REAL ESTATE INVESTMENT ALERT NO. 2

REAL ESTATE INVESTMENT ALERT NO. 2

In this Alert we provide you with a further FIRB update on the changes made by the Federal Government (effective as from 1 July 2017) in relation to the Foreign Acquisitions & Takeovers Act 1975 (Cth) ( FATA), the Foreign Acquisitions & Takeovers Regulations 2015 ( FATA Regulations) and the Guidance Notes issued by the Foreign Investment Review Board ( FIRB) ( Guidance Notes) following the announcements made in the Federal Budget in May.

We also commence our series of “Traps for the unwary” in which we highlight mistakes which can be made in commercial property investment transactions if investors are not aware of the issues they need to understand before entering into documentation.

CHANGES TO REGULATION OF FOREIGN INVESTMENT IN REAL ESTATE FINALISED (Effective from 1 July 2017)

As from 1 July 2017, the FATA, FATA Regulations and Guidance Notes have been amended to improve the operation of Australia’s foreign investment regulatory regime. Some of the more important changes as applicable to investment in real estate are:

Sensitive Land changes

As stated in the Budget Papers, the Federal Government has abolished the sensitive land criteria relating to land under prescribed airspace. To give effect to this, Section 52(6)(c)(v) of the FATA Regulations has been repealed.

This change will significantly reduce the range of non-vacant commercial properties which are regarded as being sensitive land for the purposes of the FATA Regulations and, subject to no other sensitive land criteria applying or other restriction being relevant, will result in transactions involving leased commercial land with a value of less than $252m being able to be acquired by foreign non-government investors without the need to obtain FIRB approval.

The reference to Commonwealth bodies has (subject to a small number of exceptions) been removed from the sensitive land criteria relating to land that is “leased to the Commonwealth, a State, a Territory or a Commonwealth, State or Territory body” – see change to Section 52(6)(c)(i) and new Section 52(6A) of the FATA Regulations. Although not completely eliminating the potentially far reaching impact of this sensitive land criteria, this change reduces the imposition of the lower sensitive land threshold ($55m) on a large number of properties that were previously within the scope of the regulation. See also updated Guidance Note 14 issued by FIRB.

Portfolio investments in unlisted wholesale trusts

From 1 July 2017, foreign investors (including foreign governments) will be able to acquire an interest of less than 5% of the issued capital of an unlisted Australian land corporation or Australian land trust (irrespective of the number of other shareholders in the corporation or unitholders in the trust) without the need to obtain either an exemption certificate or approval from FIRB (subject to certain other criteria in Regulation 37(4) being satisfied). To give effect to this change Section 37(4)(e) of the FATA Regulations has been deleted.
Prior to 1 Jul 2017, this only applied if there were at least 100 holders of securities in the corporation or trust. This change will substantially streamline the investment process for foreign investors wishing to acquire a passive portfolio interest in such entities.

Broader definition of commercial land

Commercial land now includes aged care facilities, student accommodation and retirement villages, thereby providing for a higher threshold to apply to the acquisition of interests in this type of property - see updated Guidance Note 15. This change should facilitate foreign interest in these important sectors of the Australian property market.

Exemption Certificates

A number of new types of exemption certificates have been created allowing foreign investors to obtain pre-approval for the acquisition of new or near new residential land prior to actually identifying the specific property to be purchased. This will assist such purchasers acquire property on an unconditional basis provided that the purchase strictly complies with the conditions of the exemption certificate – see new Guidance Note 49.
New exemption certificate guidelines for developers of residential property have also been issued which extend to failed off the plan sales - see updated Guidance Note 8.

Improved fee structures

A number of changes have been made to the fee structures applicable in various circumstances which, in many cases, provide for a more equitable outcome to foreign investors – see updated Guidance Notes 29 and 30.

We are proud to have been able to work closely with the Property Council of Australia and FIRB in initiating these changes and further improving Australia as a prime market for the investment of foreign capital in real estate.

TRAPS FOR THE UNWARY

When acquiring real estate, it is usual for debt finance to be obtained to assist in the acquisition and/or development of the property.

In the case of non-residential property, unless the borrower has access to a corporate facility which can be used for various purposes (including to assist in the financing of real estate), the finance will generally be provided to the purchaser of the property and will be secured by (among other things) a mortgage over the property. It is our experience that the purchaser is often a special purpose vehicle ( SPV) established for the purpose of acquiring and/or developing the specific property.

Financiers dealing with SPV’s will normally impose tight restrictions on the borrower, including that:

The SPV cannot acquire any other property; and
The SPV cannot borrow funds from any other financier.

The reason for these restrictions is to minimise the risk to the financier of its borrower incurring debt from other financiers which could then cause the borrower to go into default under its financing or to be put into receivership. In addition, financiers do not wish to be subject to any disputes as to their priority position in respect of the assets of the borrower.
Generally, term sheets provided by financiers will make the above restrictions clear however if the investor does not focus on this or understand the restriction this can lead to serious consequences to the investor.

We are aware of matters where foreign investors have executed a term sheet (which included such restriction) but did not realise the consequences of the restriction. The investor wanted to use the SPV to buy other properties and borrow money from other financiers for the purposes funding the acquisition of those properties. After commencement of the drafting of the formal documentation for the loan the investor objected to the inclusion of the above restrictions.

The financier was not able to accommodate the request with the result that the financing was not provided.

In the Australian market it is common, when SPV’s are established, for the ownership structure of which the SPV forms a part to be sufficiently flexible to avoid the above outcome.

We can help investors better understand the terms of financing documents as well as the structuring options which can used in relation to property investment so as to avoid adverse outcomes such as that mentioned above.



We trust you have found the above information useful and hope it will assist you in current and future transactions. If that is the case, please feel free to share this email with your business network. I welcome your feedback at peter@peterfaludiconsulting.com.au

Regards
Peter

The comments made in this Alert do not constitute the provision of any legal, tax or accounting advice by Peter Faludi Consulting or any Director or employee thereof and therefore you should not rely on this Alert in making any decisions relating to present or future transactions in which you are involved. We strongly recommend that you seek legal, tax and/or accounting advice (as relevant) in relation to the same.

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