Guidelines

• Compliance with the law;
• Compliance with constitutional terms;
• Skill, care diligence and integrity;
• Accountability;
• Transparency;
• Acting in investors interests, including alignment of interests and conflict of interests;
• Confidentiality.

Compliance with the law is the foundation of every corporate governance framework. Being primarily responsible for this, the manager has to have appropriate systems in place to monitor, confirm and disclose compliance to the investors and non-executive officers. The non-executive officers should oversee the manager in all these respects, and should be able to seek external advice on these matters. The investors should make any and all necessary information available to the manager and are expected to immediately highlight any doubts they may have about the vehicle’s legal compliance.

The manager, the non-executive officers and the investors should all have access to sensitive information about the investment vehicle and its involved parties. This information must be treated according to the agreements in the constitutional terms. In general the need to maintain confidentiality has to be balanced against the need to ensure transparency and if there is a conflict, the need for transparency should prevail. However, information which, when disclosed, would create a competitive disadvantage to the vehicle, is expected to be treated as confidential and not to be disclosed widely. Confidentiality provisions should indenture all investors with the same restrictions and may not effectively prohibit investors exercising their rights under the constitutional documents.

Vehicles must comply with all laws and regulations applicable in the jurisdiction in which they are established.

The manager should ensure that the vehicle complies with all laws and regulations.

The manager should confirm to the vehicle, the non-executive officers and investors that the vehicle is compliant with applicable laws and regulations.

The manager has primary responsibility for compliance by the vehicle with applicable laws and regulations, including AIFMD, anti-money laundering regulations and tax legislation.

The manager should have in place appropriate systems and processes to monitor compliance and should hold regular meetings with the vehicle, non-executive officers, investor representatives and, if appropriate, investors.

The manager should ensure that it has the necessary systems to monitor compliance, that the vehicle is compliant with the laws applicable in the jurisdiction in which it has been established, and that it can continue to operate without risk of breach of law. The manager should also consider the structure of the vehicle, and illustrate that it has been structured in such a way as to be tax efficient. The manager is normally expected to meet with the vehicle and non-executive officers or investor representatives, and, if the issue is sufficiently material, with investors, to brief them on relevant changes in law, including tax legislation, where these are likely to affect the vehicle.

Non-executive officers or investor representatives should ensure that the manager has in place adequate systems to monitor compliance with applicable laws and regulations.

Non-executive officers or investor representatives have a role in monitoring compliance, by, for example, receiving regular reports from, and having regular meetings with, the manager. Non-executive officers may themselves incur liability in certain jurisdictions through holding their office. They should have the ability to seek separate legal advice paid for by the vehicle, if they consider this advisable or necessary. The vehicle should also provide insurance cover for non-executive officers if it is not otherwise available.

The investor should support the manager in ensuring that the vehicle is compliant with applicable laws and regulations.

The manager on behalf of the board of the vehicle has primary responsibility for compliance with applicable laws and regulations. Investors may be required to provide information legitimately required by the manager (such as for tax purposes) and in such circumstances should do so promptly.

Investors always need to consider carefully all information supplied by the vehicle, the manager and non-executive officers, take due note of any identified potential risks and raise questions with the manager or non-executive officers whenever appropriate, including any concerns regarding compliance, or failure to comply, with applicable laws and regulations.

The manager should establish systems and processes to ensure that the constitutional terms are monitored and adhered to, and should confirm to the vehicle, non-executive officers, investor representatives and investors that the vehicle is compliant with its constitutional terms.

The contractual obligations of the manager will normally include the obligation to ensure compliance by the vehicle with its constitutional terms. These will usually be disclosed to investors and potential investors through a prospectus or information memorandum, which would include the investment strategy for the vehicle and the initial business plan.

The manager needs to be fully aware of the constitutional terms, and therefore able to confirm to the vehicle, non-executive officers, investor representatives and investors that the vehicle is compliant with its constitutional terms. The constitutional documents of the vehicle should also set out the remedies that are available to investors and others if there is a breach.

The constitutional terms should contain a clear investment policy setting well-defined restrictions and address how these principles and best practices should be applied in practice by those involved in the vehicle. They should be stated as fully and completely as possible, thus creating binding contractual obligations for compliance by the vehicle and its investors.

The manager should adopt the corporate governance best practices as a matter of policy from the outset of the vehicle. Thereafter the manager should assess the extent to which the vehicle complies with these best practices, and should report on compliance in the vehicle’s annual report or elsewhere, explaining the reasons for any departures from the best practices. Investors will then be able to form their own opinions on the corporate governance of the vehicle.

The constitutional terms should set out the role of the non-executive officer, investor representatives and investors in relation to decision-making on reserved issues.

At the inception of a vehicle investors should agree to certain key parameters of the vehicle.  Any changes in or breaches of such parameters would be decisions reserved for investors such as:

• the vehicle’s constitutional terms;
• the vehicle’s investment strategy;
• the timing of the vehicle and mechanisms for termination;
• the debt restrictions for the vehicle;
• the vehicle’s liquidity mechanism;
• the removal or replacement of the manager; and
• the manager’s fee structure.

Examples of reserved matters for non-executive officers or investor representatives may include:

• annual business plan;
• resolving conflicts of interest;
• changes to the external valuer and significant changes to the valuation methodology;
• changes to the external auditor, or to accounting principles or practices, where these are likely to have a significant impact on accounting treatment;
• matters considered by the permanent risk management function;
• appointment of external advisers to represent investors on specific issues, such as those relating to risk identification and management;
• changes in key personnel including appointment of replacements;
• any circumstances where there is the risk of investor liability;
• matters of confidentiality, in cases where the nature of the investment and the relative market are particularly sensitive.

For such reserved issues, investors would expect the manager to provide them, or non-executive officers or investor representatives, with appropriate information on which to base their decision, including any professional advice. Where there is to be prior consultation between non-executive officers and investors, investors would expect such consultation and subsequent reporting to be conducted on a timely basis.

As the number of investors in a vehicle grows, so a lesser threshold for key decisions is likely to be more appropriate.  Open end vehicles with established liquidity mechanisms enabling investors to exit may offer less opportunity for influence or control by investors than closed end vehicles, where the investors’ ability to exit the vehicle may be very limited.

While approval of the annual business plan may not be a matter reserved for the decision of non-executive officers or investor representatives, it is best practice for the manager to present the annual business plan to investors each year and establish a mechanism by which they can take feedback.  In this way investors can make their views on the annual business plan known to the manager.

See section 2 of the Corporate Governance Assessment tool.

The constitutional terms should set out the way equity is issued and redeemed in a vehicle.

The manager should clearly articulate how equity is to be issued and redeemed.  In the case of closed end vehicles, the issue of equity is likely to be through one or more initial closings where a number of investors subscribe at the same time, with redemption being towards the end of the life of the vehicle.  In the case of open end vehicles, the process of issue and redemption of equity would be on a periodic basis. This may be annually, quarterly, monthly or even daily. The method of valuation of the equity should be clearly set out, including the underlying valuation and accounting principles applied. In some jurisdictions and vehicle structures, the mechanism is prescribed by legislation or government regulations.

