Präsident: Dr. Andreas Mattner Vorstand: Ulrich Höller Dr. Eckart John von Freyend Friedrich Wilhelm Patt Prof. Dr. Wolfgang Schäfers Bärbel Schomberg Christian Ulbrich Thomas Zinnöcker Präsidium: Dr. Georg Allendorf Klaus Beine Jan Bettink Claus-Matthias Böge Matthias Böning Stefan H. Brendgen Michael Bücker Claus-Juergen Cohausz Barbara Deisenrieder Prof. Thomas Dilger Wolfgang Egger Birger Ehrenberg Andreas Engelhardt Dr. Jürgen Gehb Günter Manuel Giehr Bernhard H. Hansen Werner Knips Barbara A. Knoflach Dr. Reinhard Kutscher Matthias Leube Franz Meiers Dr. Mathias Müller Rainer Nonnengässer Oliver Porr Klaus Raps Dr. Georg Reutter Rupprecht Rittweger Prof. Dr. Matthias Thomas Dirk Tönges Peter Tzeschlock Dr. Hans Volkert Volckens Dr. Marc Weinstock Claus Wisser Thomas Ziegler Geschäftsführer: Axel von Goldbeck Klaus-Peter Hesse Zentraler Immobilien Ausschuss e.V. German Property Federation Wallstraße 16, 10179 Berlin T: +49 (0) 30 - 20 21 585 - 0 F: +49 (0) 30 - 20 21 585 - 29 info@zia-deutschland.de www.zia-deutschland.de Büro Brüssel: Rue du Commerce 31 B-1000 Bruxelles Telefon: +32 (0) 2 - 792 10 05 Telefax: +32 (0) 2 - 25 48 90 29 VR 25863 B (Berlin-Charlottenburg)

Mitgliedsverband des BDI

ZIA Zentraler Immobilien Ausschuss e.V. - Wallstraße 16 - 10179 Berlin

The German Property Federation (‘ZIA’) is a membership organization founded

in order to represent the interests of the whole real estate industry. We pursue

the objective to create an environment in which real estate investments can

prosper. Therefore, ZIA advocates the interests of the German real estate in-

dustry vis-à-vis the political decision makers in Germany and in the EU. Our

more than 160 members – including the biggest companies in the property in-

dustry – represent the industry at any stage of the supply chain. Our member-

ship further includes 20 property linked associations. ZIA was founded in 2006

and is a member of the Federation of German Industries (Bundesverband der

Deutschen Industrie).

We highly welcome the opportunity to comment on ESMA’s proposed guide-

lines on the key concepts of the AIFMD, especially with a view to the definition

of the term AIF.

We are of the opinion that clarifying the key terms of the AIFMD (Directive

2011/61/EC) at EU level is fundamental for a proper and uniform application of

the directive throughout Europe. Thus, we believe that ESMA is right to ensure

the alignment of supervisory practices among the European authorities by de-

fining the material terms of the directive. Otherwise, the autonomous determina-

tion of the scope of application of Directive 2011/61/EC by the EU member

states could cause qualification conflicts in a cross-border context.

In particular, ESMA’s approach to interpret the different elements of the statuto-

ry definition of an Alternative Investment Fund (‘AIF’) to determine the scope of

the AIFMD is supported by ZIA.

ESMA

European Securities and Markets Authority

103, rue de Grenelle

75007 PARIS

FRANCE

Berlin, January 30th, 2013 Comments on the Consultation paper Guidelines on key concepts of the AIFMD

Dear Madam or Sir,

2

General Comments

At the outset ZIA wants to point out that it is of vital importance for every busi-

ness to be acquainted with the legal framework early enough to be able to ad-

just its business in order to meet new regulatory standards and/or receive ap-

provals required under the companies’ articles. Therefore, it is essential to iden-

tify the business concerned by the AIFMD within the wide range of different

business models, strategies and structures across Europe. Although this is a

challenging task, it has to be done quickly and – in principle – before the na-

tional transformation acts enter into force by July 2013. The uncertainty about

the scope of the directive already causes unrest in the real estate markets.

