Member Article

In the slipstream of the general Belgian, European and global economies, 2010 will be qualified as a
year of slow and prudent transition for Belgium’s real estate market. After a correction process in 2008-2009, the Belgian real estate market is showing signs of recovery, and the appetite for investments appears to be increasing.
However, the decrease in prices for Belgian real estate and the weakened office rent market do slow down the activity on the real estate financing market. In this article, we will examine some important recent relevant legislation, financing transactions and some long-awaited law proposals, all in the field of real estate finance, and their impact on the Belgian real estate market.

Recent legislation:The Act on the
Continuity of Enterprises

The Act on the Continuity of Enterprises
of January 31, 2009 (Wet betreffende de continuïteit van
ondernemingen/Loi relative à la continuité des entreprises -
the “Act”) entered into force on April 1, 2009.The Act introduced a
reorganisation procedure comparable to a US Chapter 11 procedure which has
generally been seen as a success. Recent statistics show that, in 2009, 856 companies
took advantage of the Act’s protective judicial reorganisation procedure vis-à-vis creditors to safeguard
the continuity of their business.The Act replaced the Act of July 17, 1997 on
Judicial Composition Proceedings (gerechtelijk
akkoord/concordat judiciaire), which had only been
applied 78 times in 2008. Moreover, the aforementioned 856 applications do not
include the ‘amicable settlements’ between debtor and creditors, a non-judicial
settlement possibility which has also been introduced by the Act (see below for
more details).This being said, having the new Act in force did not prevent
6,339 companies from going bankrupt during the first eight months of 2010,
representing an increase of 6.25% compared to the same period in 2009.The
potential for safeguarding companies at risk is, of course, balanced by the
efforts that have to be made by the co-contracting parties/creditors of these
companies under the Act’s reorganisation procedures.

In any event, the real estate market will
be increasingly faced with companies applying for the Act’s safeguarding
procedures. It is important to note that the granting of such safeguarding
procedures cannot, as such, terminate the agreements in force, notwithstanding
explicit contractual language to that effect.This also applies to real-estate
agreements and finance agreements.

The
essential structure of the new Act can be summarised as follows. The Act gives
a key role to the existing corporate bodies to manage the company’s assets
during its restructuring and abolishes the mandatory (and expensive) use of
court-appointed administrators (as was the case under the old regime).

The range of measures offered to
distressed companies has been enlarged, whereby we can identify two tracks.

The pre-procedural phase can be considered
as the first track.

The existing system of information
collection by the court, and the organisation of specific chambers in the court
for company investigations, have been maintained.

A new preventive instrument is the
appointment of a mediator by the Chairman of the Commercial Court, at the request of the
debtor, in order to facilitate a reorganisation. Moreover, in the event that
manifest and gross shortcomings of the debtor jeopardise the continuity of the
company, a court mandatee can be appointed at the request of any interested
party.

Still in the pre-procedural phase, a major
innovation is that any debtor is now offered the possibility to reach, without
entering into a judicial reorganisation, an amicable settlement with two or
more creditors, with a view to redress the financial position of the debtor or
to reorganise the latter’s enterprise.The parties to the amicable settlement
are free to determine its content but the amicable settlement does not affect
the rights of third parties. However, should the company ultimately fail, the
settlement arrangements will be protected against certain effects of the
hardening period (if any), provided the amicable settlement has been filed with
the court.

The second track is judicial
reorganisation.

Basically, the Act
distinguishes between three types of judicial (i.e., court-supervised)
reorganisation processes, which a debtor can apply for when his business is at
risk: (i) judicial reorganisation through amicable settlement with two or more
creditors; (ii) judicial reorganisation through a collective agreement with his
creditors (the reorganisation plan has to be approved by more than half of the
creditors representing more than half of the amount of the claims involved);
and (iii) judicial reorganisation through a transfer under judicial
supervision. An important change to the old Act of 17 July 1997 is the
relaxation of the conditions to apply for judicial restructuring procedures. As
soon as the continuity of a debtor’s enterprise is threatened, it may use the
new Act’s procedures.The reorganisation has also been made less expensive, as
it will be followedup by a delegated judge and not be an expensive court
appointed administrator.