Vehicle extensions provide an opportunity for the manager to review the corporate governance with investors.

Where the manager presents proposals for an extension of the life of the vehicle or a short run-off period to allow properties to be sold (which is not a fixed extension specified in the constitutional terms), this is in effect a new vehicle and provides an opportunity to review the constitutional terms of the vehicle.

Non-executive officers or investor representatives should ensure that the manager has in place adequate systems to monitor the extent of compliance with the vehicle’s constitutional terms.

Since the manager is obliged to ensure that the vehicle complies with its constitutional terms, the role of the non-executive officer or investor representative is to monitor compliance through receiving reports and having regular meetings with the manager. The non-executive officer or investor representative should have the ability to engage advisors (at the cost of the vehicle) to assist with legal or technical matters.

In circumstances where the termination of the manager’s mandate is activated, the non-executive officers or investor representatives should oversee the process to ensure stability during the transitional period.

Non-executive officers (where independent of investors) are expected to act as mediators between investors and managers and to review with investors the consequences and costs associated with the process of manager change.

Investors should fully understand the constitutional terms before investing. Acceptance of the constitutional terms is demonstrated by signing the subscription agreement.

In order to allow an investor to fully understand the investment, the constitutional terms should state the vehicle strategy and vehicle operation, the relationship and obligations between investors and the vehicle (including investor decisions, meetings and votes), and the liquidity opportunities for investors, including the eventual exit procedures upon winding-up, if appropriate. Investors are expected to comply with these obligations. The constitutional terms should be clear and unambiguous, and include the appropriate jurisdiction in which meetings to decide on important issues which are reserved to investors are to be held.

The manager should implement a code of ethics to demonstrate integrity.

The manager operates under a duty of care to the vehicle which has appointed it, and, through the vehicle, to investors. Investors, when deciding to invest, have usually relied upon the manager’s track record, and its acknowledged standing, integrity and reputation. The manager needs to be able to satisfy both the vehicle and investors that it has performed its duties with the required degree of integrity, and that it has behaved ethically in its dealings with the vehicle, non-executive officers, investor representatives, the vehicle’s external advisers and investors.

The manager should exercise the necessary control over its staff, external advisers and third party service providers to ensure that it can operate in the best interests of the vehicle and its investors.

The manager has to demonstrate to investors that it has the required skill to meet its obligations as a manager. This may include using third party service providers. See section 3 of the Corporate Governance Assessment tool. The manager is expected to have the required level and quality of expertise in terms of staffing, external advisers and third party service providers, as well as the necessary resources, in particular:

• adequate number of properly trained staff with the required level of experience, qualifications and skills;
• access to competent external advisers and expert service providers in the relevant jurisdictions, each of whom has an adequate system of internal controls and reports regularly to the manager on the effectiveness of such a control framework.

The manager should follow INREV guidance.

The manager, in order to show that it has acted and is acting diligently, both upon the establishment of the vehicle and during its life, is expected to be able to demonstrate to investors that it conducted the necessary due diligence (in line with the INREV due diligence protocol) upon the establishment of the vehicle, and that the vehicle is legally able to adopt its strategy to achieve its anticipated returns.

The manager should implement an agreed policy on risk identification and management for the vehicle, and establish and maintain a permanent risk management function.

The manager should identify risks early and manage them in a timely and proper manner. The manager needs to be able to show that potential risks are identified, monitored and managed quickly and diligently. This can only be achieved if the manager has competent staff, external advisers and service providers with the requisite expertise. The manager should also implement an adequate system of internal controls and ensure that information on the effectiveness of such a control framework is provided regularly to investors. See section 3 of the Corporate Governance Assessment tool.

Non-executive officers should have the appropriate level of skill, training and access to external advisers and service providers to ensure that the interests of investors are protected.

Non-executive officers should be appropriately trained so as to be up-to-date on relevant issues, and to have access to the vehicle’s external advisers and service providers. In particular, non-executive officers need to have the opportunity to discuss with the vehicle’s external valuers matters regarding property valuations.

Non-executive officers should ensure the monitoring of internal controls, risk management and reporting.

Non-executive officers should satisfy themselves that the manager has in place secure systems which monitor the vehicle's activities, that adequate internal controls are established by the manager to identify and manage risks on a timely basis and in a proper manner, and that the manager complies with its reporting obligations in a regular and timely manner.

Non-executive officers should have regular meetings with the manager and other external advisers and service providers, and with investors (if appropriate, with the manager absent), when considered necessary.

Non-executive officers are expected to attend meetings with the manager, other external advisers and service providers, and with investors when circumstances require, and to refer to investors’ matters of concern. See section 3 of the Corporate Governance Assessment tool. They may also need to call upon independent professional advice. To ensure that non-executive officers are able to act free from influence by vehicles or managers, it is necessary that they have the opportunity to discuss freely and openly with investors (without the manager being present) matters of a particularly sensitive nature.

Investors should employ staff or other resources with the requisite market experience, skills, expertise and knowledge.

Investors need to ensure that they and their representatives have had the appropriate training and are up-to-date with relevant developments, so as to be in a position to seek the appropriate information from the vehicle or the manager in understanding the performance and development of the vehicle.  Investors should act diligently when requested to consent to proposals made by the manager, and should respond in a timely and proper manner.

The constitutional terms of the vehicle should contain provisions dealing with circumstances in which investors fail to meet their obligations to the vehicle. See section 3 of the Corporate Governance Assessment tool.

Investors should act diligently to assess and monitor the identification and management of risks.

Investors should obtain from the manager, before investing, information they consider necessary to satisfy themselves that the vehicle strategy is appropriate, that the risks are appropriate relative to the rewards, and that the manager has the requisite experience and resources (human, financial and information) to be able to deliver the expected returns. INREV has published a recommended questionnaire for investment evaluation to assist investors in their due diligence investigations.

Investors should regularly review the performance of non-executive officers, and should periodically ratify their reappointment.

Investors will need to be satisfied that non-executive officers are properly performing their role to protect the interests of investors and so should assess their performance annually.

The manager should demonstrate how it is accountable to investors.

The manager is accountable to the vehicle and the investors as a whole. Investors will rely on the manager to ensure that the objectives established at the outset and investment plans are achieved and that the vehicle operates in accordance with its constitutional terms and all applicable laws and regulations. The manager can demonstrate this accountability, for example, by being available, upon reasonable notice, to meet with non-executive officers, investor representatives and investors to review and discuss matters relating to the vehicle. The manager would also normally be expected to exercise control over, and maintain close relations with, the external advisers and service providers, including external auditors, valuers, portfolio and property managers and risk managers.

The manager should be indemnified by the vehicle, except where the manager is negligent.

