Newsletter
RELEVANT REGULATIONS FOR REAL ESTATE SECURITIZATION
Since the Real Estate Securitization Act was promulgated by the President on 23 July 2003, the Ministry of Finance (MOF) has been working to draft relevant regulations. The drafting pro-gress is outlined as follows.
I.Enforcement Rules of the Real Estate Securitization Act
The MOF published a draft of the Enforcement Rules of the Real Estate Securitization Act ("Enforcement Rules") on 16 August 2003. The publication period for the draft ended on 2 Sep-tember 2003, but up until now, the MOF has not yet officially announced the Enforcement Rules.
Based on the draft published by the MOF, the Enforcement Rules will provide further details of the regimes of the Real Estate Investment Trust ("REIT") and Real Estate Asset Trust ("REAT").
"Promoter" means the owner of the real estate or the rights related to such real estate in which an REIT invests. To avoid conflicts of interest and to safeguard investors' interests, the draft Enforcement Rules provide that promoters of an REIT shall not be an interested party of the trustee. Also, to prevent beneficiary certifi-cates held by promoters being overvalued to the detriment of other investors' interests, promoters are not allowed to transfer or dis-pose of its beneficiary certificates within one year from the establishment of the REIT. With respect to the trust registration, the draft Enforcement Rules clearly indicate that the applicant shall be the trustee, and shall specify in the "other registration matters" column of the register book that such real estate is the trust property of the REIT.
Secondly, with regard to the certificate issued by a notary public evidencing the consent of a mortgagor to relinquish its rights under the mortgage for as long as the trust agreement remains in force (which a property owner must submit when seeking registration or ap-proval of the trust if the trust property is mortgaged), the draft Enforcement Rules provide that such certificate is binding not only on the mortgagor and the property owner, but also on the trustee and on the successors of the mortgagor. The mortgagor shall also in-form its successor of the assignment at the same time of the assignment of the mortgage.
To the extent applicable, the provisions of the Financial Asset Securitization Act and its en-forcement rules also apply to other matters of real estate securitization, such as filing process of the REIT and REAT plans by the trustee, au-thentication of beneficiary certificates, and beneficiaries' meetings.
II.Regulations Governing the Public Of-fering and Private Placement by Trustees of Beneficiary Certificates of Real Estate Investment Trusts and Real Estate Asset Trusts
On 30 September 2003 the MOF announced the above regulations, which mainly define the fol-lowing: the documents to be submitted by a trustee for approval or for registration, the timing for filling an application for approval or regis-tration of a public offering or private placement of beneficiary certificates; the actions required to be taken after approval or registration; and the circumstances under which the MOF may reject, disagree, withdraw or cancel its approval or the registration. The main points are outlined below:
If the investment target has been decided when the trustee files an application for approval or registration, the trustee must also submit a written evaluation report together with the application. However, if at the time of filing the investment target is not yet certain, no evaluation report is required. In the case of a private placement, no evaluation report need be submitted.
To avoid conflicts of interest, the regulations require the trustee to provide a declaration stating that the promoter is not an interested party of the trustee in the case that the in-vestment target is decided. The promoter must provide a document evidencing its con-sent to transfer the ownership of the real estate or its related rights. If the investment target is not yet certain, the two documents mentioned above are not required. "Interested party" above has the same meaning in Article 7 of the Trust Enterprise Act.
Also, in line with the provisions on lock-up periods provided in the draft Enforcement Rules, the regulations further stipulate that if a promoter holds beneficiary certificates due to a transfer of real estate or its related rights, it must deposit such certificates with Taiwan Securities Central Depositary Co., Ltd., and may not remove from deposit, transfer, or pledge them, for a period of one year after acquiring them.
In principle, property ownership rights trans-ferred into a REAT should be free of any mortgage, otherwise, the property owner must provide a certificate issued by a notary public evidencing the consent of the mortgagor to relinquish its rights under the mortgage for as long as the trust agreement remains in force. However, in practice, mortgagors may be unwilling to see mortgaged property securi-tized, because the property provides them with a regular flow of income.
To facilitate real estate securitization, the regulations provide that if at the time of ap-plication for approval or registration the trus-tee is unable to obtain the evidence of can-cellation of a mortgage on the trust property or a certificate of a notary public evidencing the consent of the mortgagor to relinquish its rights under the mortgage for the life of the trust agreement, it may substitute for the above documents a written undertaking by the trustee to obtain the evidence of cancellation of the mortgage immediately upon completion of the public offering or private placement of beneficiary certificates.
In the case of a public offering of REAT beneficiary certificates, the trustee must also submit an evaluation report produced by a securities underwriting firm, and a credit rat-ing report on the beneficiary certificates pro-duced by a credit rating agency. This provi-sion is intended to ensure adequate disclosure of information to investors through external expert opinions.
A trustee making a public offering of REAT beneficiary certificates must engage a securi-ties underwriter to underwrite the certificate. The lead underwriter must not be an interested party of the property owner or the owner of the real-estate-related right.
