Newsletter
REAL ESTATE SECURITIZATION STATUTE ENACTED
The depressed state of Taiwan real estate market over the last decade has not only impacted the construction industry and other related sectors but also affected the qualities of assets of finan-cial institutions due to the decreased value of their collaterals. However, in contrast to the real estate market, the capital market has developed vigorously. In order to make the most of the dynamism of financial markets to stimulate the real estate market, the government has made the real estate securitization an important policy since 1999.
After years of discussion, the Legislative Yuan finally passed the Real Estate Securitization Statute (the "Statute") on 9 July 2003. The Statute was promulgated by the President on 23 July 2003 and took effect immediately. The scope of real estates to which the Statute applies is broader than that of the Regulations Governing the Establishment, Supervision and Administra-tion of Investment Trust Companies for Urban Renewal, which already provides a real estate securitization mechanisms. The Statute also lowers the threshold for setting up investment trust companies, simplifies the approval proce-dures for real estate securitization, and grants considerable tax concessions. Its main provi-sions are outlined below:
The Statute defines two mechanisms for placing real estates in trust: the real estate in-vestment trust, and the real estate asset trust. An investment trust is a trust, set up according to the Statute, under which beneficiary cer-tificates are offered to the public or are pri-vately placed with specific persons, and the proceeds are invested in real estates, real-estate-related rights, real-estate-related securities, or other investment instruments approved by the Ministry of Finance (MOF).
An asset trust is a trust, set up according to the Statute, under which a property owner trans-fers real estates or real-estate-related rights to a trustee that in turn issues beneficiary cer-tificates representing rights to the profits, in-terests or other benefits accruing from the en-trusted real estates or real-estate-related rights. These beneficiary certificates are offered to the public or are privately placed with specific persons. Compared to the financial assets securitization which could be conducted through special-purpose companies (SPCs), the only permissible vehicles for real estate securitization under the Statute are trusts, un-der which a fund is established and beneficiary certificates are issued.
At present, trustees are limited to trust enter-prises as defined in the Trust Enterprise Law that have been established for at least three years, and have been awarded at least a certain credit rating by a credit rating institution rec-ognized by the MOF. When the Statute was before the legislature, hopes were expressed that trustees could also include specialist real estate developers, but this suggestion was not adopted.
An investment trust must normally be consti-tuted as a closed-end fund. However, with the MOF's approval, the trust may be offered as an open-end fund with restricted buy-back period or quantity, or other conditions. In the case of an asset trust, the asset value is known at the time when the trust fund is established, and the assets mainly generate fixed incomes; thus, there is no issue of a closed-end fund versus an open-ended fund.
The types of real estate that may be securitized are limited to immovable property and asso-ciated rights (i.e., superficies and other rights approved by the competent authorities for the industry concerned) that already generate sta-ble incomes. Therefore, the real estate whose development has been completed and which generates a stable cash income, such as office buildings, shopping centers, parking lots, or public infrastructure facilities, or rights in such real estates, may be made the subject of real estate securitization.
Developing projects are excluded from the scope of the Statute. Thus, the Statute is of little benefit to construction companies, and this has provoked vigorous complaints from the construction industry. According to press reports, the Council for Economic Planning and Development of Executive Yuan is al-ready preparing an amendment to the Statute to address this issue. Also, the Statute does not explicitly require that the real estates concerned must be within ROC territory. It remains to be clarified by the MOF whether this can be taken to mean that overseas real estate may be securitized under the Statute.
Regardless of whether the securitization ve-hicle is an investment trust or an asset trust, before offering beneficiary certificates to the public or privately placing them with investors, the trustee must file an application or make registration with the MOF, together with the required documents, for approval or registra-tion. The required documents include a trust plan, trust agreement, prospectus or the of-fering circular, professional certifications of the personnel who are to operate and manage the fund, a statement of the methods of man-agement and disposal of the entrusted property, minutes of the relevant meetings of the trus-tee's board of directors, a project checklist filled out by the trustee and reviewed by an CPA or lawyer, and a written legal opinion.
For an asset trust, the following must also be submitted: a valuation report on the entrusted property; if the entrusted assets have been mortgaged, proof of cancellation of the mort-gage or a court-notarized statement by the mortgagor relinquishing its rights under the mortgage for as long as the trust agreement remains in force; a detailed statement of the property owner's debts; and any dissenting documents of creditors. The specific contents of the above documents are still to be an-nounced by the MOF.