The manager should be willing to accept a certain level of liability for its actions but would generally expect to be indemnified by the vehicle for losses where the manager has not been negligent or in breach. See section 4 of the Corporate Governance Assessment tool.

The manager should be able to be terminated with or without cause.

The ability of the investors to terminate the contract of the manager, both for cause and without cause, is an indication of the extent to which the manager is accountable. Greatest accountability is achieved with a no-fault termination mechanism, after a special resolution of investors. Reasonable compensation may be due to the manager depending on the circumstances of the termination. See section 4 of the Corporate Governance Assessment tool.

Investors will expect protection against circumstances where the performance of the manager (whether measured quantitatively or qualitatively) is sub-standard. In such circumstances it may be appropriate to establish a process of dialogue with a timetable between the manager and the investors (through the non-executive officers or investor representatives) to address such underperformance.  In circumstances where the plan agreed from such a process is not followed by the manager then the investors may consider suspension of the investment period or even termination of the manager after a special resolution.

Non-executive officers and investor representatives should be accountable to investors.

Non-executive officers and investor representatives are accountable to investors in their role as monitors of the performance and compliance of the vehicle. This may be by participation on a non-executive board or advisory committee. Such accountability should, however, not be coupled with liability to other investors other than in the case of wilful misconduct or bad faith on the part of the non-executive officer or investor representative.

See section 4 of the Corporate Governance Assessment tool.

Investors should ensure that the manager and, where appropriate, non-executive officers are held accountable for the performance of the vehicle.

Investors are accountable to their own relevant bodies, but not to the vehicle, non-executive officers or the manager. They are, however, responsible for holding the manager and non-executive officers accountable. For example, they are expected to attend relevant investor meetings and consider carefully and diligently all information and reports supplied by non-executive officers, the manager and external advisers. They are expected to conduct themselves in such a way as not to be open to criticism that they have acted in an unethical manner.

The manager should make available to the vehicle, non-executive officers, investor representatives and investors, in a timely manner, all relevant information and reports.

During the life of a vehicle the manager provides information (including reports) relevant to the vehicle, in order to enable investors to understand the performance of the vehicle and its compliance with the vehicle strategy, and to be satisfied that it meets the objectives established in the business plan. See section 5 of the Corporate Governance Assessment tool. Investors and non-executive officers need to be in a position to, for example:

• assess the performance of the vehicle against given targets, such as industry peer groups;
• understand the progress compared to the business plan and forecasts;
• understand the risks in a vehicle and how they are being managed;
• satisfy themselves as to compliance with the vehicle's constitutional terms and applicable laws and regulations without imposing any obligation on investors themselves to monitor compliance);
• understand the extent and nature of investments and divestments and the consequent funding of transactions;
• understand the fees payable to the manager and the vehicle expenses charged directly.

The manager should respond in a timely and transparent manner to all reasonable questions and enquiries raised by non-executive officers, investor representatives and investors. Material events, such as a change in key personnel, should be reported to investors immediately.

The manager should have regard to INREV Guidelines on property valuations.

During the life of the vehicle the manager will provide investors, investor representatives and non-executive officers with property valuations. Investors would expect external property valuers to be independent. In order to ensure that valuations are adequately monitored, and that the interests of investors are protected, the rotation of external valuers upon the expiry of their mandates is encouraged, and the fees paid to external valuers should be structured in such a way as not to compromise the independence of valuations.  See section 5 of the Corporate Governance Assessment tool.

The manager should report to investors on the extent of compliance with INREV corporate governance principles and guidelines including any circumstances in which best practice is not followed and the explanation as to why this is so.

The constitutional terms of a vehicle should set out the use of side letters, which should be disclosed to all investors.

We recognise that there may be circumstances in which different investors will have different arrangements with a vehicle.  For example, larger investors may receive a discount on fees payable to the manager. The manager should set out how side letters and similar individual investor agreements will be dealt with. The manager should disclose the terms of such side letters, while recognising that certain investors may request anonymity in such matters. See section 5 of the Corporate Governance Assessment tool.

AIFMD specific requirement: In case of an externally managed AIF, the AIFM is responsible for compliance with the transparency requirements of the AIFMD.

Non-executive officers or investor representatives should be satisfied that procedures are in place to ensure that investors are in receipt of information prepared by the manager.

Throughout the life of the vehicle, the manager is under an obligation to ensure that all relevant information and reports are made available to investors, investor representatives and non-executive officers, in a timely, proper and comprehensive manner, so as to inform investors, investor representatives and non-executive officers on matters such as strategy, achievement of targets and the progress and performance of the vehicle. Non-executive officers and investor representatives have a role in seeing that the manager meets these obligations.

Investors should feed back to the manager their precise information requirements, and whether they are being satisfied by the vehicle.

This should help ensure that the vehicle's reporting is managed as efficiently as possible.

The manager should demonstrate that its interests are truly aligned with those of investors through vehicle structures.

The vehicle is established to deliver investment performance to investors. The manager is expected to act in the interests of investors. As far as possible, this can be assured by creating structures in the vehicle to ensure the alignment of the manager’s interests with those of the investors.

Alignment of interest may be achieved by the manager investing a meaningful amount in the vehicle. See section 6 of the Corporate Governance Assessment tool. INREV recognises that there may be circumstances in which co-investment by the manager may not be appropriate, however.

Alignment of interest may also be achieved through the fee structure, including payment of performance fees to the manager based on vehicle performance. This may not fully align the manager to downside risks, however. Any performance fee structure should incentivise the manager to behave in a manner consistent with the risk profile of the vehicle and should reflect the added value that the manager is expected to provide. For example, the element of manager remuneration related to performance is typically less for a core vehicle than for an opportunistic vehicle. See section 6 of the Corporate Governance Assessment tool.

Remuneration policies are required for those employees of the manager whose professional activities have a material impact on the investment strategy or the risk profile of the vehicle they manage. The remuneration policies should promote sound and effective risk management and not encourage risk-taking which is inconsistent with the risk profile of the vehicle.

The constitutional terms should set out the provisions to be applied in the event that key personnel leave the manager.

Where certain employees of the manager have been identified in the documentation as key men or personnel, the constitutional terms will often contain specific provisions to cover the situation where these personnel leave the manager. The provisions may extend to the manager being prohibited from making further investments, or even face losing its mandate. See section 6 of the Corporate Governance Assessment tool.

The manager and the vehicle should implement a written protocol documenting how to handle conflicts of interest within the vehicle.

Conflicts of interest between the manager and the vehicle may arise in a number of circumstances, such as where:

• the manager (or another vehicle controlled by the manager, or a related party to the manager) competes with the vehicle to acquire assets;
• the manager (or another vehicle managed by the manager, or a related party to the manager) buys or sells assets from the vehicle;
• changes are proposed to the fee structure or other arrangements between the manager and the vehicle;
• the manager seeks to sell its interest in the vehicle;
• investors are in conflict over a decision that is required to be made by them.