If a holder of beneficiary certificates is not in compliance with the above requirements, the trustee must give the holder notice to dispose of its beneficiary securities within one month to comply with the above requirements. A holder that fails to comply within that time-frame may not exercise voting rights in respect of its holdings, and the trustee may not dis-tribute trust benefits to the holder. However, if (x) none of the holders of beneficiary cer-tificates through private placement is an indi-vidual, and (y) none is an interested party or affiliated enterprise (as defined in the Com-pany Act) of the promoter of the REIT or of the property owner of the REAT concerned, then the above requirements for dispersion of holdings do not apply.
III.Other Supplementary Regulations
The MOF announced the above criteria on 24 September 2003,which stipulate the required contents of a memorandum for a private placement of REIT beneficiary certificates or REAT beneficiary certificates.
On 30 September 2003 the Securities and Futures Commission (SFC) announced the above criteria, and instructed TSE and GTSM to amend their respective criteria for listing and trading. The criteria stipulate the required contents of prospectuses for public offerings of REIT beneficiary certificates or of REAT beneficiary certificates.
The MOF announced the above regulations on 30 September 2003, which explicitly define the scope of "professional and technical per-sonnel" and of "interested parties in real estate securitization cases," and stipulate in detail the qualification for such personnel, their respon-sibilities, investigation procedures, the scope of investigations, and the format and required content of investigation reports.
On 29 September 2003 the MOF announced amendments to the above criteria, which pro-vide that for trust enterprises engaged only in REIT or REAT business, the MOF may set separate requirements for minimum paid-in capital, shareholder structure, qualification for responsible persons, and restrictions on busi-ness activities. A trust enterprise engaged only in REIT business should have a mini-mum paid-in capital of NT$300 million, while a trust enterprise engaged only in REAT business, or both types of real estate trust business, must have a minimum paid-in capi-tal of NT$1 billion. Both these capital re-quirements are lower than the minimum paid-in capital of NT$2 billion required for setting up a trust company for other types of trust business.
To further cater for trust companies engaged only in REIT or REAT business, the amend-ments also include some adjustments to the qualification for professional promoters and shareholders of a trust company, and to the documents to be submitted when applying for approval to set up a trust company.
On 15 September 2003, the MOF announced amendments to the above criteria, to take into account of the operational needs of trust companies engaged only in REIT or REAT business. Thus, the responsible persons of such trust company may qualify on the basis of their work experience with real estate management organizations or administrative experience of real estate management, instead of the usual requirements for academic quali-fications and for professional experience with financial institutions or in the area of trust business.
Unless otherwise approved by the MOF, such responsible person may not concurrently act as the responsible person of a real estate management organization. The amendments also introduce a new provision requiring at least one person to be appointed with the au-thority to decide the application of a Real Es-tate Investment Trust fund, and to be exclu-sively responsible for handling the application and management of the fund assets. The qualifications to be met by such personnel are also defined.
IV.Administrative rules announced by the MOF
1.Local and foreign individuals with an adequate understanding of the beneficiary certificates concerned, if at the time of subscription or acquisition (a) the investor has net assets of over NT$10 million, or the combined net assets of the investor and his/her spouse exceed NT$15 million; or (b) in the most recent two tax years, the in-vestor had an annual average income of over NT$1.5 million, or the investor and his/her spouse had a combined average annual income of over NT$2 million.
2.Corporate entities or funds whose audited financial statements for the most recent accounting period show assets exceeding NT$50 million; trust enterprises holding trust property worth more than NT$50 million under current trust agreements; and securities investment trust enterprises and securities investment consultant enterprises with discretionary control of investment funds exceeding NT$50 million.
3.Securities investment trust funds offered by securities investment trust enterprises, mutual trust funds offered by trust enter-prises, the Civil Service Pension Fund, Labor Retirement Funds, and the Labor Insurance Fund.
A trustee must make a due investigation of the eligibility of persons approached as prospec-tive private placement investors, and must obtain reasonable and credible evidence of such eligibility from private placement sub-scribers. When beneficiary certificates are transferred, it is the transferor's responsibility to make a due investigation of the eligibility of the transferee, and to obtain reasonable and credible evidence from the transferee. The trustee is not permitted to register the transfer in the absence of such evidence.
Since the Real Estate Securitization Act was promulgated in July 2003, the Industrial Bank of Taiwan and Societe Generale have already car-ried out a real estate asset securitization involv-ing the IBM Building in Taipei as the entrusted asset. In addition, various life insurance com-panies which own large amounts of real estate, are planning to launch real estate securitization products based on their office buildings. They include Far Glory Life Insurance, Shin Kong Life Insurance, and Fubon Group.
Lee and Li previously assisted the Council for Economic Planning and Development in drafting the Real Estate Securitization Act, and is cur-rently also assisting various companies in plan-ning real estate securitization. As various pieces of supplementary regulations and accompanying measures are announced, providing a more complete legal framework, more real estate se-curitization products will be launched, and this will reinvigorate Taiwan's real estate and capital markets.