The judicial reorganisation
involves a moratorium granted to the debtor of up to six months. During this
period, in principle, no enforcement can take place and no bankruptcy
proceedings can be opened in relation to the debtor.The moratorium period may
be extended up to a period of 18 months. Recent statistics show that the
suspension period lasts on average 5.7 months. As already said, the
reorganisation procedures introduced by the Act have generally been seen as a success.
One of the most frequent criticisms in practice is that some debtors seem to be
misusing the Act and have obtained moratorium periods too easily, thus creating
unfair competition on the market. Another wide-spread criticism has been that
public authority creditors, most notably the social security and tax
authorities, have often been reluctant to agree with a settlement, thereby
diminishing the chances of saving the company. However, the Court of Appeals of
Brussels recently ordered both social security and tax authorities to be bound
by a reorganisation plan (approved by the other creditors) that included a reduction
of social security and tax liabilities and that they did not approve.

Recent PPP financings: government

support and mini-perms

Belgium’s public authorities are increasingly interested in using PPP as
a tool for financing major construction projects. Probably the largest ongoing
PPP project to date is the Antwerp Mobility Masterplan, developed by the
Flemish regional government in order to improve mobility and traffic safety in
and around the City of Antwerp.The Masterplan invests in new roads, tramlines,
light-rail and cycling paths and includes the future construction of a bridge
over (or tunnel under) the river Scheldt. Apart from such classic
infrastructure projects, public authorities are increasingly using PPP in other
sectors. Social infrastructure projects have been realised through PPP (e.g.,
social housing, student accommodation) and other projects are in the pipeline (e.g.,
prisons, hospitals, tramways and brownfields). A major recent infrastructure
PPP transaction, the Flemish schools financing, closed in June 2010.The transaction
highlights some interesting developments in the field of PPP financings.

In this PPP for building
schools in the Flemish Region, the regional authorities have supported sponsors
by providing a guarantee.The project covers the refurbishing, construction and
redevelopment of about 211 primary and secondary schools in Flanders.
Each school is serviced by a separate project company with a debt:equity ratio
of 90:10. It features a €700m six-year revolving credit facility arranged by BNP Paribas
Fortis, KBC and Dexia and a €1.5bn 30-year term loan solely underwritten by BNP Paribas Fortis.The
six-year construction financing is set to be refinanced by the €1.5bn 30-year facility which
carries a guarantee from the Flemish regional government. The refurbishing,
construction and redevelopment of schools in the Walloon and Germanic Region is
also being examined in the format of a PPP transaction. PPP infrastructure
projects in Belgium are often structured as DBFM (design, build, finance,
maintain) contracts.The Flemish schools PPP points to a relatively new PPP
model, whereby DBM and F competitions are separated (DBM + F).The deal features
a so-called mini-perm loan financing (over six years) to pay for the (re-)construction
phase. Once the project is completed and starts generating income, a more
long-term financing solution is put in place. In mini-perm transactions it is
generally anticipated that the short-term loan will be easily and cheaply
refinanced because the property will have an operating history on which to
successfully obtain permanent financing. However, the government guarantee
supporting the long-term debt facility indicates that today’s capital markets
seem to require government support to guarantee the long-term financing.

Pending law proposals: Belgian
REITs

(Bevak/Sicafi)

For tax purposes, alternative
financing for real estate investments can be obtained via undertakings of collective
investments, comparable with US REITs.A real estate Bevak/Sicafi (hereinafter “REIT”) is a closedend real estate fund under Belgian
law with a fixed number of shares. Its object is to use the capital it raises through
a public issue to invest directly or indirectly in real
estate. REITs are strictly regulated by law.They are (almost completely) exempt
from corporate taxes but only under strict conditions. For instance, their
shares must be listed and traded on an exchange and the property risk must be
spread: a REIT can only invest 20% of its assets in a single building or site. Belgian
REITs have been active on the financial and real estate markets in 2009 and
2010, in order to diversify and restructure their portfolio, but also in order
to remain within the legal debt ratio window given the decreasing fair market
value of the underlying assets.

On the one hand, the REITs have been
raising capital and issuing bonds in order to be able to purchase property.The
Belgian REITs have been diversifying their portfolio by acquiring
senior-citizen housing and hotels. As market prices have fallen, interesting
purchase opportunities have arisen. On the other hand, some REITs are seeking
to increase their share capital for legal reasons. As explained below, an
important reason for REITs seeking to raise capital in today’s markets, is the combination
of rules set forth by the Royal Decree on REITs of April 10, 1995 (as amended)
and IFRS. Some REITs would have to increase their share capital in order to
respect their maximum legal debt ratio (i.e., the ratio of total debts/total
assets). As mentioned above, REITs are strictly regulated by law. The main
rules are provided by the Royal Decree on REITs of April 10, 1995 (as amended).
An important rule is that their debt level cannot exceed 65% of the value of
their assets (in practice, banks may require an even lower maximum debt ratio).

