Closed Real Estate Unit Investment Fund

Large investors often act independently at the level of personal contacts with those who need financial injections. But not everyone has enough funds for independent activity. If you still want to invest, then people are united in special structures. We’ll talk about one of them, namely, a closed mutual investment fund.

general information

Initially, let's figure out what constitutes a closed-end real estate unit investment fund (ZPIF). This is the name of the property complex, which is created without the formation of a legal entity. It is formed from the assets of several investors that transfer their funds to the fund. After that, they become owners of his shares. The property of the fund has the legal status of common ownership. Therefore, the result of its activities is distributed among the participants in proportion to the contributions. By the way, when a closed real estate unit investment trust is formed, then not only cash, but also rights to such objects as buildings and land can be transferred to it. When the structure is created, it is managed by the management company according to the adopted declaration. The activities of these structures are strictly regulated by law and a number of regulatory acts of the Federal Service for Financial Markets of the Russian Federation. The FFMS should register the rules of trust for each investment fund.

What is their difference?

Why did you need to create such an additional type of structures as CUIF? This is due to the need to facilitate a number of operations. If we talk about closed-end funds, then in this case there is such an advantage as the ability to make decisions by participants regarding activities at the general meeting. The main difference of the closed-end mutual investment fund is the consideration of rights to real estate as an asset. That is, the main operations are carried out with residential and commercial buildings, land and the like. In this case, two types are conventionally distinguished. The first to be mentioned is a closed-end mutual investment loan fund. They specialize in financing the construction of various real estate properties. Another type is a closed rental unit (investment) fund. He specializes in renting real estate. Often the one that he built. That is, the feature is an affordable wide range of operations, the displacement of various types of activities, and many other things are carried out in the real estate market (buying / selling residential and commercial buildings, land, etc.).

On the finances of the construction world

More recently, the creation of up to eighty percent of all real estate was provided by the end consumer, that is, people who planned to live and work in new apartments and buildings. Therefore, often there were situations when they began to build, having only 10-20% of the necessary funds. This was enough for the fence and the beginning of land work. At the same time, there was a calculation for loans or the sale of immovable property to individuals or legal entities. In a way, it was a housing cooperative. The principle of operation was as follows: we sell several apartments, we are building the first floor. Then we wait until someone else buys. In this case, the first buyers took a big risk - after all, they could wait a long time until the building was completed.

There was one minus in this scheme - there was no control over targeted financing.And this often turned into loud scandals in which defrauded equity holders were victims. The adoption of federal law No. 214-FZ allowed us to begin the process of crowding out consumer capital to a late stage. At the same time, there is an understanding that it needs to be replaced with something. Otherwise, the reduction in construction volumes and rising housing prices - just around the corner. According to this law (No. 214-FZ), credit (banking structures) and investment (CIF) funds are allocated for construction.

Although there are some nuances. So, the state was able to take care of protecting citizens, although it pushed banks away from this market segment. Why? The fact is that the legislation of the Russian Federation introduced the norm of joint liability of a financial institution with a developer. This was done with the goal of turning institutional investors into a guarantee of completion.

Work specifics

So, we have considered, although not mandatory, but still important for understanding information. In order not to go into theory, let's look at how these structures work in practice. As an example, let’s take a Holy Land closed-end rental unit investment fund. So, in order to participate in the process of creating new housing (or other real estate), ZPIFN acquires property rights from developers. An equity agreement (or investment) is used as a documentary basis.

Then, the management company transfers the available funds to the developer and acquires the right after construction is completed to receive certain objects (for example, apartments) with certain parameters (for example, footage or altitude) in their assets. But what to do with the property received? This is decided by the management company of the closed-end mutual investment fund.

It should be noted that it can start financing the developer only after all the necessary permits are issued in the manner prescribed by law. This is done in order to limit the participation of closed-end mutual investment funds at the most dangerous stage of construction. But this is not critical, because no more than fifteen percent of the total cost falls on the design of all the documentation and the creation of projects. A connection to a closed-end investment investment fund allows the developer to receive large-scale and regular financial investments, which are necessary for construction and installation works, the creation of engineering communications and moving forward. A similar policy is observed in the closed real estate unit investment fund Metronome.

The nuances of work

But that is not all. A whole series of nuances that are of interest to the developer should be highlighted:

1. Guaranteed stable financing. This is very important, but it’s difficult to observe when using unpredictable sales. Also, unlike a bank loan, you do not need to pay interest. After all, it withdraws funds from circulation. In addition, you can make advance payments for bulk purchases of building materials, which allows you to receive discounts and fix the cost.
2. Stabilization and regularity of the implementation process. The fact is that to allocate part of the property in kind - this can not be done. Why? The essence of this situation is that the closed-end mutual investment fund is a tool for investors, not consumers. Therefore, in order to pay off the shares, you will have to sell real estate. And if you go with registration - this is an additional bureaucratic burden. Because of this, ZPIF is interested in selling real estate before the end of construction. Of course, this can also be done on the secondary market, but in this case it will be necessary to go through the State Commission, sign an act on the implementation of the investment contract and draw up the ownership right. All this, due to certain material costs and a long time, reduces the efficiency of investments.

