Qualifying Investor Funds (QIFs) have become increasingly popular as structures for the holding of real estate assets. This is true not only for international investors who are attracted to the Irish property market due to the dramatic falls in property values over the last number of years, but also for Irish investors who wish to restructure their property portfolios.
A QIF is a type of investment fund that is regulated by the Central Bank of Ireland (CBI). QIFs are the most flexible type of investment fund available in Ireland. While they enjoy the benefits of regulated fund status, they also benefit from minimal investment restrictions and are exempt from any borrowing limits.
QIFs are subject to a fast track authorisation process with the CBI. This means that provided the QIF’s service providers and directors have been previously approved by the CBI, a QIF can obtain authorisation from the CBI within one day of an application being made.
A QIF can be structured so that it is established as a company, a unit trust, an investment limited partnership or a common contractual fund. Creating the QIF as a limited liability company to hold property assets also avoids the risk of personal unlimited liability attaching to the investors, as could be the case where property assets and the related borrowings are held directly in an investor's own name.
A QIF requires certain service providers in order to facilitate its operation: a promoter, investment manager, custodian and administrator. The promoter firm must maintain a minimum capital level of €635,000 on an ongoing basis and be able to demonstrate this to the CBI. An investment manager is required to manage the assets of the QIF. Typically the promoter and investment manager will be a regulated investment management firm. However, the CBI will consider the appointment of a non-regulated firm to carry out the role of promoter and investment manager, provided it is able to show appropriate expertise to the CBI and subject to a review of the entity’s fitness and probity. There are a number of firms operating in Ireland that already have CBI approval and are willing to act as promoter and investment manager to QIFs seeking authorisation from the CBI.
A QIF is also a favoured vehicle for holding property assets as it is not subject to Irish tax on the rental income or on any gains on disposal of the assets These features make the QIF a popular vehicle for geared funds, as a greater proportion of rental income will be available to service the interest payments on the QIF's borrowings. This makes the QIF an attractive proposition from the perspective of both the investor and the lending bank. It should be borne in mind however that a QIF must operate an exit tax on the happening of certain chargeable events. There is no stamp duty payable on a transfer of units in a QIF.
The property assets of a QIF, which can be held directly or through a wholly owned subsidiary of the QIF, must be valued at least twice yearly to determine their market value, in addition to being valued upon the initial acquisition by the QIF.
In recent months, we have advised on transactions where QIFs have been used as part of an overall restructuring plan for property portfolios where the ownership of loans and related security has transferred to NAMA. In these cases the properties have been acquired by the QIF with the assistance of new borrowings, taking NAMA out of the picture (with NAMA’s consent). While this option will generally require a well performing portfolio with a relatively low debt to equity ratio, it can be a good strategy for investors seeking to reorganise their funding and ownership structures in a tax effective manner.
Further evidence of the acceptance of the QIF as a means of holding property assets in Ireland was the announcement earlier this year that NAMA itself is looking at establishing a QIF aimed at institutional investors as part of its plans to generate cash from its portfolio.
As the property market in Ireland starts to revive it is likely that we will see the QIF emerging as one of the preferred structures for many sophisticated property investors.