Conflicts of interest may also arise with third party service providers. For example, the external valuer may make an offer to provide additional property services to a vehicle. This could potentially compromise the independence of its valuations.

When potential conflicts of interest arise, the manager should bring them immediately to the attention of the vehicle and the non-executive officers or investor representatives, and implement the agreed conflict procedure. The manager should always ensure that dealings in related-party transactions are on an arm’s-length terms basis. For example, if the manager (or another vehicle managed by the manager) wants to compete with the vehicle to acquire assets, the manager should disclose this to the vehicle, together with a policy for ensuring fair treatment for all its clients. See section 6 of the Corporate Governance Assessment tool.

The vehicle should set out how all investors will be treated on new issues, redemptions and transfers of equity in the vehicle.

Conflicts of interest can arise whenever investors vary their holdings in a vehicle. The manager should ensure that the rules governing new issues, redemptions and transfers are clearly and transparently set out for all investors.  Such rules should be in accordance with guidance provided in the INREV liquidity guidelines and should be fairly and consistently applied. Conflicts of interest can also arise for the manager in providing a service for secondary transfers between investors, and its role in raising new capital, if applicable.  At the outset the manager should clearly articulate the role that it provides in respect of secondary transfers, including any fees charged or interaction with third party trading platforms or placement agents.

Non-executive officers or investor representatives should ensure that the manager demonstrates that its interests are aligned with investors’ interests.

During the life of the vehicle, the role of the non-executive officer or the investor representative is to protect investors’ interests. One way in which the non-executive officer or investor representative can do this is by ensuring that the manager’s interests are aligned with those of the investors.

Non-executive officers should ensure that the manager has a written protocol documenting how conflicts of interest should be managed.

If conflicts are identified, non-executive officers should ensure that the manager implements the agreed conflict procedure. Non-executive officers may have to make decisions on behalf of the vehicle if the manager is conflicted. If non-executive officers are not satisfied that a conflict has been fairly and properly resolved, they would be expected to refer the matter to investors. Non-executive officers are expected to be actively involved in overseeing transactions between the manager and the vehicle, such as changes in the fee structure, and to be satisfied that the terms of such transactions are at arm’s length and are reported to investors.

The vehicle should be run in the interests of investors to deliver anticipated returns.

Investors should advise the vehicle and non-executive officers in a timely manner if they consider that the vehicle is not being run in their best interests.

Investors should disclose conflicts of interests to other participants in the vehicle and act appropriately.

Conflicts of interest between an investor and the vehicle may arise in a number of circumstances, such as where an investor competes with the vehicle to acquire assets or an investor buys assets from, or sells assets to, the vehicle. Investors need to act with integrity, and to disclose appropriate information to the particular vehicle, the manager and other investors, in a timely and proper manner. For example, if an investor competes with the vehicle, or buys an asset from, or sells an asset to, the vehicle, the investor would normally excuse itself from the relevant discussions in the vehicle or from receiving any information. In such circumstances, an investor may have to create ‘Chinese Walls’ so that different individuals or teams of people are able to act for the different parties.

The constitutional terms should set out the obligations of confidentiality assumed by the vehicle and its investors.

The manager will be aware of information relating to the vehicle, some of which may become publicly available, and some of which may be disclosed in order to be transparent. Information which is commercially sensitive to the vehicle, however, is expected to be treated as confidential and not to be disclosed widely. The constitutional terms may contain confidentiality undertakings, so that the vehicle passes on to its investors the duty to keep certain information confidential, and to refrain from acting on it.

The need to maintain confidentiality has to be balanced by the need to ensure transparency; if there is a conflict, the need for transparency should prevail. The constitutional terms should set out the rights of non-investors, such as potential investors and their advisors, to receive information without entering into a confidentiality agreement. Confidentiality provisions should not effectively prohibit investors exercising their rights under the constitutional documents, such as when engaging third party advisors. See section 7 of the Corporate Governance Assessment tool.

Non-executive officers and investor representatives should comply with confidentiality provisions in the constitutional documents.

Non-executive officers or investor representatives may be aware of confidential information relating to the vehicle, which is neither publicly available nor known to investors. If non-executive officers or investor representatives have received information relating to the vehicle which is commercially sensitive, they should observe the confidentiality provisions contained in its constitutional terms. If appropriate, non-executive officers should assist the manager in the disclosure of the information to investors.

Investors should comply with the confidentiality provisions, particularly when seeking to dispose of their investment, and should not use confidential information for their own benefit.

Investors may be in possession of information which is not publicly available, and which has been communicated to them by the vehicle or the manager and which may be commercially sensitive. Investors intending to disclose potentially confidential information to third parties who are potential investors are expected to seek confidentiality undertakings satisfactory to and in favour of the vehicle from the relevant third parties. Investors may also involve the manager in discussions with these parties, and request that the manager delivers to potential purchasers such information as may reasonably be required.

Control over investments

Investors participating in club deals and joint venturesare usually seeking greater control over the strategy and activities of the vehicle in order to set focused investment strategies and to control the destiny of their investment. Investors are therefore more likely to want greater involvement in the decision-making of the vehicle than would normally be the case for a multi-investor vehicle.  In addition to the matters set out in CG10 of the guidelines normally reserved for investors, investors are likely to want to control the other matters set out in CG10 that may be reserved for non-executive officers. In particular, investors are likely to want to have control over the timing of acquisition and disposal of individual property assets, so that their investment behaves more like a direct property investment. Under the AIFMD, however, investment activities should be carried out by the manager, and investors should ensure that their desire to control investments does not conflict with the requirements of the AIFMD.

Non-executive officers

In circumstances where a small number of investors are actively involved in the running of a vehicle, it would be expected that investors who participate in club deals and joint ventures would have the personnel resources to engage fully in the activities of the vehicle, without creating any management inefficiencies, such as delay in ratifying decisions. In these circumstances the role of the non-executive officer might not be relevant.

Role of the manager and fees

In club deals and joint ventures, the role of the manager may be that of asset manager, sourcing the assets and managing the day-to-day leasing and operational activities of the portfolio of properties. Fees may be less than for a multi-investor vehicle, given the reduced needs for vehicle management, as opposed to asset management. In addition, consideration should be given as to whether a performance fee to the manager would be appropriate, since the manager may not fully control the investment strategy, if the vehicle arrangements require approval of individual decisions by investors.

In this section we deal with variations in the application of the corporate governance guidelines to open end and closed end vehicles. In practice there is not a clear division between these two categories as vehicles may have characteristics of both. Nonetheless we set out how the governance for a pure open end vehicle may be expected to vary from a pure closed end vehicle.

Liquidity mechanism for investors

Closed end vehicles would typically have a fixed life, and investors would normally expect to invest at the start of the life of the vehicle, and redeem their investment towards the end of the life, as the vehicle sells its assets and winds down. Investors may have the ability to sell their investment on the secondary market, but would not normally expect to do so.