However, because the value of their
existing asset portfolio decreased in 2008-2009, their debt ratio increased.
Market analysts predict that the REITs will have to make additional efforts in
order not to lose tenants. An increased vacancy level and a loss of rental
income could only push asset valuation levels further down.

Moreover, throughout 2010 the falling
long-term interest rate has been hurting REITs that have concluded significant
interest rate swaps or other derivatives to hedge their exposure to interest
rate fluctuations. Such derivatives may protect the REIT by capping the maximum
interest rate paid at a certain ceiling, but they sacrifice the profitability
of interest rate drops. As during 2010 interest rates have been dropping, the
costs of such derivatives have been high and the derivates have decreased in
value. In accordance with IFRS, both the asset portfolio and the interest rate
derivatives have to be booked at market value, which, in today’s markets,
further increases the debt ratio.

As mentioned above, the maximum debt ratio
of 65% is provided by the Royal Decree on REITs of April 10, 1995. Another
provision set forth by this Royal Decree imposes that REITs, to be exempt from (almost
all) corporate taxes, must distribute at least 80% of their net profits to
their shareholders. Combined with today’s markets and IFRS (decreased value of
asset portfolio and interest rate derivatives, which have to be booked at
market value in accordance with IFRS), this high-profit distribution level can
obviously make it very difficult for REITs to respect the maximum debt ratio of
65%, unless they increase their share capital.

In summary, an important reason for REITs
seeking to raise capital in today’s markets, are the combined rules set forth
by the Royal Decree on REITs (a maximum debt ratio of 65% and a minimum
dividend distribution level of 80%) and IFRS (assets and derivatives to be
booked at market value).

In addition, the high-profit distribution
level of 80% under the Royal Decree on REITs of April 10, 1995 may conflict
with the Belgian Companies Code, which provides that a company (including a
REIT) cannot distribute a dividend to its shareholders if the net assets have
fallen (or would fall, as a consequence of the dividend distribution) below the
share capital, which is the case for some REITs.

To illustrate the complex legal situation:
REITs sometimes decrease their share capital in order to be able to distribute
dividends to their shareholders. To solve this legal imbroglio, accentuated by
the financial crisis, Belgian REITs have been lobbying for structural law
reform for some years now. An open consultation was held by the federal government
in February 2010 on a draft Royal Decree to replace the Royal Decree of April
10, 1995 on REITs (as amended).

First and foremost, the draft Royal Decree
sets up a more flexible procedure for raising capital. It allows REITs to
distribute dividends (up to 80% of their (net) profits) not only in cash, but
also in shares.The REITs also lobbied for an exemption from the legal requirement
to always respect the pre-emption rights of existing shareholders in case of a
capital increase (by contribution in cash). Currently, REITs cannot limit the
pre-emption rights of existing shareholders, whereas other companies can.

The draft Royal Decree also proposes an interesting
new kind of REIT, the ‘institutional REIT’. An institutional REIT can be a 100%
subsidiary of a publicly listed REIT, as well as a common subsidiary of a
publicly listed REIT and third parties. Such third party shareholders must be
institutional or professional investors, such as pension funds or credit institutions.The
institutional REIT must be directly or indirectly controlled by a publicly listed
REIT: a publicly listed REIT must hold, directly or indirectly, 50% or more of
its share capital. In case certain conditions are met, the institutional REIT
can benefit from the same tax regime as a publicly listed REIT.

Further, the draft Royal Decree requires a
REIT whose debt level is higher than 50% to submit a plan to the Banking
Commission to avoid its debt level exceeding 65%. It also requires REITs to
have three independent directors on their boards and introduces new rules to
further secure the independence of the real-estate expert who values the
properties owned by the REIT.

Unfortunately, for the Belgian REIT
sector, since the resignation of the Belgian federal government in April 2010
and subsequent elections, the legislative process has been put on hold until
the formation of a new federal government.To be continued, once the new federal
government is in place.