Likewise it is essential for the national regulators to make decisions based on a

clear and sufficiently foreseeable legal basis. Otherwise numerous administra-

tive procedures or court proceedings will tie up the authorities’ capacities, too.

These facts and the date on which the AIFMD has to be implemented clearly

demonstrate the urgent need of a clarification of the directive’s scope. This ap-

plies especially to property companies with a wide European range of business

models, strategies and structures, involved in several kinds of activities related

to construction, building, refurbishment, operation, management and – of

course – financing residential and commercial real estate which, depending on

the view held by ESMA and the European Commission, may qualify as AIF – or

not.

ZIA does not deny that the identification whether or not an undertaking should

qualify as an AIF is not easy.

Although the distinction is particularly difficult in respect to the real estate indus-

try, it is highly important because it is a very capital intensive business. The

new rules governing the capital adequacy for banks according to CRD IV –

well-known as Basel III – could reduce the supply with loans for the real estate

industry. Given that, the economic importance of financial intermediaries which

are collecting equities will increase.

Nevertheless most of the business models in the real estate industry are capital

intensive: some of these businesses are clearly structured as funds, others fol-

low different models. Property linked activities are often called ‘investment’ or

‘asset management’, but the underlying business is providing accommodation

services to businesses and citizens. This is clearly a commercial business

equal to providing for other goods.

ZIA understands that the aim of the AIFMD is not to cover all types of commer-

cial activities relating to real estate and not to cover all types of investments by

any company, but to regulate the specific risks arising from funds.

Taking this aim into account ZIA believes that the key identifier of a fund is the

contractual relationship between the vehicle at hand and its investor. In other

3

words, the determinant factor is the function of the undertaking: only if the un-

dertaking’s objective solely provides an investment exposure to the underlying

assets, the business model qualifies as a fund. Hence, a specific defining char-

acteristic of a fund is the contractually agreed and binding defined investment

policy between the fund’s management and the investors.

And vice versa: The lack of a defined investment policy is a reliable indicator

that an undertaking is an ordinary company with a commercial purpose. Further

details are set out in our answer to Q12.

Critical Issue: The Real Estate Industry

Several discussions with members of the European Commission as well as with

officers of the national regulator have taught us that the distinction between

funds and ordinary companies is particularly difficult in the real estate sector.

This is because the underlying business activities of real estate funds are quite

similar to those undertaken by ‘normal’ property companies and REITs.

As already mentioned above, a proper solution could be found from the inves-

tor’s perspective. This approach is fundamental to the identification of funds

and the development of effective distinguishing features. Also real estate funds

must have a clearly defined and fixed investment policy. On this basis they

raise money from investors and assess and reward their performance.

It is essential to look at the business purpose: ‘Normal’ listed and unlisted prop-

erty companies have a statutory purpose, which is required by German law and

which the board has to adhere to. Usually, the statutory company purposes are

very broadly defined in a few words. Regularly the wording is like the following:

The business of the company consists of

real estate investments (purchase, development, management and

sale), not restricted to any kind or location, but

also delivery of any kind of services related to real estate assets and

the technical facilities,

further, the company is also entitled to any business and activities in

any kind of form in Germany and other states which it considers sup-

portive to its main businesses. It can form subsidiaries, enter into minor-

ity or controlling participations and it can restrict its business only to cer-

tain of the main activities.

According to the German company law the intent of the statutory purpose is to

show the company’s main focus of business activity to external parties, only. It

could be changed by a majority of two thirds of the shareholders at any time.

4

Summarized, listed and unlisted property companies have simply a business

strategy which offers the flexibility required by an operating business and which

can in any event be changed from time to time, on a full opportunistic basis, by

the management. The investors have – depending on the legal form of the

company – the possibility to sell their shares, but they do not have any legal

claim to demand that the company refrains from any action within the wide stat-

utory purpose nor demand damages.

