Overview Of Real Estate Investments In Italy

Investment Entities

Real estate investments in Italy are mainly carried out via one (or a combination) of the following types of investment vehicles.

Real Estate Companies

Real estate companies are special purpose vehicles carrying out the purchase, management, leasing, building, and sale of Italian real estate assets (società immobiliari). Real estate companies are generally formed as limited liability companies (società a responsabilità limitata, "S.r.l.") or joint-stock companies (società per azioni, "S.p.A.").

With a few exceptions, real estate companies are generally not listed on an exchange.

Real Estate Investment Funds ("REIFs")

Real estate investment funds ("REIFs") are undertakings for collective investments formed pursuant to contract law and generally utilized to invest in a plurality of real estate assets, carry out large-ticket real estate investments, and then defer the management of such real estate assets to a professional licensed entity.

REIFs must be managed by licensed Italian managers, or alternatively by nondomestic European Union ("EU") licensed managers passporting their management license into Italy to manage a REIF.

REIFs must invest at least two-thirds of their assets into real estate assets (including rights in rem on such assets, equity interests in real estate companies, and units of other REIFs). The remaining one-third may be invested in listed or nonlisted financial instruments.

REIFs may not directly carry out building activity, and more importantly, REIFs may not directly own business activities. As a result, while REIFs may own retail real estate assets, they may not hold the trading licenses. Certain deal structures are commonly used, however, in order to allow REIFs to own the retail real estate assets and indirectly control the related trading licenses through an affiliate.

Listed Real Estate Investment Trusts ("SIIQs")

Listed real estate investment trusts (società di investimento immobiliari quotate, "SIIQs") are Italian investment vehicles having certain features resembling some found in a REIT, although they do not qualify as undertakings for collective investments. SIIQs must comply with the following features:

SIIQs must be formed as joint-stock companies, and their shares must be listed on a regulated stock exchange of a EU Member State or a European Economic Area ("EEA") Member State, provided that such country is included in the list of countries that allow an adequate exchange of information (so-called "White List Countries"); SIIQs must be resident for income tax purposes in either Italy or in another EU Member State or a EEA Member State that is a White List Country; No shareholder can own, directly or indirectly, more than 60 percent of the voting rights or have right to more than 60 percent of the company's profits; At least 25 percent of the shares must be owned by shareholders who do not own, directly or indirectly, more than 2 percent of the voting rights nor have the right to more than 2 percent of the company's profits; and SIIQs' main business must be the leasing of real estate assets according to criteria set forth in the law. SIIQs do not need to be licensed by the Bank of Italy nor do they fall under the Bank of Italy's supervision.

Real Estate SICAFs

Real estate SICAFs ("RE SICAFs") are a new kind of undertaking for collective investments formed pursuant to company law. They may be utilized to invest into a plurality of real estate assets and to carry out large-ticket real estate investments.

A RE SICAF is an Italian joint-stock company with fixed corporate capital and that has its registered office and headquarters in Italy. A RE SCIAF collects investment funds via the offering of its shares, and sometimes other equity instruments, and then places those funds into real estate assets.

The same considerations applying to REIF investments apply, mutatis mutandis, to RE SICAF investments.

Direct Investment

In this scenario, the investor directly invests in real estate properties without interposing any vehicle. Unless required by specific circumstances, this is not very common.

DEAL STRUCTURES

Real estate investments in Italy are commonly implemented through one (or a combination) of the following acquisition structures.

Asset Deal

Asset deals entail the direct acquisition of "hard" real estate assets (e.g., land, buildings, or portions thereof) or going concerns that include real estate.

Commonly, the main advantage of the asset deal is that it excludes the risks associated with the acquisition of the existing corporate entity that has legal title to the real estate asset.

Share Deal

Share deals, typically, entail the acquisition of the shares of real estate companies. Share deals are commonly preferred when the investment involves the transfer of the real estate asset together with the administrative authorizations required to run the relative business activity. This is the case, for example, in the acquisition of shopping centers or retail parks where, in addition to the real estate asset, investors are normally also interested in owning the related trading license.

LETTING IN ITALY

In Italy, contractual relationships aimed at the letting of commercial assets are normally governed either by property lease agreements or business lease agreements.

Commercial Property Lease Agreements

In a property lease agreement, the landlord grants to the tenant the right to occupy a real estate property for a certain period of time, against the payment of rent.

Normally, commercial property lease agreements are executed when the activity to be carried out within the property does not require an administrative authorization (e.g., offices, logistics complex, etc.) or when the administrative authorization is directly held by the tenant and not the owner (e.g., single retail units, hypermarkets, etc., although it is not entirely uncommon for the owner of the real estate asset to also hold these administrative authorizations).

Italian commercial property lease agreements are regulated by Law no. 392 of July 27, 1978 ("Tenancy Law"). The Tenancy Law contains various mandatory provisions in favor of the tenant that may not be departed from. Any departure from this to the benefit of the landlord, if challenged by the tenant, can be declared null and void and automatically replaced by the relative mandatory provision of the Tenancy Law.

Some of the main mandatory provisions of the Tenancy Law include:

Minimum Duration and Renewal. The minimum duration is of six years, with automatic renewal for additional minimum six-year periods at each expiration.

Exit Rights. The landlord is not entitled to withdraw from lease outside of expiration and, in any case, at expiration of first term the landlord's withdrawal is limited to where it intends to occupy premises for own use, or where it intends to renovate the leased premises. The tenant is always entitled to withdraw from the lease in the case of "serious reasons" (gravi motivi).

Rental Increases/Indexation. The rent indexation is capped at 75 percent of variation of the National Institute of Statistics ("ISTAT") index for leases having the minimum mandatory duration (i.e., 6 + 6 years). The rent indexation is capped at 100 percent of variation of the ISTAT index for leases exceeding minimum mandatory duration.

Sublease and Assignment of...