Abstract
The financing problem in less developed or developing countries are especially experienced in real estate investments. In order to solve this financing problem, the capital accumulation should be realized in a systematic way. The real estate investment companies have emerged as an alternative solution to financial difficulties experienced in the real estate sector. Indeed, the investment companies with the exclusive purpose of providing capital to infrastructure investments and services have gained importance as a result of the expansion of infrastructure investments and activities.
I. INTRODUCTION
Real estate investment company (“REIC”) is a set of business organization formed by a certain group of investors through investing the certain amount of capital, in order to purchase or obtain financing for the purchase of various real estate assets. The REICs founded in order to manage a portfolio consisting exclusively of the infrastructure investments and services or to obtain financial resources for a project related to such type of investment or service (shall hereinafter be referred to as an “infrastructure real estate investment company” or “infrastructure REIC” or “partnership” depending on the content) are encountered as a special form of the real estate investment companies.
The respective structure featured as an alternative method in the capital market is subject to certain terms and restrictions under the modern legislation enacted in compliance with the international regulations with regard to its establishment, management, organization, investment and scope of business. Furthermore, the infrastructure REICs are required to satisfy and abide by certain legal criteria even after their foundation or conversion.
In this study, the governing legislation to which infrastructure real estate investment companies are subject to, the foundation and conversion procedures thereof and the rights and advantages provided to its investors will be examined.
II. General View of the Infrastructure Real Estate Investment Companies
A. Field of Activity of the Infrastructure Real Estate Investment Companies
The field of activity of the infrastructure REICs consists of the infrastructural investment and services. The scope of the mentioned infrastructural investment and services are identified conclusively in paragraph (b) of Article 3 titled “Definitions and Abbreviations” of the Communiqué on Principles Regarding Real Estate Investment Companies (“Communiqué”) numbered III.48.1, published at the Official Gazette dated 28.05.2013 and numbered 28660 which stipulates that “…the agricultural, irrigation, mining, manufacturing, energy, transportation, communication, information technologies, tourism, housing, culture, urban and rural infrastructure, municipal services, urban transformation, environment, research and development services and education, health, justice, security, general administrative infrastructure and other similar investments and services, as well as projects relating to and rights and interests associated with these investments and services…” represent the investments and services in the field of the activity of infrastructure real estate investment companies.
The fields of activity of the infrastructure real estate investment companies are restricted with the investments and services specified in the Communiqué, and thus it will not be possible to invest in those real estate investment projects or real estates that are outside of that scope in the capacity of an infrastructure REIC.
B. Governing Legislation of the Infrastructure Real Estate Companies
In the prior period before the Communiqué entered into force, the first direct legislation regarding the infrastructure real estate investment companies was brought by the Communiqué on the Principles Regarding Real Estate Investment Companies (Serial: VI, No: 24) published at the Official Gazette dated November 8, 1998 and numbered 23517. Subsequently, Communiqué on the Principles Regarding Infrastructure Real Estate Investment Companies (Serial: VI, No: 24) (“Promulgated Communiqué numbered VI.24”) has been entered into force via publication at the Official Gazette dated January 29, 2009 and numbered 27125 and yet the mentioned communiqué has been revoked by the Communiqué Regarding the Promulgation of the Communiqué on Principles Related to Infrastructure Real Estate Investment Companies (Serial: VI, No: 24), (III.48.4) as published in the Official Gazette dated 23.01.2014 and numbered 28891. The Communiqué on Principles Regarding Real Estate Investment Companies (III-48.1), which is applicable currently, has been put into force while the Promulgated Communiqué numbered VI.24 was still in force; however, it has been amended1 when the Promulgated Communiqué numbered VI.24 was repealed and redrafted in such a way to exhaustively contain the infrastructure real estate investment companies.
Other legislation, which the infrastructure REICs are subject to and which is taken as a basis or is referred to in the provisions stated in the Communiqué, consists of the Build-Operate-Transfer Law numbered 3996 and other related legislations of the Capital Markets Board (“The Board”).
1. Communiqué on Principles Regarding Real Estate Investment Companies1
The basis of the Communiqué is Article 48 titled “Investment Companies” and Article 49 titled “Conditions Regarding the Foundation and Activities of Investment Companies” of the Capital Market Law dated December 6, 2012 and numbered 6362 (“CML”).
