On 5 October 2017, the bill amending the Regulated Real Estate Companies Act of 12 May 2014 (“GVV-wet”) was approved by the Chamber of Representatives and submitted to the King for ratification.
The bill - as passed at a plenary meeting of the Chamber of Representatives of 5 October 2017, and soon to be law – firstly, amends the existing arrangement for Public and Institutional Regulated Real Estate Companies.
Although the RREC Act was only recently passed, the legislator wishes to introduce a number of reforms intended to provide Regulated Real Estate Companies (the “RRECs”) the necessary tools to activate the property (real estate) of other institutional and professional market players.
Aside from this, the bill introduces a new category of Regulated Real Estate Companies, i.e. the Social Regulated Real Estate Company.
1st Reform: Amendments relating to Public and the Institutional RRECs
The aim of the first series of adjustments is to:
(i) remedy specific limitations of the RREC status, which in practice were often found to be restrictive, in combination with
(ii) a broadening of the permitted activities of the RREC to include the “asset class” “Infrastructure”, and
(iii) the guarantee a “level playing field” with the specialist property investment trust.
New “asset class” accessible to RRECs
The permitted activities of RRECs are to be extended to include the infrastructure sector, so they too can in future participate in, inter alia, DBFM(O) contracts, concessions and other forms of PPP, (renewable) energy (projects), networks and utilities.
Relaxation of the control requirement
Today, Public Regulated Real Estate Companies (“PRRECs”) and other market parties already cooperate in a structural manner in so-called “Institutional Regulated Real Estate Companies” (“IRRECs”). To date, these were subsidiary companies of the PRRECs which are under the (exclusive or joint) control of the PRREC, and in which institutional and professional parties can hold a participation.
To date, only three of the 17 PRRECs have one or more subsidiaries, which have adopted the form of an IRREC. This shows that the rules currently governing the IRREC do not meet the wishes of the market.
The bill is now scrapping the requirement for a PRREC to have exclusive or joint control of the IRREC, and in place of this inserting a minimum participation threshold of 25% of the capital of the IRREC (either direct, or indirect). This measure is aimed at easing and promoting cooperation between the PRRECs and the other market players.
At the same time, the bill specifies that the actual value of the participations held by the PRREC in such uncontrolled IRRECs, may not exceed 50% of the actual value of the consolidated assets of the relevant PRREC.
Participation of natural persons in IRRECs
The bill also gives natural persons the opportunity to hold securities issued by an IRREC. The minimum amount of the subscription (in the event of capital increase), or of the consideration (in the event of acquisition), paid by the natural person acquiring it shall be determined by Royal Decree.
Providing a “level playing field”
Expanding activities into the infrastructure sector requires more flexibility regarding the maximum debt ratio. The existing rules provided a maximum degree of debt of 65%.
In specific circumstances, it will be possible to disregard external funding in the context of infrastructure works when calculating debt ratio, in order to provide the PRRECs a “level playing field” with other suppliers of equity and subordinated loans in the context of project finance for PPS projects and (renewable) energy projects.
In addition, care is taken to ensure that a healthy “level playing field” is created between the RREC-status and the specialist property investment trust by uniformizing tax rules.
2e Reform: introduction of a new category of RREC: the Social RREC
The new category of RRECs is intended to be active in the area of property infrastructure required for the social sector and the care of persons. More specifically, aimed at, amongst others, property infrastructure for care of the disabled, care for the elderly, childcare, youth welfare and education.
The aim of introducing the Social RREC is to broaden the funding basis for such forms of property infrastructure and, where the case arises, make this possible publicly, by granting a tax status similar to the current favourable tax status of Public and Institutional RRECs.
The social aim of these investments is guaranteed in practical terms by a number of specific rules, which deviate from the “common-law arrangement” currently applicable to Public RRECs. A number of these specific deviating rules are explained in brief below.
Permitted activities
In principle, Social RRECs are only allowed to own property with a social purpose. Such an RREC may likewise act as a lessee and also hold option rights to these assets. Ownership of other assets, such as stock and securities, is not permitted. In this area, the legal framework of these RRECs is stricter than that of the other RRECs.
Company form
The Social RREC must take the form of a Social Cooperative Limited Liability Company. Unlike the rights of the Public RREC, the participation rights in a Social RREC may not be traded on the regulated market.
Debt ratio and liquidity
Given that the sole opportunity for partners of a Social RREC to cash in their shares, is redemption of those shares by the relevant RREC, debt ratio and liquidity are very important. After all, it is necessary to ensure that requests for redemption do not jeopardize the company’s continued activities.
For this reason, the maximum permitted debt ratio will be specified by Royal Decree, however, by law, this may not exceed 33% of the assets of the Social RREC. This percentage is much lower than the percentage applicable to the other Public RRECs (i.e. 65%).
Mindful of the non-liquid nature of an investment in a Social RREC, limits may be imposed by Royal Decree on offering shares in such RRECs to retail investors. Shares which represent the fixed part of the capital may not be offered to retail investors.
Retail investors may withdraw at any time, in principle, in exchange for the nominal value of their shares.
In connection with this, the new regulations provide for the compulsory establishment of a liquidity reserve through deductions from company profits. This is one-fifth of the positive net result, each year until the reserve fund reaches one-fifth of the variable part of the capital.
Payment of dividends
As in the case of the ordinary RREC, a minimum annual payment of 80% of the distributable profit also applies to the Social RREC. However, this payment is still subject to the reserve of the maximum annual yield of 6%, prescribed for Social Companies by the Companies Code.
The bill was submitted to the King for ratification on 5 October 2017. The bill (or Act) has not yet been published, and shall enter into force on a date to be specified by the King.