By contrast, the "General and Special Terms of Contract" of funds have laid

down in-depth into which assets, participations, holdings or activities the man-

ager may invest and also, what kinds of financing, hedging etc. may be used,

as well as which country allocations must be strictly observed. Not only with re-

gard to the length of such documents it is very obvious that only the fund com-

mits the manager to a "defined investment policy" as in the AIFMD. There is an

explicit contract on which it is based. The fund manager cannot generally

choose to change their investment focus from one sub-sector to another (for

example, apartments to offices) or between assets with very different risk/return

profiles.

Thus, we believe that ESMA should place particular emphasis on clarifying the

term ‘defined investment policy’. We therefore take the liberty to draw ESMA’s

attention to our statements concerning the definition of an AIF.

REITs

Another controversially discussed issue is the qualification of so called REITs

(‘Real Estate Investment Trusts) under the AIFMD. The discussion is apparent-

ly sourced by the misleading term ‘investment trust’ and the wide variety of

companies and business models that are commonly referred to as ‘REITs’.

In Germany, REITs are listed public limited companies which undertake com-

mercial activities, very similar to ‘normal’ property companies without REIT sta-

tus. However, the German REIT Act provides for a special 'flow-through' tax

status, which means that REITs do not pay corporate income or trade tax at

company level, provided that the REIT fulfills certain requirements according to

the REIT-Act. Among others, at least 75 % of the capital of German REITs must

be invested in property; 90 % of earnings must be paid out to share holders; 75

% of revenue must relate to real estate assets, and the REITs’ equity must not

fall below 45 % of the immovable property value as shown in the financial

statements under IFRS.

As set out above and explained in detail below, the assessment of whether an

undertaking qualifies as an AIF or not, should focus on whether the entity is a

collective investment undertaking with a defined investment policy. ZIA is of the

opinion that aforementioned criteria – which are decisive for the tax status only

– do not constitute a ‘defined investment policy’ in the meaning of the AIFMD.

In particular, the term REIT is not an appropriate characteristic for distinguish-

5

ing funds (in the meaning of the AIFMD) from businesses with a general com-

mercial purpose. Especially with respect to REITs, ZIA appeals for the ob-

servance of the principle ‘substance over form’.

Further Effects

ZIA wants to stress that a clear identification of business models which qualify

as AIF under the AIFMD is of great importance, since other regulations at Eu-

ropean level like the European Market Infrastructure Regulation ‘EMIR’

(OTC derivatives) which has already entered into force, or the discussed draft

directive on a common system of financial transaction tax (‘FTT’), refer to the

definition of AIF according to the directive at hand. The real estate industry will

encounter serious difficulties in assessing their businesses in the light of the

ongoing regulation of the financial markets.

Therefore, we are appealing to ESMA for an appropriate definition of the key

concept ‘AIF’.

The businesses of our members are capital intensive and therefore they are

dependant of well-functioning capital markets. Thus, ZIA supports prudential

rules as financial market stability is fundamental for the economy and the Euro-

pean property industry. However, the rules – inter alia regarding Alternative In-

vestment Funds – must be limited to the needed extent.

Detailed Responses to Consultation Questions

Q 1: Do you agree with the approach suggested above on the topics

which should be included in the draft regulatory technical standards?

If not, please state the reasons for your answer and also suggest an

alternative approach.

ZIA supports ESMA’s approach and the topics to be included in the guidelines

on key concepts of the AIFMD.

However, we would suggest that ESMA also clarifies the term ‘joint venture’

(‘JV’). According to recital 8 of the directive, JVs should not be included in the

scope of the AIFMD. Unfortunately, neither the text of the directive nor the Lev-

el II provisions provide further explanations of the term JV. As JVs are a very

common vehicle especially in the real estate sector, we would like to ask ESMA

for a more detailed consideration of this exception.

Taking ESMA’s key concept guidelines into consideration, ZIA is of the opinion

that most JVs do not qualify as AIF. However, due to the fact that any JV is tai-

lor-made there are many different types of JVs, and there will be many border-

line cases. This bears the risk that JVs will be treated in different ways in the

context of the AIFMD by national regulators.