The mentioned Communiqué which serves as a regulatory act generally consisting of the provisions regarding the real estate investment companies, also contains certain special provisions regarding the REICs that shall exclusively invest in the infrastructure investments and services.
In addition to the aforementioned restrictions in the scope of business, the Communiqué also provides certain conditions and principles regarding the foundation of, conversion to an infrastructure real estate investment company and its activities. Indeed, the Communiqué which has a priority for an infrastructure real estate investment company will become a legislation that will reach to a broad application area, once the orientation to the infrastructure real estate investment companies increases.
2. Law on Performance of Some Investments and Services by Build-Operate-Transfer Model No. 3996 3
In order to respond to the question as to what an infrastructure company is, the definition of the equity company stated in the Law on Performance of Some Investments and Services by Build-Operate-Transfer Model (“Build-Operate-Transfer Law”) should be reviewed. Indeed, the infrastructure company definition mentioned in Article 3 titled “Definitions and Abbreviations" of Communiqué refers to the “capital company as defined in the Law on Performance of Some Investments and Services By Build-Operate-Transfer Model no. 3996 dated 8/6/1994”. The capital company is defined as “a joint stock company established or to be established in compliance with the Laws of Republic of Turkey to which, if necessary, the state institutions and organizations (including the state economic enterprise) are shareholders and which meets the conditions stipulated in the Council of Ministers decision stated in the article 4 of the Law” in Article 3 titled as “Definitions” of the Build-Operate-Transfer Law.
3. Other Related Legislation within the Framework of the Capital Markets Law
Infrastructure real estate investment companies shall be subject to various other legislations of the Board in the wake of establishment or conversion such as the Communiqué on Corporate Governance (II-17.1),4 Communiqué on Public Disclosure Platform5 (VII-128.6) Communiqué on Prospectus and Issue Document6.(II5.1) due to their nature of becoming public company in consequence of the initial public offering, or due to issuance of7 their shares to the qualified investors as a result of the sale of shares to qualified investors. Also, in cases where there is no provision in the Communiqué regarding the sale of the shares to the qualified investors, pursuant to the subparagraph (k) of the sixth paragraph of Article 11/A of the Communiqué, the provisions regarding the sale of the shares to the qualified investors stipulated in the Communiqué on the Purchase of the Capital Market Instruments (II-5.2) that was published on the official gazette dated 28.06.2013 and numbered 28691 will be applied mutatis mutandis.
4. Registered Capital Legislation
Registered capital system is a system of capital increase where the board of directors are authorized to issue new shares or increase the capital without having to convene a general assembly meeting in the future, through inserting a provision into Articles of Association thereof to that end.7
According to Article 6 titled “Conditions of Foundation and Conversion” of the Communiqué, in order for an infrastructure REIC to be established, it should be established as a joint stock company with registered capital or, for a company that’s already in the form of a joint stock company to adopt the registered capital system, it should apply to the Capital Markets Board. In this manner, joint stock companies, especially those that intend to convert into infrastructure real estate investment companies, during their conversion applications, will have to follow the necessary procedures for adopting the registered capital system at the same time.
5. Specific Legislation Arisen from the Infrastructure Investments and Services
The specific legislation such as Electricity Market Law,8 Mining Law9 to which an infrastructure real estate investment company would be subject based on its scope of business, should also be taken into account for establishment of or conversion to an infrastructure real estate investment company.
III. Foundation and Conversion of the Infrastructure Real Estate Investment Companies
A. In General
Infrastructure real estate investment companies differs from the real estate investment companies at some regulation that they are subject to since they are formed to make specific investments regarding the acts and/or transactions to be provided by the significant financing within the framework of infrastructure real estate investment activities.