Open end vehicles, in contrast, typically last for an indefinite period, and provide clear mechanisms for new investors to subscribe for equity, and for existing investors to exit from their equity position. Consequently, the constitutional terms governing subscription, valuation and redemption of equity in the vehicle must be clearly set out for all investors and prospective investors, along with the anticipated liquidity for investors. Such terms are likely to be more developed in open end vehicles than in closed end vehicles.

Valuation guidelines

Given the importance of the mechanism for subscribing for and redeeming equity in an open end vehicle, particular attention should be paid to the valuation and accounting principles applied. These valuation and accounting principles should be clearly set out in the constitutional terms and disclosed to any potential investors, including the frequency of such valuations. The vehicle should also follow INREV’s methodology for calculating and disclosing the INREV NAV. The constitutional terms should describe how the price for equity subscription (bid price) and equity redemption (offer price) are related to the INREV NAV.

Control or influence in decision-making

The constitutional terms will set out the extent of control or influence delegated to non-executive officers and investors in the running of a vehicle. In closed end vehicles, where investors are likely to be committed to the vehicle for its entire life, investors may seek some control or influence over certain decisions, as set out in CG10 of the guidelines. The degree of control or influence offered to investors can be less in open end vehicles, however, based on the assumption that investors should have the opportunity to exit the vehicle if the investment strategy of the vehicle no longer meets their investment objectives. Since the liquidity of open-ended vehicles cannot be guaranteed, it constitutes good governance to also provide for key investor rights in open end vehicles.

No-fault termination clauses

One indication of accountability of the manager is the existence in the constitutional terms of a clause providing for no-fault termination of the manager. A no-fault termination clause is less common in open end vehicles than in closed end vehicles, since investors who no longer wish the manager to run the vehicle, and who would vote for a termination of the manager if such a mechanism were available, may exit the vehicle through redemption. As the liquidity in open end vehicles may not be fully available it constitutes good governance to also provide for no-fault removal provisions in open end vehicles.

Co-investment by the manager

One indication of alignment of interests with investors is the manager having a meaningful co-investment in the vehicle as an incentive for the manager to perform. Co-investment by the manager is likely to be less important to investors in an open end vehicle than in a closed end vehicle, if a proven exit mechanism is available to investors who may be concerned about the commitment of the manager to run the vehicle.

Performance feeterms

Another indication of alignment of interests with investors is a performance fee structure that incentivises the manager to act in a way that is in the interest of the investors. Performance fee structures should be designed to suit the risk profile of the vehicle. Open end vehicles are typically core, not opportunistic, and so it would be expected that the balance of fees to the manager will be more weighted to base fees than for a closed end vehicle. In addition, the bid/offer price mechanism should take account of any accrued but unpaid performance fee.

Conflicts of interest

AIFMD specific requirements: The AIFM that manages an open-ended AIF shall identify, manage and monitor conflicts of interest arising between investors wanting to redeem their investments and investors wishing to maintain their investment in the AIF, and any conflicts between the AIFM’s incentive to invest in illiquid assets and the AIF’s redemption policy.

To what extent should the Board of an AIF monitor the activities and level of compliance of its appointed AIFM?

This scenario may typically occur where an AIF within the scope of the AIFMD appoints an external AIFM as its manager. In this case there are a number of important activities which the Board of the AIF delegates to the manager, but which it must monitor in order to ensure that the AIFM is performing such tasks reasonably and in compliance with legal and regulatory requirements.

Important tasks delegated to the AIFM must include portfolio management and risk management, and will often also include administration and marketing. The AIFM may also, for example, provide support to the Board of the AIF in the performance of its duties. In addition, the AIFM commonly identifies and manages key service provider relationships on behalf of the AIF, such as depositories and auditors, and under the AIFMD has a responsibility to manage the valuation of the AIF’s assets and liabilities on behalf of the AIF to which it has been appointed. Clearly, the Board of the AIF has to be comfortable with the competencies and performance of the AIFM and will normally perform a degree of due diligence on the AIFM pursuant to this goal.

There are two key elements to this due diligence role:

• Initial due diligence
• Ongoing due diligence

Both initial and ongoing due diligence should be documented.

Initial due diligence

Before appointing an AIFM, the Board of the AIF should perform initial due diligence. The initial due diligence should, among other things, assess the ability of the proposed AIFM to perform the tasks to be delegated to it, and its ability to comply with the requirements of the AIFMD.

One of the key indicators for the Board of the AIF will be authorisation and supervision by the relevant supervisory authorities. Other typical factors which the Board of the AIF may consider may include:

• Scope of activities and experience of the AIFM;
• Knowledge, skills, experience and reputation of the Board, senior management and key staff, including the portfolio manager and risk manager;
• Organisation of the AIFM, including human and technical infrastructure, and the control arrangements of the risk management, compliance and internal audit functions;
• Delegation arrangements, and ability of the AIFM to perform adequate due diligence and ongoing monitoring;
• The identity and nature of the shareholders of the AIFM;
• Values statement or code of conduct, and how they are implemented in practice;
• Segregation of risk and portfolio management functions;
• Independence of the internal/external valuer.

From a practical perspective, the AIFM could provide the Board of the AIF with part or all of its application for authorisation to the supervisory authorities, and/or its handbook describing its organisational structure, policies and procedures, to assist the Board of the AIF in its assessment of the ability of the AIFM to comply with the requirements of the AIFMD.

Ongoing due diligence

The Board of the AIF should perform ongoing due diligence to assess whether the AIFM continues to have the ability to perform the tasks which have been delegated to it and to comply with AIFMD requirements. From an ongoing compliance perspective, the AIFM should provide the Board of the AIF with one or more reports covering:

• Risk management, including, among other items, KPIs on compliance with the risk limits and the risk profile of the AIF as disclosed to investors;
• Compliance with the regulatory requirements, including in particular KPIs on the compliance of the AIF;
• Internal audit reports, providing, among other items, an evaluation on whether risk management, control, and governance systems are functioning as intended.

Typically, each of these reports would be AIF-specific. In each case, the report should also cover remedial action to correct any deficiencies identified in the current or previous reports. The Board of the AIF should receive these reports at a frequency which is appropriate to the activities of the AIF, and at least annually.

In addition, when the AIF is appointing key service providers such as auditors and depositories, or providing representations to them, and when approving reports and accounts of the AIF, they are relying on the output of many of the key functions of the AIFM. Such reliance may be formally constituted in the form of reports and representations from the AIFM to the AIF.

• The Corporate Governance Module: principle number 7 refers to confidentiality and principle number 5 to transparency.
• The INREV Due Diligence Questionnaires (DDQs) touch on confidentiality in the assessment process.
• INREV provides a standard non-disclosure agreement (NDA) with the purpose to replace the wide variety of NDAs currently being used in the industry.

