All questions

Real estate ownership

i Planning

The legal framework for planning and zoning is essentially set out in the Federal Building Act, the Federal Building Use Regulation and building regulations of the individual states.

Planning and zoning is usually based on a large-scale regional plan for the use of land, which the competent municipality then specifies authoritatively and in greater detail for particular areas within that municipality. The planning process will involve extensive consultation with other competent authorities, such as environment, safety, water, nature or monument conservation, and participation by the general public. The land-use plans regularly contain restrictions on development and use. Municipalities also enjoy some statutory pre-emptive rights applicable to the sale of land that they can exercise to protect inter alia certain planning requirements. While such statutory pre-emptive rights have historically been rarely exercised, certain cities with significant housing or office shortages like Berlin and Munich have recently started to use these rights much more aggressively.

Individual building projects as well as changes of use generally require a building permit to be issued by the competent building authority stating if the project or change is in accordance with planning law and the state's respective Building Code. The admissibility of a building project outside the area of a land-use plan will generally be judged by its surroundings.

ii Environment

Under public law, if soil or groundwater contamination of a property presents a danger, significant detriment or disturbance to individuals or the public, the competent authority may issue an order for decontamination, remediation, investigation or monitoring addressed to the current owner of a property, any previous owner thereof, any party who is responsible under corporate or commercial law for the owner, any party holding actual possession of the property or the party actually responsible for the contamination or the polluter's universal successor. Usually, the authorities will select the party that it can most effectively hold responsible to undertake the necessary measures, which is normally the present owner or – in particular in case of industrial or business premises – the tenant of the property. Along with public law liability, there is civil law liability for clean-up or damages with regard to neighbours or other third parties affected by the contamination.

Environmental issues, therefore, are an important consideration in the due diligence of a real estate transaction, and in the representations and warranties, indemnity provisions or other covenants of a real property-related sale and purchase agreement.

iii Tax

Any sale and comparable conveyance of real estate is subject to RETT. If the real estate is held by a legal entity, the purchase of 95 per cent (in the near future likely the change of ownership of 90 per cent, see above) or more of the shares in such a legal entity is likewise subject to RETT (see Section IV and Section VII.i). The RETT tax rates depend on the location of the real estate and differ from state to state, from 3.5 to 6.5 per cent of the purchase price.

In addition, fees for the notarisation of the sale and purchase agreement, and land charges required for the financing, will accrue, as will registration fees for the land registry office for the registration of the priority notice securing transfer of title, the transfer of title, any land charges and the deregistration of existing land charges. Such fees are fixed by law and amount to regularly less than around 0.5 per cent of the transaction value with a decreasing percentage figure applying the higher the transaction value is.

Generally, the sale and letting of real property is exempt from VAT; however, under certain circumstances it is possible to opt for its application at the normal rate of 19 per cent. The seller of a property that has accepted the previous seller's option for VAT upon purchase in the past may want to sell the property not exempt from VAT; otherwise, the seller may be required to repay previously deducted input VAT to the tax office. The purchaser will have to pay the VAT in addition to the purchase price (reverse charge) which may commercially be acceptable if such VAT can be deducted as input VAT (i.e., when the property is used by the purchaser for supplies and services that are not exempt from VAT, including, but not limited, to letting with an option to VAT). Lettings can only be made subject to VAT if and to the extent the tenants are enterprises within the meaning of the VAT Act and render VAT-able and not VAT-exempt supplies or services (see Section VI.iv) – that is, use the premises for a business involving the delivery of goods and services subject to VAT. The issue of whether an input VAT deduction has been applied in the past should be carefully addressed in the due diligence procedure, particularly when acquiring multi-tenant commercial buildings, as the seller may have let space to non-professionals or professionals who render VAT-exempt services (such as banks, doctors, etc.) in the past, or the purchaser may want to do so in the future. As a result of such changes in circumstances, the purchaser may be required to repay input VAT to the tax office.