Participation options

Now let's look at the schemes according to which the owners of investment shares of a closed mutual investment fund can participate in the construction of certain objects. Initially, to select a certain property, they need to get together and make an appropriate decision. This is a common step for all schemes. And then the differences begin. But for now, let's just get by with the names:

1. Project financing.
2. Attraction of investment resources.
3. Management of commercial real estate.
4. Housing programs.
5. Integration of closed-end industrial investment funds into the construction project management system.

Each of these schemes has its own characteristics in implementation. And there are so many of them that it is advisable to devote a separate part to the article.

Real estate and construction project financing

In this case, it is envisaged that investors and founders transfer funds (as well as property rights and securities) to the fund during its formation or upon entry into a share in the secondary market. After the creation is completed and the closed-end mutual investment fund is recognized as created, the management company invests assets in real estate. Fund shareholders receive their income from the difference between the purchase and sale prices of property rights or finished objects. It is formed during the construction process, as well as due to an increase in market prices for finished objects.

In this case, the management company is a classic trustee, which manages the funds of customers. Only this happens not in the stock market, but with property. The rules of trust management of a closed real estate mutual investment fund provide, as a rule, the maximum return on working with a client. After all, a certain percentage comes as a reward. And if the management company is not a bunch of scammers, then it is directly interested in getting the maximum benefit. The amount of income depends on the selected segment, as well as the requirements for potential projects. At the same time, thanks to the participation of many investors, shareholders can get more benefits than if they do it on their own.

Another important plus is that ZPIFN does not have to pay income tax. Due to this, investors can use the delay effect.

Resource mobilization

Some developers use closed-end investment funds to obtain funds to build facilities. In this case, the management company creates a closed-end mutual investment fund for a specific property of the customer. Property rights are introduced by the owners as payment for shares during the formation of the fund. Then the management company and the founders attract investors to provide financing for a particular object. For this, a secondary market is used (for example, an exchange). This is how money is obtained to finance construction. An investor, becoming a shareholder, receives the right to a certain part of the income that will be received when the object is sold. It can be both sale and lease. The second approach often uses a closed combined unit investment fund. Such a scheme is popular due to:

1. The simplicity of creating a structure, making investments, accounting and reporting.
2. Tool transparency for third-party contributors.
3. Opportunities to use shares as collateral.

Commercial Property Management

This option is used by rental closed-end mutual investment funds. The essence of this scheme is to place assets in commercial real estate and receive income from its rental. Investors use this option to get a stable income. For owners, this option is attractive for the following reasons:

1. Turning non-core assets into a source of resources for the core business.
2. Obtaining preferences on the payment of income tax and property.
3. Attracting financial resources from the sale of shares while retaining their pre-emptive rights to commercial real estate.

The fund is acquired with funds contributed or is immediately formed from suitable property. Management of closed-end mutual investment funds additionally provides for the conclusion of an agreement with an operating company. She must take on all the work to ensure and maintain the facilities, and send the entire net flow of rental payments to the closed-end investment fund. The value of the assets of shareholders is growing due to the transferred money and an increase in the market value of the object. By agreement with the founder, the income is managed as follows:

1. Invested in the reconstruction and modernization of an object to increase its value and / or rental rates for it.
2. Periodically paid to shareholders.
3. Invest in the construction / purchase of other real estate (residential or commercial).
4. Invest in the stock market, place on a bank deposit.

Housing programs

This is another option for the use of funds, which involves the participation of municipal or corporate housing programs. In this case, the CIFF acts as a tool that accumulates funds and ensures the construction of housing for a certain audience, which is determined by the founder of the housing program. Under this case, a certain plot of land is laid. It can be selected by the municipality or corporation from among the lands that are included in its territory. Then, the mortgage is transferred to the closed mutual investment fund, which begins the construction of real estate. Organization of construction and control is carried out by the management company.

Integration of closed-end investment investment funds into the construction project management system

This option is used by large market players. They integrate closed-end investment funds into their business processes in order to increase the efficiency of construction project management and the distribution of funds that are needed to finance various facilities. The place of these structures in the chain depends on the role, organization, needs and objectives pursued.

Consider a small example. The parent company creates a closed-end mutual investment fund and receives 100% of the shares. Volumes and directions of use of the formed fund are determined by the investment declaration. Additionally, in the future, the amount of funds may be increased. Then separate companies are created or acquired. They are engaged in the preparation of project documentation, receive all necessary permits for construction, as well as the right to land.

Most suitable for these purposes are companies with the form of ownership of an LLC or a closed joint-stock company. After all the preparatory work has been completed, ZPIFN concludes an agreement (investment or equity) with this structure and provides construction with finances. If temporarily there is no need for this, then the funds can be directed to the asset, which is provided for by the investment declaration. After the construction is completed, the objects are realized. Profits from sales of objects from closed-end mutual investment funds are not taxed.