B. Conditions of Establishment and Conversion
1. Conditions of Establishment
The infrastructure REICs are subject to certain terms and conditions during their establishment, pursuant to Article 6 of the Communiqué. In order for the Board to permit the establishment, an infrastructure REIC should first necessarily be established as a joint stock company with registered capital holding a business name covering “Real Estate Investment Company” phrase. The Articles of Association thereof should be drafted in compliance with the CML, the Communiqué and other related legislation, and shall state explicitly that minimum 75% of the total assets of thereof will be composed of infrastructure investments and services, and the initial capital whereof must be 100,000,000 (One hundred million) TL at least. However, if at least one of the shareholders of the REIC in question is a legal entity categorized as a public entity and institution and holds at least 20% of capital shares of the infrastructure REIC, the respective initial capital will be applied as 5,000,000 (Five million) TL provided that the issued capital reaches at least 100,000,000 (One hundred million) TL as a result of a capital increase upon the sale of shares via public offering of sales to qualified investors. Besides, the cash payment of its shares representing a portion of 10,000,000 (Ten million) TL of its capital must have been issued and the price of all shares issued.
in cash must have been fully paid. Yet this condition of minimum limit of 10,000,000 TL shall not apply if at least one of the partners is a legal entity categorized as a public entity and institution and holds at least 20% of capital shares of the infrastructure REIC. If the shareholders wish to put capital in kind to this company, the value of each of the capital in kind must be assessed as per Article 9 of the Communiqué.
Founding partners, general manager and members of the board of directors of the infrastructure REICs that have drafted the Articles of Association in compliance with the conditions required by the Capital Markets Board, must also bare certain qualifications. Conditions required for the founders such as not having been convicted of any one of the offences and crimes listed in the CML by a final court verdict, and not having been adjudged bankrupt, not having any overdue tax debts are stipulated in Article 7 titled “Qualifications of Founders and Shareholders” of the Communiqué and conditions required specifically for general manager and members of the board of directors such as being graduated from a four-year university, having experience in fields such as infrastructure, law, banking, real estate, and finance, and the general manager being employed exclusively for this duty, are contemplated in the sixth part titled as “Management Structure” of the Communiqué.
It is required that the qualifications of assets to be included in its portfolio, and their future weights in total assets of the company be in conformity with qualifications and limitations specified in this Communiqué. As aforementioned, this ratio is 75% pursuant to the subparagraph (a) of the first paragraph of the article 24 of the Communiqué.
Also, it is required to duly commit to the Board that its shares equal to 25% of its initial capital will be offered to public or will be sold by private placement to qualified investors.
Besides the foregoing, since the scope of business of an infrastructure REIC includes activities that are subject to specific legislation such as energy, mining, communication and housing, the permission of the Board alone or providing the conditions stipulated in this Communiqué may not be sufficient, and the conditions required such legislation must also be provided and the permissions required thereunder must be obtained.
2. Conditions of Conversion
In the light of the provisions of the Communiqué in relation to the establishment and conversion, in addition to certain provisions required for establishment discussed above, there are also some terms and conditions particularly brought for conversion to an infrastructure real estate investment company.
It was mentioned above that only joint stock companies could be converted to infrastructure real estate investment companies. A legal entity to be converted to an infrastructure real estate investment company must be in the form of a joint stock company with registered capital or must have applied to the Board for adopting the registered capital system. In this respect, the company willing to be converted into an infrastructure REIC must also regulate the provisions required for the registered capital system while amending its articles of association in compliance with the Board principles.
The minimum capital is same as the amount stipulated for the establishment. The condition of having at least TL 10,000,000 (Ten million) TL paid-in cash capital applies hereto as well. However, for conversion, it is alternatively possible to satisfy this condition by ensuring that the sum of the accounts of (1) cash and (2) cash equivalents and (3) financial investments taking place in the group of current assets in the to-be-converted company’s audited nonconsolidated or solo financial statements of the last accounting period, is equal to the specified rate or amount. Also, its capital shall not have been increased out of funds created by carriage of assets to current market value during the last two years.
In addition to the foregoing, the conditions of establishment prescribed for the members of the board of directors and general manager under the Communiqué in establishment process and for the company to commit to sell via public offering or by private placement to qualified investors its shares representing minimum 25% of the company’s capital, and to ensure that minimum 75% of total assets of the company is composed of infrastructure investments and services, are applicable for conversion processes as well.
Besides, the company must revise its articles of association in line with the CML, the Communiqué and other related legislation before the conversion application and submit to the consent of the Board and the other related authorities (if any) which the company is responsible to by force of a special legislation.