Real estate is subject to real property tax, which is a municipal tax and is presently calculated on the basis of certain tax values of 1964 and 1935, respectively. Because of a recent ruling of the Federal Constitutional Court, legislative activity is underway to change the historically low tax base to represent current values of the real properties (see Section VII.ii).

iv Finance and security

Real estate transactions will usually be financed by banks or other providers of debt financing such as insurance companies. Security can be created by way of a land charge over a property, a hereditary building right and a co-ownership share or, in the event of a share transaction, by a pledge or security transfer of the shares of the holding company to be acquired. In case of a share transaction involving a German GmbH or AG, because of applicable capital preservation rules, the availability of the property as security for the financing of the share purchase price is limited. Senior and junior debt financing can be secured with different ranking. Land charges are registered in the land register and, if no other agreement is made, the time of receipt by the land registry office of the filing for registration will generally determine the ranking of the land charge with regard to all other registered rights.

v Real estate investment funds

In line with the AIFMD, the German Capital Investment Code (KAGB) takes an all-encompassing approach and regulates all types of investment funds, including, for the first time in 2013, closed-ended investment funds. The regulation entails a licence requirement for managers of investment funds, requirements as to the eligibility and acting of depositaries and product regulation, as to the permitted legal form of investment funds and limitations as to the investment policy.

The KAGB confirms the changes to the legal regime applicable to open-ended public real estate funds that had already been introduced by the Investor Protection and Functionality Improvement Act in 2011. Most importantly to investors, the Act provides for a lock-up provision prohibiting investors from redeeming units in an open-ended public real estate investment fund for a period of at least 24 months. Further, investors are only entitled to redemptions of fund units once a year. In line with the AIFMD, the KAGB requires with respect to the expert committee responsible for the valuation of the properties that an independent expert or, if the previously determined value of the property exceeds €50 million, two independent experts must value the property. In addition, in the case of an acquisition of a property, one or two experts, as the case may be, who are different from the experts that are responsible for the regular valuation, must value the property proposed to be acquired. To enable a fund to meet certain redemption requests, it is required to maintain liquidity of 5 per cent of its net asset value.

The above-described restrictions do not apply to special open-ended real estate investment funds, which are only open to professional and semi-professional investors within the meaning of the KAGB. The only mandatory restrictions applicable are a limitation of leverage of up to 50 per cent of the value of the real estate assets held in the fund, and a prohibition to invest more than 20 per cent of the fund's assets in private equity (excluding real estate companies).

On 1 January 2018, the tax regime applying to open-ended public real estate funds significantly changed. Before, these funds were generally tax-exempt and their investors were (only) taxed on distributions and certain deemed distributions resulting from rental income and capital gains realised at the level of the fund (the concept of 'semi-tax transparency'). Contrary thereto, under the new regime, the funds themselves will become subject to tax with certain items of German-source income (including rental income and capital gains resulting from German-situs real property). At investor level, a second layer of taxes applies; to mitigate the resulting 'double taxation', the investors may enjoy a (partial) tax exemption depending on the investment strategy of the fund.

Following the legislative changes, the KAGB nowadays subjects public and special closed-ended real estate funds to a regulatory regime broadly comparable with the one applicable to open-ended real estate funds. Hence, the fund rules for public closed-ended real estate investment funds must be approved by the German Federal Financial Supervisory Authority (BaFin). Closed-ended investment funds may only be established in the legal form of an investment limited partnership or an investment stock corporation with fixed capital. Public closed-ended real estate investment funds may only take up leverage of up to 60 per cent of the gross value of the fund. If the fund is not risk diversified (which is deemed to be the case if it holds less than three properties, unless the risk diversification is commercially present with a view of the type of property), it may only be acquired by investors committing to invest at least €20,000 and passing a suitability test.

The above-described investment limitations do not apply to a special closed-ended real estate investment fund.

To obtain marketing approval for public real estate investment funds as well as special real estate investment funds from another EU member state or a country outside the EU, the management company must prepare and submit to BaFin a sales prospectus and key information document.