6

The characteristic feature of a JV is that each participant in the JV will have a

contractual right – and will exercise this right on a regular basis – to participate

in the key strategic decisions relating to the undertaking. That contrasts with the

position in the context of an AIF where the AIFM would have discretion in man-

aging the AIF, within the bounds set by the AIF’s defined investment policy.

Hence, JVs do not have a defined investment policy since every participant is

involved in the management and can influence, control and change the existing

business policy.

Further, JVs often have no more than two participants and the conditions

are negotiated in individual contracts. Thus, a JV arrangement means that capi-

tal cannot be said to be raised from the public.

From ZIA’s point of view also the term ‘holding company’ has to be specified.

The definition of a holding company is set out in Article 4 para. 1 lit. o) of the

AIFMD. However, it would be helpful if ESMA gives some guidance as to what

Articles 3 para.1 (which clearly states that the AIFMD should not apply to hold-

ing companies) and Article 4 para. 1 lit. o) of the AIFMD are intended to achieve

and how they should be construed.

Q 2: What are your views on/readings of the concepts used in the defini-

tion of AIF in the AIFMD? Do you agree with the orientations set out

above on these concepts? Do you have any alternative/additional

suggestions on the clarifications to be provided for these concepts?

ZIA agrees with the concept presented by ESMA.

We support the clarification that: “It is only when all the elements included in the

definition of AIFs under Article 4 para. 1 lit. a) of the AIFMD are present that an

entity should be considered an AIF.”

ESMA laid down in para. 10 that the draft guidelines are relevant only in an

AIFMD context, even though the discussed terms are relevant for other Euro-

pean legislations, such as the term ‘collective investment undertaking’.

We reject this idea, since we are of the opinion that under the aspect of ensuring

the uniformity of the legal system this is an inadequate approach. ZIA believes

that it is unfortunate that, for instance, a collective investment undertaking could

have a different meaning under the AIFMD and the UCITS Directive, even

though the legislative intention is very similar under the two Directives.

Therefore, ZIA suggested the following clarification: If European legislation re-

fers explicitly to the term ‘AIF’, that term should absolutely be construed by ref-

erence to the draft guidelines.

7

Q3: What are your views on the notion of ‘raising capital’? Do you agree

with the proposal set out above? If not, please provide explanations

and possibly an alternative solution.

ZIA broadly agrees, in particular with the suggestion that capital raising involves

some kind of commercial communication between the AIF/AIFM and its pro-

spective investors, which aims at procuring the transfer of investors’ capital.

This criterion is, in principle, suitable to distinguish raising capital by listed

commercial businesses from funds. Normally, investors decide for themselves

when to buy, sell or hold for their own reasons, and they usually buy or sell the

shares without involving the company as counterparty, especially when they in-

vest in listed companies.

Further, the focus should lie on the participation offer. To differentiate between

an active capital procurement and an association of shareholders, the possibil-

ity to participate in the development of the business model or business plan

could be a reasonable criterion. In order to actively “collect” capital, one has to

present a concept to third parties. When shareholders merge in order to create

a company, the focus lies often on the realization of a collectively developed

idea. Further, typically there is no “ready-made” business model that is pre-

sented to third parties, but a collective development of this business model.

Moreover, an operating company will typically raise capital for a general corpo-

rate purpose, with a view to generating total returns on the capital invested in

the underlying business. In contrast, AIFs raise capital in order to invest it in ac-

cordance with defined investment policy. The AIF already has developed a

fixed policy and seeks for the necessary capital for its realization afterwards.

The subscription offer contains a detailed description of the investment policy.

The investment policy of an AIF has to be documented in an adequate form and

has to be communicated to the potential investor because no subscription will

take place without a clear description of the defined investment policy.

