Wednesday, 29 June 2011 00:00

Several legal issues in the limited partnership private real estate funds

Content abstract:

As the organization form of real estate investment fund leading - a limited partnership, with its flexible set up, tax incentives, unique way of responsibility, freedom of income distribution pattern and other advantages favored by many real estate investment fund.

The promulgation of the "partnership enterprise law to set up a limited partnership in China real estate investment fund has provided a legal basis. Recently a large number of local rules, more make the advantage of a limited partnership real estate investment fund is now becoming visible. This article through to the limited partnership discusses the several legal issues in the real estate investment fund, hope will be a limited partnership real estate investment fund law points presented to the readers:

Key words: real estate fund limited partnership

Limited partnership is made up of one or more general partners (hereinafter referred to as the "GP") is responsible for the day-to-day operations and bear unlimited joint and several liability, and the more not bear responsibility for daily operation and management, but with limited liabilities only limited partners (hereinafter referred to as the "LP") of the special form of partnership organization. It was originally "kang shorts contract" [1]. Since then, both in Germany, Britain, and the United States in its domestic legislation of limited partnership made specific provision [2], and the French "dormant partnership" system also has similarities with limited partnership.

The organization form of the current real estate investment fund mainly have three types of corporations, limited partnerships and trust system. And limited partnership as the main form, with its unique legal features are inseparable:

First, the limited partnership particular mode of responsibility and flexible forms of profit distribution, and is helpful to broaden the financing channels of real estate. As countries a series of overheated real estate market in China and the tightening macroeconomic regulation and control policy, the real estate development enterprises are facing the same problem: a shortage of funds. Corresponding to this is there are many social idle funds, hope in the real estate market, but with no real estate investment experience and channels and don't start; And some have experience in real estate investment and investment channels for investment managers but only inaction by hand have no money. Limited partnership is very good to solve the problem: LP assume limited liability, greatly reduce the investment risk, makes its willing to put money to GP and investment management; And GP after LP capital support through its investment experience and investment channel, put money into high yield and stable real estate market, as the LP earn returns at the same time, also by limited partnership flexible forms of profit distribution to obtain its due returns; At the same time, with the support of the real estate developers investment funds, in the "capital chain" was almost broken. Arguably, it is a real estate development enterprises, social investors and professional managers win-win-win result.

Second, limited partnership internal governance mechanism, is conducive to reduce operating costs and improve the efficiency of decision making. Limited partnership rules only by the GP is responsible for the day-to-day operations and investment decisions. This can avoid cumbersome decision-making procedures in company investment enterprises (such as: the board of directors, the shareholders' committee resolution, etc.), reduce the management cost of money and time. Because of the real estate investment is not complicated, when choosing the suitable investment projects, basic no other special cumbersome management and decision-making. As a certain investment experience and channels of the GP can completely independent competent management and decision-making. So, while reduce the investment fund management cost, completely will not affect the effect of investment management.

Third, the exclusive tax policy of limited partnership, is conducive to further improve the investment returns. Both corporations and trust system of investment fund, double income taxes are inevitable. And limited partnership enterprise only for partners in the personal income tax, greatly improving the investment returns.

Fourth, the freedom of the limited partnership partnership rights transfer rules, to provide investors with convenient exit channel. Limited partnership is different from ordinary partnership, LP can freely assign its rights and interests of the partnership can even use the partnership rights pledge, it provides a free LP exit channel. Because the real estate development cycles are usually longer, can have free exit mechanism, at the same time in the investment will attract more investors to participate in the real estate investment fund raising.

Because of these advantages, a limited partnership private equity real estate funds have become one of the main methods of current real estate investment and financing. In many individual and institutional investors and real estate developers for a limited partnership private real estate funds flocked, this paper discusses the related legal problems.