Summary

• There should be free flow of information between existing investors and the fund. The fund documentation should prescribe a mutually binding confidentiality undertaking.  
• If there is a business need to provide information outside of the investor group – for example, to a potential new investor looking to buy a secondary position – then the manager should be able to refer to the fund’s documentation, which should state clearly under which conditions and circumstances such information should be provided. 
• The condition could be to ensure that the investor would be qualified for admission to the investment vehicle (e.g. minimum net worth tests, tax position et cetera).
• The manager should then provide confidential information provided that the outside party has signed an appropriate NDA.

How should a manager apply the interim and annual reporting requirements when four detailed quarterly or two semi-annual reports are provided to investors?

The INREV reporting guidelines focus on the content rather than the format of the reports to investors.
Many managers prepare three or four quarterly interim reports or one semi-annual report along with a more complete annual report, including commentary on the last quarter/half year. Although these interim reports are expected to be in an abridged form, they can also contain all the disclosures set out in the annual reporting requirements at the manager’s discretion. The reporting guidelines reflect the minimum requirements with respect to the content of the report to investors.
In some circumstances, managers provide to investors four quarterly reports or two semi-annual reports with annual financial statements provided separately. These reports contain all the disclosures set out in both the interim and annual reporting requirements and, therefore, comply with such requirements. In such case, the annual report accompanying the financial statements may only include a summary of the information provided in the detailed interim reports.

The fund documentation should include details of valuation rules and procedures, pricing methodology including the methods used in valuing hard-to-value assets, and the frequency of valuation for all material assets and liabilities of the vehicle.

The external valuer must be independent. When other services are provided by an external valuer which could possibly harm the independence of the external valuer, these must be disclosed.

When the external valuer firm involved in valuing a property is or has recently been involved in the leasing, sale or purchase of the property, or the firm earns significant fees for other services besides the external appraisal, this should be properly disclosed, including a description of these services.

The external valuer must have the appropriate professional qualifications and competence to perform the property valuation.

The external valuer should have a local and/or international professional appraisal accreditation, and should be authorised or regulated to undertake valuations in the country concerned for the intended purposes.  They should also have the requisite level of competence and possess relevant market knowledge and experience in order to perform the property valuation.

The external valuer firm must demonstrate that the level of competence and expertise is maintained throughout the organisation and its key employees.

It is also important that the valuer is regulated by the local and/or international professional appraisal accreditation, for example through Royal Institution of Chartered Surveyors (RICS) valuer registration.

Any deviations from the above principles should be fully disclosed and explained.

A review of the continuing appointment or re-appointment of the external valuer firm should be undertaken on a regular basis, and at least once every three years.

The assessment of the external valuer firm is an ongoing process. A formal assessment must take place at least once every three years, with the objective that the external valuer firm is the best-suited valuer to perform the valuation. The assessment may result in a rotation of external valuer firm. The assessment also includes an evaluation of whether the external valuer firm is properly insured against claims. In the event of rotation, there should not be any affiliation between the external valuer firms. Reference is also made to the code of conduct included in the INREV Corporate Governance framework.

The valuation fees of an external valuer should not be directly linked to the outcome of the valuation.

In addition, the valuer should not hold any shares in the valued interest and its remuneration for a given valuation mandate should not represent a significant amount of its total annual turnover.

External property valuations must be performed at least once per year for all properties. 

 External property valuations are generally required for:

• (statutory) financial reporting;
• management reporting to shareholders and other stakeholders;
• performance measurement and (incentive) fee determination;
• regulatory authorities;
• securing finance / debt and on-going loan covenant compliance;
• corporate acquisitions and assessment of enterprise value.

Valuing property at least once per year does not mean all properties have to be valued at one time or necessarily at year-end, although this is best practice. More frequent external valuations or internal valuations may be undertaken to comply with the specific reporting requirements of the vehicle.

Although the professional valuation standards of the external valuers would already require physical inspection, this requirement has been included here in order to impose a partial responsibility in this respect on the manager as well.

In addition, for large portfolios, and based on its professional judgment, the external valuer may  consider using a rotation principle on a three year rolling basis for the physical inspection of properties that have a homogeneous risk profile such as portfolios of residential units or storage space. If a rotation principle is applied by the external valuer, the manager should ensure that this approach is reasonable.

Newly acquired properties and properties undergoing significant (re)development activities should be included in the physical inspection sample of the year.

The manager must ensure that comprehensive, appropriate and transparent information is provided to the external valuer to enable it to undertake a proper valuation and to enable it to make its own assessment of expected costs, including estimates of long-term maintenance and/or ground pollution costs.

The manager must inform the external valuer in sufficient detail and not withhold any information that may be relevant to the property valuation. Examples of the kind of information provided by the manager to be used in determining property valuations and which may be verified by the external valuer with source documentation include lease/rent roll information, lease incentives granted, refurbishment costs, measurement data, property operating expenses, real estate taxes and any other information in connection with changes of market circumstances, tax and regulatory changes.

The manager should ensure that the legal ownership right (i.e., leasehold, freehold) and any restrictions or encumbrances are properly reflected in the value assessment.

The manager should provide the external valuer with all the latest developments regarding any known environmental issues.

The value of the property should be its market value or fair value.

The IVS Committee and The European Group of Valuers’ Associations (TEGOVA) define market value as “the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion”. The IASB definition of fair value under IFRS 13 is “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date”.

In order to comply with professional international valuation standards, the market value estimate should, in principle, be free of any uncertainty clauses and special assumptions. Any special assumption or uncertainty clause should be adequately disclosed.

In order to comply with IFRS 13 the manager should ensure that the external valuer provides sufficient market evidence (if available in the market) and comparables to support all key assumptions used in the estimation of the market value.

Valuers should comply with a recognised international professional valuation standard.

Appointed valuers should comply with recognised international professional valuation standards such as International Valuation Standards (IVS), RICS or TEGOVA.

Transfer taxes and purchasers’ costs are deducted when determining the value of properties.

When determining the market value of a property, the valuer should make the same allowance for transaction costs that a normal purchaser of the property would make in the market, regardless of the exit strategy.

External valuation report must include information regarding the valuation method used for investment property, property held for sale, property under construction and ground leases, as well as applicable valuation inputs and market assumptions.

The valuation methods can include, among others:

• market approach - based on market comparables;
• income approach - based on income capitalisation;
• other valuation models based on earnings multiples or discounted cash flow methodology;
• replacement cost less depreciation (cost approach) should only be used in specific and rare circumstances when other valuation methods cannot be applied.

The valuation of property under construction can be based upon:

• fair value at completion less costs to complete (residual approach);
• cost approach should only be used in specific and rare circumstances when other valuation methods cannot be applied.

During the initial phases of the construction of a property, the level of uncertainty surrounding the fair value of the property is high. In this context, the fair value as determined using the residual approach may be equal to the consideration paid for the property plus subsequent construction costs.