For investment trusts, the MOF will set a minimum percentage of the trust fund that must be held as cash, government bonds, real estates, real-estate-related rights, and financial asset securitization products. The Statute also provides that investments in real estates and real-estate-related rights must comply with the principles of risk diversification. Total in-vestments in beneficiary certificates and as-set-backed securities issued by other trustees or by SPCs under the Statute or the Financial Asset Securitization Statute must not exceed 20% of the net asset value of the investment trust fund on the day the investment is made.
Idle funds of an investment trust or asset trust may be invested only on the following: bank deposits; government bonds and financial debentures; treasury bills and negotiable cer-tificates of deposit; commercial papers guar-anteed or accepted by banks with certain credit ratings or rated above certain credit ratings; and other financial products approved by the MOF; provides, however, that (1) the total amount invested by an investment trust in the short-term paper of any company must not exceed 10% of the net asset value of the trust fund on the day of the investment; and (2) the combined total of a real estate investment trust deposits in a single financial institution and its investments in bonds or short-term paper is-sued, guaranteed, or accepted by the same in-stitution must not exceed 20% of the net asset value of the trust fund on the day of the in-vestment, and must not exceed 10% of the net worth of the financial institution concerned.
In addition to the above, investments by a real estate trust must comply with the following requirements:
1.Except otherwise permitted by the Statute, the fund shall not provide guarantees, loans, or sureties for any third party.
2.The fund shall not be used to undertake securities credit transactions.
3.Transactions are not permitted between different investment trusts and asset trusts set up by the same trustee.
4.The fact that an investment trust fund has been approved by or registered with the MOF must not be used in promotional lit-erature to imply a guarantee of the truth-fulness of the information or documents filed with the MOF, nor of the profitability of beneficiary certificates.
During the term of a real estate trust fund, the disclosure of related information is necessary in order to adequately protect investors. The Statute requires information to be publicly announced by a real estate trust under the following circumstances:
1.When money is borrowed against trust property.
2.When an investment trust fund invests in real estate or related rights.
3.An assessment report on the fund trust property must be published every three months.
4.The net asset value of beneficiary units on the previous business day must be pub-lished each business day.
To further protect investors, if the property owner of an asset trust is an interested party of the trustee, then under the Statute, the trustee may not issue beneficiary certificates in re-spect of the trust, except in specific circum-stances. Before a trustee uses the funds of an investment trust fund for a transaction in-volving real estate or related rights above a certain value (to be separately announced by the MOF), it must first have a written valua-tion report prepared by a specialist valuer.
Tax concessions provided for by the Statute include the following:
1.Beneficiary certificates issued under the Statute are exempt from securities transac-tion tax.
2.The trust benefits accruing to beneficiary certificates under the Statute must be dis-tributed annually. Distributed benefit is the income of the beneficiary and taxable as interest income. However, the distributed benefit does not count toward the business income of the trustee. When distributing such interest income, the trustee should withhold tax at the prescribed rate. It does not count toward the beneficiary's total income for consolidated income tax pur-poses, nor toward the beneficiary's total business income.
3.Land value tax is payable by an investment trust at the basic rate of 1%. The progres-sive taxation rates do not apply.
4.Local governments are empowered to es-tablish approval criteria for reductions in or exemptions from land value tax and house tax.
5.The assumed useful life of buildings forming part of trust property may be re-duced by half for the purpose of calculating depreciation.
In order to allow the trusts to operate in ac-cordance with market mechanisms, and to reduce the cost of securitization and the un-certainty as to tax burden, the Statute releases the rental of trust property and the term of a lease respectively from the restrictions of Ar-ticle 97 of the Land Law (which provides that annual rental shall not exceed 10% of the registered land value), and of Article 449 of the Civil Code (which limits the maximum period of a lease to 20 years). The Statute also excludes the provisions of Article 26 of the Trust Enterprise Law, thereby allowing the trustee of an investment trust to borrow money against the trust property if so permitted by the terms of the trust agreement. However, the purpose of such borrowing is limited to raising funds needed for the operation of the real es-tate, or funds needed to distribute profits, in-terest or other benefits. To the extent of the amount borrowed, a trustee may also create mortgages or other collateral rights with re-spect to the trust property.
The enactment of the Statute represents the first step towards real estate securitization in Taiwan. However, the secondary regulations required in order to implement the Statute urgently remains to be completed by the MOF, before real products can be launched. Other related measures to facilitate real estate secu-ritization, such as information disclosure sys-tems for real estate transactions, real estate valuation and credit rating systems capable of inspiring public confidence, all remain to be established. Only when they are in place can the real estate securitization market develop soundly. We look forward to the rapid intro-duction of related regulations and associated measures, in the hope that real estate securi-tization can revitalize Taiwan real estate market, and thereby stimulate the economy.