests in such a partnership will be liable for the debts and obligations of the partnership only to the extent of his nominal capital contributions and the relationship between the partners is usually governed by a private limited partnership agreement. Limited partners are not permitted to take part in the management of the partnership or its investments. The general partner (which is normally an SPV (single purpose vehicle) controlled by the sponsor of the partnership which manages the partnership's property investments) has unlimited liability for the debts and obligations of the partnership. The general partner does have a right of recourse or indemnity against the commitments of the limited partners as investors to meet partnership obligations unless otherwise agreed.
A limited liability partnership (LLP) is a corporate entity comprised of members who have limited liability. As in a partnership and limited partnership, the relationship between the members is normally set out in a private members' agreement. An LLP which carries on a business is taxed like a partnership so that any income and gains of the members are taxed as if they were partners in a general partnership. The LLP is not a separate taxable entity except on its winding up. An LLP is sometimes used as a property investment vehicle but tends not to be suitable for investment by tax exempt investors (such as pension schemes) for whom the vehicle is not tax transparent.
The liability of members is limited to the amount which they have agreed to contribute to the LLP. Certain creditor protection provisions apply which allow distributions made to members within the two years prior to the onset of the insolvency of the LLP to be recaptured by a liquidator if the members knew, or ought reasonably to have foreseen, that insolvency would occur.
An LLP is more commonly used as a vehicle for the manager of an investment fund due to various tax advantages which are available to the members of the LLP.
Property holding companies (nominee companies) are established and enter into a trust deed. The nominee companies hold legal title to the property on trust for a syndicate of participating investors. Each investor owns a defined share in the property. After the property is sold, the companies are brought to an end to ensure that no residual liabilities arise subsequently. This is also known as a co-ownership trust and is used in circumstances where a group of investors want to take strategic and other important investment decisions but also have tax transparency and minimum regulation.
It is possible to structure an investor syndicate trust so that it is not a collective investment scheme for regulatory purposes, with the result that its operation does not require the appointment of an FCA authorised person. Normally this type of structure is used for co-ownership of a single property investment rather than for a property portfolio.
Property unit trusts are schemes which pool investors' funds into a single fund which invests in property. Individual investors then buy units in the fund. Units are bought or sold through a fund manager and the value of individual units varies in line with the overall value of the fund. Unit trusts divide into those that are authorized by the Financial Conduct Authority, either for retail or institutional investor distribution (the requirements which apply to the terms of the unit trust are stricter for retail investors), and those that are not authorized.
Generally, property unit trusts are set up on a closed-ended basis, ie investors do not have a right of regular redemption of their units. It is possible to have an open-ended Property Unit Trust (where investors have a regular right of redemption of their units by reference to the underlying net asset value of the assets of the trust). These tend to be the largest property funds and require substantial portfolios and additional liquid property-related assets and cash/near cash to be maintained to ensure that there is sufficient liquidity to meet investor demand. Gating provisions will commonly apply so as to permit the manager of the Unit Trust to defer redemptions to ensure fairness between outgoing and remaining investors and to avoid forced sales.
A private limited company is formed and registered under the Companies Acts of the UK (of which England and Wales form part) and has a separate legal personality. With some exceptions for UK corporate investors, including banks in connection with joint ventures, UK-incorporated companies are not widely used for UK property investment due to the absence of tax transparency for either income or capital gains tax.
This is a company formed and registered under the Companies Acts and has a separate legal personality. It must meet certain minimal capital requirements. One specific form of a tax-efficient public limited company is a real estate investment trust ('REIT') (see below).
Qualifying companies and groups of companies have been able to join the UK REIT regime since 1 January 2007. Part of the underlying political motivation for introducing REITs was an attempt to stop investment in UK property continuing to flow offshore. A REIT allows a corporate entity that buys, develops, manages and sells real property to invest (tax efficiently) in a professionally managed portfolio held for long-term benefit. Broadly, REITs benefit from an exemption from tax on the income and capital gains from their property rental business and distributions of income profits and capital are treated as UK property income in the hands of shareholders. A 20% withholding tax is imposed on such distributions (subject to exceptions).
To qualify as a REIT, the company must satisfy a number of conditions and apply to HMRC (the tax authority) for approval as a REIT. Two of those conditions are that the company is not a ‘close company’ (or is simply a close company by virtue of one of the participators being an institutional investor) and that its letting business comprises at least three properties. As a result, ownership of REITs must be widely held and will only be a suitable choice of property holding vehicle if there are a number of investors investing in multiple properties.
Property companies which are tax resident offshore may not join the REIT regime unless they move onshore. The REIT regime is also not as attractive for investments in overseas property. Although REITS may develop property, the REIT regime is not appropriate for developers.
There is no requirement for a PAIF's shares to be listed or traded on a stock exchange, so various listing requirements will not apply. However, PAIFs which are either a fund subject to the European Union's Undertakings for Collective Investment in Transferable Securities Directives (UCITS) or a non-UCITS retail fund are often preferred by retail investors because they are authorised and regulated by the FCA, thereby affording a level of protection for investors.
Much of the EU legislation on UCITS is implemented in the UK through FSMA and secondary legislation made under FSMA. The Government’s intention is that this legislation should be preserved, in other words that it should remain unchanged, after the end of the Brexit transition period (which ends at 11.00pm on 31 December 2020). UK legislation which implements UCITS will only continue to be recognised by the EU as a basis for regulatory cooperation during the Brexit transition period. At the end of the transition period, the UK legislation which implements UCITS will no longer be recognised by the EU as a basis for cooperation.