In a circular letter dated 9 April 2018 (file no. WA 42-QB 4100-2016/0005), the German Federal Financial Supervisory Authority (BaFin) provided new guidance on the question of whether a real estate holding fund subject to German investment law (Kapitalanlagegesetzbuch, KAGB) can invest in real estate holding companies which are also classified as alternative investment funds (AIF). The background is that German investment law imposes different requirements and limitations on so called minority and majority participations in real estate holding entities.
Sec. 234 para. 1 no. 4 KAGB stipulates that in order for a holding to qualify as a majority holding, the fund manager has to hold a majority of the voting rights and capital of the entity. The circular letter provides details on numerous new guidelines defining how these requirements need to be ascertained, including the rule that the fund manager must now be in the position to dispose of real estate or shareholdings and to distribute profits without the mandatory involvement of another party. Any side letters which contradict these requirements are harmful to the qualification as a majority participation. The letter also stipulates that a fund manager must be in the position to sufficiently manage the real estate holding entity as necessary (e.g. through acquisition of the general partner in the case of a limited partnership or by having a controlled individual as manager).
Should the fund not meet these requirements, the respective participation qualifies as a minority participation which is limited by law to 30% of the fund’s NAV in the case of retail funds (raised loans not being considered). Additionally for minority participations, the fund manager must also ensure that it can dispose of its participation at short notice to generate necessary liquidity.
The latest circular letter provides legal certainty for fund managers but also sets out new requirements for real estate holdings qualifying as majority participations. Fund and/or asset managers should check whether their respective articles of incorporation are sufficient under this new interpretation and should amend legal documentation if necessary.