The Norwegian real estate market has seen an increasing trend in cross-border activity in recent years and in 2015, it was one of the fastest growing real estate markets in Europe.
Commercial real estate is usually acquired through the purchase of the entity which owns the property. The purpose of this article is to consider whether establishing a Norwegian corporate structure to acquire the company which owns the property, triggers any additional legal requirements. This was prompted by new legislation governing the managers of alternative investment funds (AIFs).
There is no general investment restriction on foreign investors in Norway. Nor is there a general requirement, subject to a few important exceptions, for a public agreement to own shares in a Norwegian incorporated company. Previously a group of investors could establish an investment company without being regulated. However, the legal position has become less clear due to the new EU regime for managers of AIFs. Under this regime, a real estate company with a commercial purpose is distinguished from a real estate AIF.
Scope of the Alternative Fund Managers Directive
The scope of the Alternative Fund Managers Directive of 2011/66/EU (AIFMD) is broad, and, with a few exceptions, covers the management, administration and marketing of AIFs. (Readers are directed to Issue 19 of the Gazette which provides a snapshot of the efforts of national governments to implement the measures introduced by the AIFMD.) The directive is aimed at undertakings managing one or several AIFs on a regular basis and its focus is on regulating the managers rather than the AIFs. An AIF is, subject to a few exemptions, subject to either a permit or registration requirement, depending on certain thresholds relating to assets under management and debt leverage. It is important to define AIFs and understand which investment companies and funds are covered by the AIFM regime. Single asset structures, in particular, may be challenging to place.
Definition of an AIF
An AIF is a collective investment undertaking that is not subject to the Undertakings for Collective Investment in Transferable Securities (UCITS) regime and includes hedge funds, private equity funds, investment companies and real estate funds, among others. The legal form of the undertaking is of no relevance.
The AIF is defined in Article 4(1)(a) of the AIFMD, which is incorporated into the Norwegian Act, section 1-2(a). Detailed guidelines on “the key concepts of the AIFMD” are provided by the European Securities and Markets Authority (ESMA). The Norwegian Financial Supervisory Authority (NOR FSA) has stated that it will conform with the EU interpretation of the directive and the ESMA guidelines and adopt the practice of regulating AIFs which develops in the EU.
The following characteristics, if all of the elements in the definition are met, are likely to lead to an undertaking being considered an AIF and falling within the scope of the regulation:
Collective investment scheme:
Collective investment scheme where (i) the undertaking does not have a general commercial or industrial purpose, (ii) it pools together capital raised from its investors for the purpose of investments with a view to generating pooled returns to the same investors, and (iii) the holders of units/ shares have no day-to day discretion or control. The legal form of the undertaking does not matter. UCITS funds fall outside the scope of the directive.
Activity of taking direct or indirect steps by an entity or a person which procures the transfer or commitment of capital by one or more investors to the entity for the purpose of investing it in accordance with a defined investment policy. It is not significant whether the capital raising activity takes place once, on several occasions or on an ongoing basis, or if the transfer of commitment of capital takes the form of subscription in cash or in kind.
Investment of private wealth by a member of a pre-existing group (ie a group of family members where the sole ultimate beneficiaries of the legal structure are family members) is likely not to be within the scope of “raising capital”.
Number of investors:
An entity which is not prevented by law, the rules of incorporation or any other provision of binding legal effect, from raising capital from more than one investor should be regarded as an undertaking which raises capital from a “numbers of investors”. This should even be the case if there is in fact only one investor.
Defined investment policy:
Policy which refers to how the pooled capital in the undertaking is to be managed to generate a pooled return. An investment policy is fixed and often part of the rules of incorporation. It often specifies the investment guidelines and criteria as well as being legally binding on the manager.
It is up to each undertaking and its owners to assess whether they fall within the scope of the application of the AIFMD/ Norwegian AIF Act. An analysis of the undertaking must be performed based on the structure, ownership, business, commercial purpose, governance structure, constitutional documents, sales material, and stakeholders, etc.
Next, we will consider whether a particular element points to a corporate structure being an AIF or not. It should be underlined that this is a specific assessment which must be based on the facts of each case.
A real estate company may hold a general commercial purpose and strategy. Management is involved in the day-to-day running of the company through actively operated property portfolios, acquiring real estate, developing property projects and managing tenancy relationships. There are several stakeholders in the management of the real estate company and a commercial purpose and substance which indicates that it is not an AIF.
On the other hand, a real estate company, especially a single asset structure, may be deemed to be a vehicle for a financial investment where the goal of the investors is to obtain the cash flow and the rise in value. At the same time, in our view, it is possible to argue that rental business may be assumed to be a commercial purpose in itself, especially if the owners are involved in the day-to-day management. A single asset structure where all services are outsourced to an external asset manager, may indicate that the corporate structure is an AIF.
Further, it will be significant whether the undertaking is viewed as a collective investment scheme or not. As set out above, the definition of an AIF presupposes that there will be “pooling of capital” in the undertaking to create a “pooled return” to the group of investors. Apart from that, the guidance on “collective investment schemes” is limited. In our view, it would be natural to look to the characteristics of a regulated securities fund (ie capital contribution rules, mechanism for pricing, redemption rules, pre-determined time for the investments, etc), even if it is not comparable in all aspects. It may be submitted that a wholly owned company in a single asset structure lacks the element of a collective investment scheme. At the same time, as set out in their guidelines, ESMA does not rule out the possibility of there being only one investor in the AIF, provided that there is no legal restriction on the pooling of capital. We believe that starting point presupposes that the undertaking is viewed as a collective investment scheme. On the other hand, where an investment company or a single asset structure is established on the basis of (public) capital raising in the market and marketed as an investment opportunity, this will point the corporate structure in the direction of being an AIF.
Another element is the requirement for a “defined investment policy”. The constitutional documents and the prospectus usually show whether a company operates in line with a defined investment policy or not. In our view, the requirement for an investment policy may be viewed differently in a single asset structure where the strategy is already ‘given’, than in an investment company which aims to invest in several asset classes and with a mandate.
Finally, in the event that a foreign fund or regulated entity acquires the company which owns the property without establishing a Norwegian holding structure, it will most likely be viewed as a direct investment and not as a separate Norwegian AIF.
Most managers registered in Norway are structured either as private limited liability companies or national funds / special funds.