Polish REIT released from the CIT – a positive signal for the commercial property market.

Polish REIT released from the CIT – a positive signal for the commercial property market.

14-11-2016


Recently, those in power have not been dealing too kindly with shopping mall developers. A tax on retail sale (so far suspended) or a bill on a ban on working on Sundays hit the retail market directly, i.e. their tenants.

On top of that, the government is planning to tax the growth of investment fund assets with an income tax (at present, investment funds as such do not pay any income tax). Nevertheless, in mid-October 2016, the Ministry of Finance presented a bill on real estate investment trusts (the REIT Bill). This initiative foresees some serious tax preferences for entities investing in commercial real property.  

Concluding from the rationale of the REIT bill, the legislator acts with the intention of encouraging private capital to invest in commercial property. However, in order to do so, REITs must meet a whole list of statutory requirements. First, they must be listed companies. Their minimum equity must amount to 60 million PLN, at least 70% of their assets must be represented by real property or stock and shares of subsidiaries or other companies on the property lease market, and the balance sheet value of their liabilities cannot exceed 70% of the balance sheet value of their assets. Another restriction is that a company operating on the property rental market must generate at least 70% of its profit from leasing property or parts thereof (from rent) or the payable disposal of property or parts thereof. In addition, such companies must generate income from renting at least three (3) properties or parts thereof. According to the Ministry of Finance, this should ensure the diversification of their portfolio.

If a property rental market company meets the above-specified requirements and reports this fact to the head of the competent tax office, it will have some reliefs. What is more, any dividends paid out by REIT subsidiaries, as well as income of the subsidiaries generated from renting property or any part thereof and from the disposal of property or parts thereof for a charge, shall also be exempt from the tax.

The above indicates that Polish REITs will focus their business on the commercial property market. While REITs will be permitted to invest in office buildings, commercial facilities or warehouses, their potential investment in residential buildings or units is explicitly excluded. Obviously, these regulations will apply to property located on Polish territory only.

It appears that the greatest flaw of the REITs is their public nature. Certainly, the assumption is that these instruments should be used to accumulate investments of private individuals, money-grubbers or any other types of investors who need not be professionals operating on the commercial real estate market. Still, public companies must be admitted for trading on the stock exchange, which requires dematerialising their shares, issuing a prospectus approved by the Financial Supervision Commission.  At the later stage of its operation, the REIT will need to comply with exorbitant information requirements imposed on the listed companies.

Will today's commercial property developers be willing to accept the above restrictions? Time will tell. If the REIT bill is enacted, it will certainly offer a very attractive option for considerations by investors who already have shopping malls in their portfolio and can be easily transformed into public companies, all the more so given that currently employed investment vehicles based on investment funds may soon significantly lose their appeal.


autor:

Małgorzata Skawińska, legal counsel trainee at CAUSA FINITA Law Firm