1, set up problems

According to the partnership enterprise law and the measures for the administration of the registration of partnership enterprises ", as a limited partnership enterprise shall have a 2-50, a partner at least one general partner (hereinafter referred to as the "GP"), a limited partner (hereinafter referred to as the "LP") shall not labor investment and may not be used as the transaction partners, GP may not act as a wholly state-owned company, state-owned enterprises, listed companies and public institutions, social organizations, etc. In addition, a limited partnership real estate investment fund set up some problems still need to pay attention to the following:

1, the contributive problem

Although the partnership enterprise law of limited partnership investment way and amount if there are no limits, but according to the characteristics of the real estate investment funds, the general investment volume is larger, and mainly to raise funds for the purpose of investment. So in the real estate investment funds, the establishment of a limited partnership should be according to the proposed investment project, determine the investment amount and investment number of funds, and limit the mode for the currency. If a limited partnership real estate investment fund proposed by means of equity investment in real estate investment, when set up also can reference of the local establishment of equity investment enterprises and the relevant provisions of the requirements.

Shanghai [3] demands for equity investment enterprise (including a limited partnership) contributive amount at least RMB 100 million yuan, the mode is limited to monetary form, a single natural person partner to spend at least 5 million yuan. Tianjin, chongqing, zhejiang also have similar provisions.

In addition, if the real estate investment fund set up in company way, according to the request of the company law, shareholders subscribed registered capital must be in the company set up five years from the date of payment, and the first capital contribution shall be not less than 20% of the registered capital. According to the "partnership enterprise law" regulation, if the real estate investment fund established by a limited partnership, a partner only his share of capital contribution obligations according to the provisions of the partnership agreement. While some local regulations on the initial capital contribution of the limited partnership equity investment enterprises have relevant regulation (such as: tianjin demands of 20 million, chongqing, 50 million), but there is no hook type to provisions of the first capital contribution must be a certain proportion of capital contribution subscribed. Moreover, the partnership enterprise law and the relevant local regulations subscribed investment are no hard and fast rules to pay. Therefore, pay the capital contribution of limited partnership real estate investment fund is more flexible.

2, the number of partners

In accordance with the partnership enterprise law, the limited partnership enterprise shall consist of 2-50 partners. However, the real estate investment volume, generally larger, if the number of partners is limited to 50 people, a lot of pressure for each partner's capital. This will seriously affect the fundraising. Some can be extended through trust form a limited partnership real estate investment fund of funds raised. To set up a trust company the trust plans of assembled funds, trust companies to the trust plan to raise money to become a partner of a limited partnership. Such a limited partnership can break through 50 partnership real estate investment fund number online. But in the actual number of partnership through trust mode expansion, should pay attention to the following questions:

First of all, assembled funds trust plan has some restrictions in the number of investors. According to the trust company trust plans of assembled funds management method "regulation, individual trust plan in the number of natural person shall not be more than 50 people, single entrustment amount is in 3 million yuan of above the number of individual investors and qualified institutional investors is not restricted.

Secondly, part of the local regulations prohibited by trust in equity funds, such as Shanghai clear requirements: "equity investment enterprise's shareholders or partners shall in its own name." [4] this article is part of the industry regarded as forbidden by the manner of real estate investment trusts signal; But there are some experts think from the point of view of legislative spirit, which is not to prohibit the trust model involved in equity investment enterprises. Visible, in the industry and the ministry of commerce and industry differences between the understanding of the rules. Practice, on the basis of fully communication with industrial and commercial department, rare adopted the trust model involved in real estate investment fund has successfully register set up in Shanghai. In front of the real estate investment funds, therefore, the sponsors shall be communicated adequately and related industrial and commercial department, whether can trust involved in real estate investment fund in advance after being approved by the ministry of commerce and industry, set up again.

Second, the profit distribution

In accordance with the partnership enterprise law, the partnership enterprise may according to own situation, agreement of profit distribution. Therefore limited partnership profit allocation way of autonomy is very high, according to the "partnership enterprise law" the sixty-ninth regulation, even can agree all profits be distributed to certain partners. [5] the freedom of the limited partnership system of profit distribution, can cause GP better to conduct investment management. General GP as a limited partnership in the partnership affairs, with its own investment experience, investment decision of real estate investment fund plans and investment programs, its contribution to the real estate investment fund is not main performance on the funding, but mainly embodied in the control and management of real estate investment activities. GP in the limited partnership investment tends to pass into the less money, if the partnership profit distribution according to contribution, will not benefit incentive GP investment management enthusiasm, for the normal operation of the investment fund and disadvantage. Limited partnership, therefore, real estate investment funds of the partnership agreement will generally agreed GP can get 20% profit distribution, all the LP won 80% of the profit distribution. This compensation and investment funds are tied to profit incentives make GP with a more active attitude to the fund management.

