Removing the limits - a new class of real estate investment vehicle

by Hogan Lovells
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UK limited partnerships have been go-to investment vehicles for United Kingdom real estate for many years.  Their attraction lies principally in their tax transparency, contractual flexibility and the limited liability protection they are able to offer investors.  They have not been without their issues, however, and, from 6 April 2017, investors and fund managers are able to make use of new legislation that has created a more flexible and simplified class of vehicle – the ‘private fund limited partnership’ (PFLP).

The legislative reform is designed to modernise, simplify and amend the existing legislation on UK limited partnerships in order to ensure that they remain competitive, particularly in light of newer tax efficient vehicles offered by major offshore jurisdictions.

All UK limited partnerships (both existing and new) that meet the PFLP conditions can apply to become PFLPs. The principle changes introduced by the PFLP regime relate to:

(a) The inclusion of a “white list” of activities that a limited partner can undertake without jeopardising its limited liability status.

(b) Increased flexibility in how PFLPs are funded by limited partners and in how limited partner capital is returned.

(c) The removal of other administrative burdens.

A non-exhaustive “white list” of limited partner actions

If a limited partner in a UK limited partnership participates in the management of the partnership’s affairs, it risks losing its limited liability. As a result, the introduction of a “white list” of safe harbours for limited partners in PFLPs provides some welcome clarity.

The white list proposals align PFLPs with a number of offshore jurisdictions regularly used in real estate investment structures (including Jersey, Guernsey and Luxembourg), which already provide safe harbours for limited partner involvement in decision making.

The white list includes: amendments to the PFLP agreement and the PFLP’s business; approving valuations of the PFLP’s assets; approving the PFLP’s accounts; extending the life of the PFLP; and deciding who will run the PFLP’s day-to-day business (all of which are matters that are usual for investors to carry on).  In addition, a limited partner of a PFLP will be allowed to be a director or shareholder of the general partner and to appoint representatives to a limited partner committee.

The white list is not exhaustive nor is it prescriptive; it will be a matter of commercial negotiation and agreement between the partners as to whether limited partners will be entitled to carry on any of the listed activities.

Relaxation of capital requirements

On the administrative side, the requirement to make a capital contribution will be removed for new PFLPs set up after 6 April 2017 and there will be no need to declare capital contributions at Companies House.  If any (optional) capital contributions are made to these new PFLPs, they will be capable of withdrawal. The current law will continue to apply, however, to capital contributions that were made to existing UK limited partnerships before they opted into the PFLP regime.  This means that although such capital contributions can be withdrawn, the limited partners may be required to return them.

The dual approach will ensure that any creditors will not be prejudiced by a UK limited partnership’s subsequent reclassification as a PFLP.

How to qualify as a PFLP

To qualify, the UK limited partnership must satisfy the following conditions:

(a) it is constituted by a written partnership agreement;

(b) it is a “collective investment scheme” for the purposes of the Financial Services and Markets Act 2000, which includes those that would qualify as collective investment schemes were it not for one of the statutory exceptions.

Registration

UK limited partnerships that qualify may opt into the PFLP regime:

(a) if registered on or after 6 April 2017, immediately upon registration (or they can opt in at a later date); or

(b) if registered before 6 April 2017, at any time after 6 April 2017.

Once a UK limited partnership becomes a PFLP, however, it will not be able to return to its ordinary limited partnership status.

Going forward

The creation of the PFLP regime is a welcome step and the conditions for qualification as a PFLP are straightforward.  We expect that the PFLP is likely to be the default choice for investors using UK limited partnership structures going forwards.

An earlier, expanded version of this blog appeared in our Real Estate Quarterly Spring 2017 edition.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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