Property JVs – how to avoid being caught by the AIFM Directive

The Alternative Investment Fund Managers Directive (AIFM Directive) applies to alternative investment funds (AIFs) that are managed or marketed in the European Union. In the UK, it has been implemented by the Alternative Investment Fund Managers Regulations which came into force on 22nd July 2013.

Because the concept of an “alternative investment fund” is very broad, it can catch arrangements which would not ordinarily be regarded as funds. For example, it can apply to an SPV company which is created to buy and develop property, and where the shares are held by the developer and a single investor. If the arrangement does constitute an alternative investment fund, then various requirements of the AIFM Directive are triggered, such as:

  • The requirement for the manager of the alternative investment fund to be registered with the Financial Conduct Authority
  • The requirement to appoint an independent depositary to carry out certain functions (there is an exemption for managers whose assets under management are smaller)

This gives rise to additional cost and additional compliance obligations.

The recitals to the AIFM Directive say that it is not intended to apply to joint ventures, but the Directive doesn’t actually define what a joint venture is.

Fortunately, guidance is available from various sources, including the UK’s Financial Conduct Authority and from the European Securities and Markets Authority (ESMA).

Based on that guidance, if you comply with the following rules when you are setting up your joint venture SPV, there should be less risk of the arrangements being caught by the AIFM Directive:

  1. The recitals to the shareholders agreement for the SPV should express the fact that the parties have jointly developed a strategy in relation to the property (as opposed to the developer having unilaterally formulated an investment policy)
  2. The investor(s) should become directors of the SPV, as well as representatives of the developer
  3. The shareholders agreement for the SPV should provide for strategic and financial decisions to be made by all parties i.e. (the directors) jointly
  4. The investor director(s) should have ongoing, continuous involvement in the overall strategic management of the venture. That means actually attending and participating at meetings
  5. The SPV can still appoint the developer to manage the development itself, but this should be in line with the strategic decisions made by the parties jointly