The information regarding applicable market assumptions could, for example, include sensitivity analysis of rent movements and yield changes.

Note that for the purpose of the INREV NAV, valuations of property under construction must be stated at fair value. Refer to INREV NAV adjustments in module 4 - INREV NAV guidelines.

In the event of significant changes in market value resulting from a rotation of the external valuer, the manager must perform an assessment of the main underlying assumptions and provide full disclosure of the rationale for such changes.

Finally, the valuation methodology applied must lead to the market value regardless of the agreed valuation methodology as per management valuation regulations.

The valuation performed by the external valuer should be subject to the manager’s formalised internal valuation review and approval process.

The manager should ensure that the overall valuation is reviewed and approved internally for accuracy prior to its inclusion in the vehicle’s NAV and disclosure to stakeholders. The review and approval process should be impartial, objective, consistent and independent.

The review and approval should include the following controls, among others:

• the manager should ensure that the valuation timing and frequency is consistent with the valuation policies foreseen in the management regulations;
• the manager should ensure that the valuer’s valuation assumptions as well as valuation method used are appropriate with regard to the nature of the property to be valued.

The manager’s review can be adapted to the nature of the reporting, allowing for high level review for monthly or quarterly reporting as opposed to a full review for annual reporting.

The valuation must result in a single number.

Valuation ranges should not be used. However, if valuation ranges are provided by an external property valuer, it has to be clear which amount is being used in the reporting, for instance, the lowest, average or maximum value of this range.

In exceptional circumstances, deviations by managers from property valuations as determined by external property valuers must be clearly explained and disclosed.

If there is a disagreement between the manager and the property valuer on the market value parameters, these parameters must be clearly explained and disclosed. We expect these deviations and disagreements to occur only very rarely and if so, more in relation to opportunistic investments, where, for example, the manager and the external valuer have different views as to the likelihood of a particular event occurring (because, for example, the manager is in discussion with governmental bodies, potential buyers or tenants). Another example of deviation could be related to disagreement about value changes if there is a considerable time period between the actual date of external valuation and a later reporting date.

In such exceptional circumstances, the market value, as determined by the manager, must be reported in the balance sheet including full disclosure to justify the deviation from the market value arrived at by the external valuer.

Whatever the circumstances, appropriate internal procedures (including escalation measures) should be followed by the manager in the event of valuation adjustments.

In certain circumstances, the manager should consider and adjust on a case by case basis if there is an impact on the market value due to a liquidation situation or a winding-up (such that valuation should reflect a non-going concern basis).

While a market value estimate should, in principle, be free of any uncertainty clause and special assumption, the manager should in certain circumstances consider the potential effect of a liquidation value since a vehicle may not have the time for appropriate marketing of property in, among others, the following circumstances:

• distressed situations;
• liquidity issues;
• portfolio transactions;
• constraints on marketing (for instance due to debt maturities or maturity of the vehicle).

The manager shall consider on a case by case basis if there is an impact and whether or not it can be measured. Such impact should be taken into account when preparing the INREV NAV.

The following considerations and methodologies are to be used when determining performance measures:

Unitised basis versus NAV basis
In some countries, the performance of vehicles may be reported at a unit level. The guidelines have been developed on the basis that performance has been determined on aggregate NAV and cash flow basis.

GAAP
The methodologies described below assume that components of measures are determined in accordance with module 4 - inrev-nav#inrev-guidelines">INREV NAV, which is determined based on IFRS financial statements. Where this is not possible reference should be made to IFRS or local GAAP.

Dates of cash flows
Dates used for performance calculations should be based on cash flows between investors and the vehicle at the date as determined for accounting purposes. As a minimum, monthly and annual cash flows must be used however it is now common to use quarterly and daily cash flows where adoption would be encouraged, especially for open ended vehicles. For capital calls, the deadline of the capital call is to be used.

Open ended vehicles are subject to a potential constant in- and out-flow of capital. To accommodate for the large flows of capital, cash flows can be rolled up periodically, ideally on a monthly basis to the end of each month.

In the case of distributions for unitised vehicles the declared date should be used.

Closed ended vehicles should apply the dates where cash flows are called or distributed to investors. The date should reflect the effective date for capital calls where the capital should be paid in and for distributions where the capital was paid by the vehicle.

Valuation of properties
Property should be valued in accordance with guidelines defined in module 3 – Property Valuation.

Fees
Vehicle level performance measures may be calculated on three main levels:

• net of both management and performance fees (required);
• net of management fees (as defined in module 6 - Fee and Expense Metrics), but gross of performance fees (carried interest) (optional);
• gross of all management fees (optional).

Performance measures are computed net of all fees and any materialised carried interest (or any other kind of performance fee) and forecasted future (provisions for) carried interest payments. However, fees charged to investors as a result of the redemption of units or exit to/of the investors should not be considered when they are earned by the managers rather than the vehicle. Even though not required, performance measures may also be computed gross of management fees and carried interest payments.

When fees are charged to investors outside of the vehicle, performance measures should include these fees as if the fees had been billed directly to/inside the vehicle.

Currencies
Default performance should always be calculated in the vehicle denominated currency in order to reflect the true performance of the vehicle.

To illustrate the combined performance of multiple vehicles, composite performance maybe presented which combines the performance of each vehicle in a standardised way over time.

Grouping criteria
To ensure fair representation of composite performance, vehicles included in the same composite must share one or more common attribute.

Composites should be defined by common attributes. A suggested hierarchy of grouping criteria is provided below:

• Style (please refer to the INREV Style classification paper, not manager defined);
• Structure (open vs closed ended);
• Strategy;
• Points of reference;
• Leverage.

For closed ended vehicles composite performance should preferably be defined by the combination of vintage year and one of the above mentioned attributes.

All vehicles (both historic and live) in a manager’s track record must be included in a composite if a vehicle matches the grouping criteria. Where a vehicle matching the grouping criteria has been excluded from the composite, reasons for doing such is disclosed.

Calculation methodology
Time weighted return composite performance should be calculated by weighting the performance of each participating vehicle or segregated account with its share of the total composite’s size. The weighting is done at the same frequency as the valuations of the vehicles and time weighted.

For closed ended vehicle composites a since inception IRR is presented. As cash flows of vehicles participating in the composite are all sharing common vintage year and attributes, aggregating cash flows do not constitute a problem.

Further considerations for multiple computation
Some vehicles have the ability to recycle capital during the investment period (to reinvest returned equity capital). For equity multiple calculation purposes, any distributions that are included as a return of equity or return on equity for the purpose of the calculation (‘nominator’) should, if reinvested (recycled), also be added to the amount of drawn capital (‘denominator’) to give a fair reflection of the true ratio of returned equity to investors. This should be the case whether the recycled equity is actually distributed and recalled, or reinvested direct by the manager without physically distributing back to investors (to eliminate the back-and-forth flow of cash).