In particular, the following criteria named by ESMA could be decisive:

There is an express linking of the capital raising with the defined in-

vestment policy;

the capital raising is done by or on behalf of a ‘sponsor’ which plans (it-

self or through a group member) to make a profit out of the manage-

ment of the capital raised from third party/external sources.

However, when a listed company raises capital via the stock market, according

to the German Securities Trading Act it has to provide proper information to the

market. Broadly speaking, the company has to provide information to share-

holders on the business case for raising the capital, e.g. the expansion of the

businesses into new territory or the acquisition of another company. These

types of corporate communication should not be qualified as being a defined in-

vestment policy.

Q5: Do you agree with the proposed guidance for identifying a ‘collective

investment undertaking’ for the purposes of the definition of AIF? If

not, please explain why.

8

We broadly agree. In particular, the definition of ‘pooled return’ is helpful in

clarifying that where the purpose of an undertaking is to manage the underlying

assets as part of a commercial activity, this should not be considered a collec-

tive investment.

Based on the interpretation of the German Investment Law a collective invest-

ment scheme should require a separate capital whose business purpose is

mainly focused on the investment and management of its funds for the account

of its investors. The investor’s share in the fund must only be – economically –

an exposure to the chances and risks of the collective investment.

However, the criterion „investment“ implicates by its wording rather an increase

in capital by acquisition, selling or passive holding of assets than by an active

use of the assets in the operational business. As far as that goes, ZIA doesn’t

share ESMA’s view that a strategy described as managing actively the underly-

ing assets should be included.

A passive investment therefore covers the provision of an object that allows

others to gain profits by using it. Undertakings that also use their assets them-

selves could fall outside the scope because, even if they invest the capital col-

lectively, they do not make an investment but take part in an entrepreneurial ac-

tivity and therefore actively participate in the market.

Admittedly, real estate assets differ from investments in securities in so far as

the business purpose is no reliable criterion to differentiate between a mere

„passive investment“ and an active entrepreneurial management of assets. In

contrast to securities-based funds that follow the market value of their portfolio

assets and are not actively involved in the management of companies in which

they are invested, a real estate fund cannot treat its real estate assets pas-

sively. Hence, regarding real estate assets the criteria ‘defined investment pol-

icy’ and ‘for the benefit of those investors’ are much more important, as ex-

plained under Q 12.

Q7: Do you agree with the analysis on the absence of any day-to-day in-

vestor discretion or control of the underlying assets in an AIF? If not,

please explain why.

We agree. As described above under Q 5, a fund-investor is in a more passive

situation. Thus, he could be distinguished from an entrepreneur by its possibility

to control the day-to-day business. We specifically support ESMA’s position ex-

pressed in para. 23 that the existence of control rights of shareholders through

voting at shareholder meetings are not determinative for the qualification just as

little as the approval on certain high level decisions by investors. According to

the German company law such rights are irrevocable.

Q8: Do you agree that an ordinary company with general commercial pur-

pose should not be considered a collective investment undertaking?

If not, please explain why.

9

We strongly agree, and we believe that this consultation paper helps to clarify

and limit the scope of the AIFMD.

ZIA believes that limiting the scope of the AIFMD is highly necessary since the

wording of Art.4 para.1 lit a) tends to be too wide. However, we are of the opin-

ion that an adequate definition of the scope by interpreting the elements of the

statutory definition of an AIF could be found.

Q9: Which are in your view the key characteristics defining an ordinary

company with general commercial purpose?

In ZIA’s view, the main feature that distinguishes an ordinary company with a

general commercial purpose from an AIF is the lack of a defined investment

policy.

Q10: Do you agree with the proposed guidance for determining whether a

‘number of investors’ exists for the purposes of the definition of

AIF? If not, please explain why.

We agree.

Q12: Do you agree with the proposed indicative criteria for determining

whether a ‘defined investment policy’ exists for the purposes of the

definition of AIF? If not, please explain why.

We agree. ZIA is of the opinion that this criterion is decisive for answering the

question whether or not an undertaking will qualify as a fund. Thus, please al-

low us to add some aspects.