C. Foundation and Conversion Procedures
1. Foundation Procedure
The founders of the infrastructure real estate investment company planned to be established must first apply to the Board through a standard form of which the manner and principles are identified by the Board together with the documents specified in this form.
The partners must apply to the Ministry of Customs and Trade for approval of the foundation following the Board’s consents of the application in accordance with the provisions of the CML and the Communiqué. Upon the further approval of the Ministry of Customs and Trade, the company must be registered to the trade registry within 30 days following the date of notice of the Board. After the incorporation of the infrastructure REIC with registration, the establishment process thereof will be completed by submittal of the documents regarding the registration to the trade registry and announcement in the Turkish Trade Registry Gazette within 6 business days following the announcement date.
2. Conversion Procedure
The company to be converted into the infrastructure real estate investment company, as similar to the establishment process, must initially apply to the Board through a standard form the manner and principles of which are identified by the Board together with the documents specified in this form and based on certain specific legislation, to other authorities which the company is responsible to. After receipt of the assents from the Board and other related authorities, the company must apply to the Ministry of Customs and Trade. In the event that the Ministry of Customs and Trade consents to the application, the company must adopt a resolution for the amendment to its Articles of Association and for conversion by gathering the General Assembly within 30 days following the receipt of the related decision of the Board. The resolution of the general assembly must be registered and announced within 15 days following its adoption. After the completion of the registration and announcement procedures, as in the establishment, the company must submit the documents regarding the registration and announcement within 6 business days upon announcement.
D. Actions to be Taken after the Foundation and Conversion
1. In General
In accordance with the regulation stated in Article 11/A titled “Special Provisions on Companies to Invest Solely in Infrastructural Investments and Services” of the Communiqué, the companies are responsible to provide the compliance of the infrastructure REIC with the legislation provisions and submit the information and documents certifying the convenience to the Board within 2 years following the registration of foundation or the amendments of articles of the association to the trade registry. While performing this information responsibility, it must offer 25% of its shares to public or sell them to the qualified investors within 2 years following the end of the time mentioned above in case the company’s issued capital is less than 200,000,000 TL or within 4 years following the end of the time mentioned above in case its issued capital is more than 200,000,000 TL.
2. Initial Public Offering
Inıtial public offering means general call made through any means and the purchase realized after this call for the purchase of all capital market instruments along with the companies’ shares. First, it is required that the company must fill out the standard form of which the manner and principle is identified by the Board and complete the documents specified in this form and prepare the prospectus and submit them for the approval of the Board due to the necessity of offering the minimum 25% of infrastructure real estate investment companies to public. If the company fails to apply to the Board within the aforementioned periods or the Board refuses to approve its application, the right to operate in infrastructure real estate investment company activity of the company shall be removed. At the same time, if the company fails to amend its Articles of Association within 3 months following the end of the said period or the date of its receipt of the negative decision of the Board, the company will be dissolved pursuant to Article 529 of the Turkish Commercial Code (“TCC”).
If the Board approves the application of the company, the initial public offering process will begin and 25% of its shares will be traded in the stock exchange at the end of the purchase process.
3. Sale to Qualified Investors
In accordance with the definition stated in the related regulation of the Board, briefly, the qualified investor means the professional customers including the customers accepted as professional based on demand. As per Article 32 of the Communiqué on the Principles of Establishment and Activities of Investment Firms (III-39.1),10customers to be accepted as “professional customers” shall meet at least two of the following criteria; (1) they executed at least 10 transactions and a minimum trading volume of 500,000 Turkish Lira in the markets where trading is requested for each quarterly period during the past one year; and (2) their total financial assets, including but not limited to their cash deposits and owned capital market instruments, must exceed 1,000,000 Turkish Lira; and (3) they worked at any one of top managerial positions in the field of finance for at least 2 years or as a specialized personnel in capital markets for at least 5 years, or must hold Capital Market Activities Advanced Level License or Derivative Instruments License.
Differing from the real estate investment companies, infrastructure REICs also have the right to sell their shares to the qualified investors as an alternative to the public offering. Infrastructure REICs willing to sell their shares solely to qualified investors should primarily ensure a provision in their Articles of Association, on this matter. Also, it is obligatory for those companies in which the infrastructure investments and services take less than 60% in the sum of assets to sell their shares first to qualified investors.