Third, internal governance mechanism

1. By the GP execute the partnership affairs

According to the partnership enterprise law the provisions of the GP is of course the partnership affairs. But this does not mean the GP all problems can be unilateral decision for the partnership. "Partnership enterprise law" the regulation is the part of the decision by all the partners shall be agreed, [6] except otherwise agreed by the partnership agreement. So as to improve efficiency in the execution of the partnership affairs process, the partnership agreement may be expressly agreed upon some will not have negative impact on the real estate investment income, but the law should be agreed to by all the partners, decided by the GP alone. Improve the operational efficiency of the real estate investment fund already so, also won't cause substantial impact to the LP interests.

GP, of course, in the process of conducting partnership affairs, shall comply with the necessary due diligence diligent duty and conflicts of interest to avoid duty. For this "partnership enterprise law also made clear: a partner may not own, or in cooperation with others and to compete with the partnership business (non-compete), may not conduct any transaction with the partnership (self trade ban), may not engage in any conduct harmful to the interests of the partnership. But it is important to note that unless otherwise stated in the partnership agreement, non-compete and trade bans LP does not apply to limited partnership enterprise.

2. The safety of the LP port (Safe Harbor) rules

LP in a limited partnership, limited liability is the premise of the sacrifice of the partnership management. However, LP, as one of the limited partnership enterprise partner, give the necessary supervision of GP is the necessary condition to develop healthy limited partnership enterprise operation. As a result, the partnership enterprise law in specified LP does not execute the partnership affairs, may not be representative of the limited partnership at the same time, follow safe harbor rules of common law countries, in the "partnership enterprise law" the sixty-eighth [7] rules on the part of the LP is not as the execution of the partnership affairs, such as: to participate in making a general partner to the partnership, withdraws from the partnership; Interests in the limited partnership received damage, to the responsible partner of any claim or lawsuit; Executing a transaction partner delayed in the exercise of rights, supervise and urge the exercise of rights or for the benefit of the enterprise in its own name filed a lawsuit, etc. It is generally believed that the behavior of the listed by the safe harbor rule does not directly in the partnership debt, so the LP can for such behavior. If the LP beyond the scope of the "safe haven" for some behavior, may be foreign bear unlimited joint and several liability.

In order to control investment, some real estate investment fund in the partnership agreement will be agreed to set up by the capital contribution more LP investment advisory committee, by the committee for a resolution of some larger investment projects. This convention is considered to be beyond the scope of "safe haven", in violation of the basic rules "LP does not execute the partnership affairs", resulting in the LP are jointly and severally liable to foreign related transaction.

Therefore, in the real estate investment fund set up investment advisory committee composed of LP, should be cautious provisions on the scope of their functions and powers, unfavorable regulation related major investment is determined by the committee, lest cause participation in decision-making of LP foreign assume joint and several liability risk. If it is really necessary to set up investment advisory committee, may provide the commission can be related to major investment projects to the GP advice is put forward.

Fourth, tax issues

Compared with company limited partnership can avoid the dual levy income tax. According to the partnership enterprise law the principle of regulation, limited partnership enterprise business income and other income to the principle of "points after the first tax", need not pay income tax before assigned to each partner, after the allocation by each partner shall pay income tax. On the issue of partner enterprise income tax in accordance with the notice of the regulation, the partner is a natural person, pay individual income tax; Partners are legal persons or other organizations, pay enterprise income tax. According to January 1, 2000 implementation of the "about the sole individual proprietorship enterprises and partnership enterprises investors to impose individual income tax regulations, natural partners should be according to the individual income tax law of the" individual industrial and commercial households "production and operation income taxable items, apply to the 5-35% of the excess progressive tax rate 5%, calculated to impose individual income tax.

however, that the generally high annual revenue of real estate investment fund partner, including natural person LP if, in accordance with the "individual industrial and commercial households" production and operation income taxable items, apply a progressive tax rate of personal income tax by between 5% and 35%, greatly part of its (more than 50000 yuan) the income gained from real estate investment funds will be in accordance with the tax rate of 35%. Natural person LP, by contrast, the tax payable is higher than in the enterprise income tax. However, the real estate investment fund LP does not actually a ly to participate in the investment fund operation management. To the individual industrial and commercial households, mutatis mutandis, the production and operation of the collection of individual income tax is not reasonable.