In order to meet this criterion, it is necessary that the fund pursues an invest-

ment strategy that has been agreed with the investor before the investment de-

cision has been taken and that cannot be modified without the approval of the

investor. This agreement is normally taken in the prospectus and the subscrip-

tion documents. Moreover, the control of the investment policy is also often

guaranteed by the supervisory authorities.

This clear defined investment strategy has to be distinguished from the term

‘business strategy’ and the formulation of business goals. These are part of

every rational economic decision and are necessary for the decision-making in

an economically active undertaking.

Examples are medium and long-term business plans as well as budget and fi-

nancial planning taking into account equity and debt capital as required by cur-

rent rules such as Basel II in the framework of debt financing. These docu-

mented economic decisions are subject to an ongoing evaluation process and

can at any moment be modified by the executive board. The members of the

board are not bound by a contractually stipulated portfolio strategy.

10

Regarding these aspects, real estate companies do not differ from operative

undertakings in other branches. Real estate companies are rather average

companies whose business purpose is mainly the acquisition, development,

rent, lease and selling of real estate. They also follow a strategy that is continu-

ously verified by market requirements, and that has been established by the

executive board or management without being bound by a program agreed

upon with investors and creditors. Compliance with this strategy is not subject

to supervision by an authority.

The same goes for REITs which differ from traditional real estate companies

mainly by an obligatory listing on the stock exchange and a special tax regime

which follows the principle of tax transparency of the REIT. Therefore, what is

said above also applies to REITs.

According to this reasoning, a „defined investment strategy“ in the sense of the

AIFM-Directive is only fulfilled, if

already during the acquisition of a share the strategy builds the basis for

the investment decision due to a binding agreement between investor

and company,

the strategy can only be modified in accordance with the investor and –

concerning open-ended real estate funds – the supervisory authority

and

the pursuance of the portfolio strategy is solely in the interest of inves-

tors.

Further, we want to direct your attention to the term ‘for the benefit of those in-

vestors’. To define the scope of the directive, the term „risk identity“ is of par-

ticular importance. An appropriate differentiation between the sphere of fund-

investors and the sphere of other share holders calls for a due consideration of

the purpose of the investment.

“For the benefit of those investors” requires that the investment is made for the

purpose of an accumulation of capital by acquisition and management of the

collectively invested capital according to the principle of maintenance of asset

value.

Maintenance of asset value implies that the funds raised are “changed” into

valuable and stable assets for the account of the investors and that they create

added value by rent or lease revenues or interests.

If the funds raised are used as „cash flow“ to cover the costs of economic activ-

ity, the added value is not based on maintenance but rather on operational

business financed by the “use of funds”. Operational undertakings are not fo-

cused on the accumulation of capital, rather on generating revenues from the

operating business.

Therefore it is not necessary – and even logically wrong – to subject invest-

ments that do not follow the principle of maintenance of asset value to the rules

of the AIFM Directive. The question of a connection between investment pur-

pose and allocation of funds has to be evaluated under the notion of risk iden-

11

tity, according to the considerations of the BVerwG in the Hapimag Judgment

from 16.9.1979 (BVerwG, NJW 1980, 2482).

It is typical for an investment in funds that the risk of investors to lose capital is

reflected almost completely in the investment risk. The materialization of an in-

vestment risk by a decrease of asset value or revenues has an immediate im-

pact on investors for whose collective account the capital assets are hold. Risk

identity is excluded when an undertaking is operationally active. Operational ac-

tivity can lead to a loss that has no influence on the net asset value of an under-

taking. The investor is not only confronted with the inherent risks of asset

losses from unfavourable investments, but also with economical risks. A miss-

ing risk identity implies that the vehicle at hand does not qualify as a fund.

We remain at your deposal, if you should wish to discuss in more detail any of

the issues raised up in this response. Please feel free to contact us.

Kind regards,

Axel v. Goldbeck Carsten Rothbart

Managing Director Head of Finance and Tax