Just as with the initial public offering process, the infrastructure REIC must apply to the Board for approval of the issue document for the sale of its shares representing 25% of its after-sale capital in the form of which the manner and principles are identified by the Board within the related periods specified above. If it fails to apply to the Board within the mentioned periods or the Board refuses to approve its application, its right to operate in infrastructure real estate investment company activity shall be removed. At the same time, if the company fails to amend its Articles of Association within 3 months following the end of the said period or the date of its receipt of the negative decision of the Board, it will be dissolved pursuant to Article 529 of the TCC.
IV. Advantages and Rights Granted to the Investors
Our Government provides certain advantages and rights to the investors in order to solve the financial difficulties in this field and make real estate investment companies attractive due to the fact that real estate investment companies are established in order to provide financing to the large scale real estate investment projects and has importance in terms of public benefits.
Indeed, the infrastructure real estate investment companies will have the opportunity to benefit from the price fluctuations in the stock exchange as a result of selling their shares via public offering and thus increasing the value of their companies. Those infrastructure REICs that prefer to sell their shares solely to qualified investors instead of a public offering will be able to raise their economic power by means of reaching to professional customers within a short period of time.
Investors have started to incline to this field as a result of the reduced risks in the infrastructure investment services with the advantages provided by our Government. Especially the tax advantages provided have made this field quite attractive. Indeed, the incomes of the real estate investment funds or companies are exempted from the corporate tax as per Article 5 titled “Exceptions” of the Corporate Tax Law. It is financially very significant that the incomes of real estate investment companies are exempt from the corporate tax without bearing any time or form requirement, considering that the corporate taxes are calculated as 20% of the company’s earnings. In addition, the provisional Article 1 of the Corporate Tax Law prescribes that “The regulations stated in the decree of the Council of Ministers published regarding the tax rates and other issues within the scope of the Income Tax Law numbered 193 and Law numbered 5422 remain valid providing that the legal restrictions specified in this Law are not overstepped until the new decrees are enacted by the Council of the Minister within the scope of the authorities granted in this Law”. Incomes of the real estate investment companies are subject to 0% withholding regardless of the fact that whether they are distributed or not distributed as per Article 94 of the Income Tax Law numbered 193.
Due to the fact that a real estate investment company is also in the form of a typical joint stock company, the commercial and economic rights under the TCC of the investors as shareholders thereof also shall be reserved. These rights can be summed as the right of dividend, right of liquidation share, right to gain the shares freeof-charge which are issued via capital increase from internal resources, right of first refusal, right to access to the general assembly meetings, speak and make suggestion, right to vote and right to demand information and audit the company’s activities and accounts.
V. CONCLUSION
The infrastructure real estate companies are structures, of which the fields of activities are very restrictive and which are subject to strict terms and limitations in terms of establishment or conversion and their activities pursuant to the Communiqué; however, they also bear various advantages inciting both local and foreign investors. Currently, the practice of this structuring is very recent and fresh; however, it will keep attracting the investors gradually especially with the help of the Board who has been improving the relevant regulations consistently by taking into account the requirements of commercial life.
BIBLIOGRAPHY
Hasan Pulaşlı, Yeni Şirketler Hukuku Genel Esaslar, Ankara 2012
FOOTNOTE
1 Communiqué Regarding Making Amendments on the Communiqué on Principles Related to Real Estate Investment Companies (III-48.1) published in the Official Gazette (OG) dated 23.01.2014 and numbered 28891.
2 OG dated 18.05.2013, numbered 28660.
3 OG dated 13.06.1994, numbered 2959
4 OG dated 03.01.2014, numbered 28871.
. 5 OG dated 27.12.2013, numbered 28864.
6 OG dated 22.06.2013, numbered 28685.
7 Hasan Pulaşlı, Yeni Şirketler Hukuku Genel Esaslar, Ankara 2012, p. 864
8 OG dated 30.03.2013, numbered 28603
9 OG dated 15.06.1985, numbered 18785.
10 OG dated 17.12.2013, numbered 28854.