In order to solve this problem, issued by the local rules and regulations made further around the rules. Shanghai regulation: execute the partnership affairs natural GP according to the production and operation of the "individual and industrial and commercial door income" taxable items, apply a progressive tax rate of personal income tax by between 5% and 35%. Does not perform any natural person having a partnership affairs LP is in accordance with the "interest, dividends, dividend income taxable items, calculate and pay individual income tax in accordance with the 20% tax rate. Chongqing also has similar provisions.

And the regulation of tianjin, more favourable for natural person GP. To execute the partnership affairs natural GP also funded in the investment fund, according to the measures for promoting equity investment fund industry development of tianjin for its return on investment or equity transfer income part, still applicable tax rate of 20%.

Can be seen from this a series of local rules and regulations, the present stage in our country for a limited partnership equity funds took to the distinction between management income and equity investment income tax basic principles. This principle is relatively reasonable, but also to promote the development of equity investment funds.

At the same time, to the greatest degree of avoid pay individual income tax is 5% - 5% progressive tax rate, can be in the name of the company as a real estate investment fund of the GP. This GP in the real estate investment fund only benefits according to the enterprise income tax tax rate can be.

[1] he: "the theory of limited partnership", "Chinese law", no.4, 2000.

[2] the German commercial code, the uniform limited partnership act, the United States, the uniform limited partnership act

[3] on the equity investment enterprises in Shanghai industrial and commercial registration of the notice, the Shanghai financial services office [2008] no. 3.

Note (1) in [4]

[5] the partnership enterprise law of the People's Republic of China, June 1, 2007, article sixty-nine: "limited partnership enterprise shall not all profits be distributed to certain partners; but, except otherwise agreed by the partnership agreement."

[6] the partnership enterprise law of the People's Republic of China, June 1, 2007, 31.

Ditto [7], article sixty-eight a limited partner of the following ACTS, shall not be regarded as conducting partnership affairs: (1) to participate in making a general partner to the partnership, withdraws from the partnership; (2) to the enterprise operation and management recommendations; (3) to participate in the choice to undertake limited partnership accounting firm audit business; (4) get audited limited partnership enterprise financial and accounting reports; (5) involving their own interests, to consult the accounting books of the limited partnership enterprise financial and other financial data; (6) in the limited partnership interests are infringed upon, to the responsible partner of any claim or lawsuit; (7) perform transactions partner delayed in the exercise of rights, supervise and urge the exercise of rights or for the benefit of the enterprise in its own name filed a lawsuit; (8) in accordance with the law guarantee for the enterprise.

Bibliography:

Jiang: "the theory of limited partnership", "Chinese law", no.4, 2000.

KouXiangHe/Pan Lan: income tax problem of movement of the limited partnership of venture capital, the finance and tax, 2008, 6.

Ding Jingrui: "big five bent arrow industry fund pilot scale", "first financial daily", on September 13, 2007.

Guo Fenglin: set up private equity has legal basis, the China securities journal, September 21, 2006.

Zhang Xiaosen: "corporate finance new ideas: private equity investment", "resource recycling", 2007, 05.

Zeng-gang zhang: "China's private equity fund set up and the organization form of study", "science and technology innovation herald, 31, 2007.

Super wu: "financing new luminescent spot, private equity funds", "China real estate information", 2006, 12.

Hsin-chieh Lin: "private equity legal issues research - as legitimate as center", "jilin university master degree thesis, April 2007.

Paper links:

http://www.lawyers.org.cn/info/9b31b6f581244461a7886eb0062dbc97