The fund documentation should include details of valuation rules and procedures, pricing methodology including the methods used in valuing hard-to-value assets, and the frequency of valuation for all material assets and liabilities of the vehicle.

The fund documentation should disclose the frequency of the NAV calculation.

The INREV NAV best practice requirements for the calculation of an adjusted NAV should be used for both open end and closed end vehicles. In this section direct links will be made to IFRS as a basis for calculating the required adjustments and, if needed, to other fair value concepts. If another basis of GAAP is used, further adjustments may be required to align with IFRS as the basis for determining an INREV NAV. References to further guidance by INREV on the interpretation of fair value and provision accounting will also be included.

A vehicle NAV calculated in accordance with IFRS should be adjusted for the following items to calculate an INREV NAV:

Reclassification of certain IFRS liabilities as a component of the INREV NAV:

a) Effect of reclassifying shareholder loans and hybrid capital instruments (including convertible bonds) that represent shareholders’ long term interest in a vehicle

Investors’ capital can take various forms aside from equity – examples include shareholder loans and hybrid capital instruments such as convertible bonds. Some vehicles are structured via a combination of equity participations and shareholder loans.

Shareholder loans and hybrid capital instruments are generally seen as part of the investors’ overall interest in the vehicle. They should be included as a component of equity in the INREV NAV and reclassified as such if they have been classified as liabilities in the financial statements of the vehicle under IFRS. The amount to be reclassified should reflect the corresponding carrying value of the liabilities in the IFRS accounts.

The existence of such instruments as part of the capital structure of a vehicle at its origination, or investor loans that are pari-passu to their equity stake and at off-market loan terms, are indicators, among others, that these items should be reclassified as part of the INREV NAV.

The reclassification should also take account of accrued interest, which is treated in a similar fashion to dividends.

b) Effect of dividends recorded as a liability which have not been distributed

Under certain circumstances dividends are recorded as a liability but have not yet been legally distributed. For the determination of INREV NAV, these accrued dividends should be reversed to the NAV.

Fair value of assets and liabilities

c) Revaluation to fair value of investment properties

If a real estate vehicle uses the option to account for investment properties under the cost model, this adjustment represents the impact on NAV of the revaluation of the investment property to fair value under the fair value option of IAS 40.

The effect of straight-lining of lease incentives, rent guarantees, insurance claims (for damages, lost rent, etc.) should be taken into account when valuing the property at fair value in accordance with IAS 40 and SIC 15 to ensure that any asset is not double-counted in the NAV.

d) Revaluation to fair value of self-constructed or developed investment property

If a real estate vehicle uses the option to account for self-constructed or developed investment property under the cost model, the adjustment represents the impact on NAV of the revaluation of the self-constructed or developed investment property to fair value under the fair value option of IAS 40.

e) Revaluation to fair value of investment property held for sale

Some investment properties may be classified as assets held for sale or as a group of assets held for sale. The carrying value of such investment properties depends on the chosen accounting treatment under IAS 40 (either fair value or cost).

The adjustment represents the impact on NAV of the revaluation of the investment property intended for sale, measured at fair value or cost, to the net realisable value (fair value less disposal costs).

f) Revaluation to fair value of property that is leased to tenants under a finance lease

Property that is leased to tenants under a finance lease is initially measured on a net investment basis and subsequently re-measured based on an amortisation pattern reflecting a constant rate of return.

The adjustment represents the impact on NAV of the revaluation of the finance lease receivable to fair value.

g) Revaluation to fair value of real estate held as inventory

Properties intended for sale and accounted for under IAS 2 (Inventory) are measured at the lower of cost or net realisable value in the financial statements. This adjustment represents the impact on the NAV of the revaluation of such properties to net realisable value (fair value less disposal costs). This adjustment should be included under the caption ‘revaluation to fair value of real estate held as inventory’.

Where the likely disposal date is more than one year from the date of the NAV computation, disposal costs should not be deducted from fair value in calculating this adjustment.

h) Revaluation to fair value of other investments in real assets

Under IAS16 other investments in real assets are normally accounted for at cost.

The adjustment represents the impact on NAV of the revaluation of other investments in real assets to fair value in accordance with the fair value assumptions under IFRS 13.

i) Revaluation to fair value of indirect investments not consolidated

Indirect investments in real estate, such as investments in associations and joint ventures, have different accounting treatments and carrying values under IFRS. Such investments can be valued at cost, fair value or NAV.

The adjustment represents the impact on NAV of the revaluation of indirect investments to fair value if not yet accounted for at fair value.

j) Revaluation to fair value of financial assets and liabilities (including revaluation to fair value of debt obligations)

Financial assets and liabilities such as hedging instruments or debt obligations are generally measured at amortised cost, taking into account any impairment when applicable. The adjustment represents the impact on NAV of the revaluation of financial assets and financial liabilities to fair value as determined in accordance with IFRS, if not yet accounted for at fair value.

In addition, vehicles may incur costs for redemption of bank debts as a result of sales of properties. As with disposal costs, these costs are generally not accrued in IFRS. Where the disposal of a property is expected within one year, and therefore, the redemption of the related bank debt is also expected within one year, any bank debt early redemption costs should be accrued in the NAV.

k) Revaluation to fair value of construction contracts for third parties

Under IAS11, construction contracts for third parties are normally accounted for based on the stage of completion. The adjustment represents the impact on NAV of the revaluation of construction contracts for third parties to fair value in accordance with the fair value principles of IFRS 13.

Adjustments to reflect the spreading of one-off costs

As described in further detail below, set-up costs and acquisition expenses should be capitalised and amortised. The rationale for these adjustments is to spread these costs over a defined period of time to smooth the effect of the write-off of costs on the vehicle’s performance. Furthermore, it is a simple mechanism to spread costs between different investor groups entering or leaving the vehicle’s equity at different times.

In practice, there are many other ways in which vehicles address such issues for pricing, valuation, or other purposes including using bid-ask spreads for issue premium or redemption discounts on the NAV calculated on the basis of set percentages, the capitalisation and amortisation of such costs over different time periods or, indeed, not taking into account such costs at all in the calculation of the vehicle NAV. Since the INREV NAV is primarily intended to facilitate comparability between different vehicles, the INREV approach is a simple but fixed methodology. Please note that these capitalised costs are subject to an impairment test each time the NAV is calculated and therefore should always be recoverable over time. As the adjustments with respect to set-up costs are separately disclosed in the calculation of a vehicle’s INREV NAV, investors can choose how these are taken into account when valuing their holding.

l) Set-up costs

Under IFRS, vehicle set-up costs are charged immediately to income after the inception of a vehicle.

Such costs should be capitalised and amortised over the first five years of the term of the vehicle.

The rationale for capitalising and amortising set-up costs is to better reflect the duration of the economic benefits to the vehicle.

When capitalising and amortising set-up costs, a possible impairment test should be taken into account every time the adjusted NAV is calculated when market circumstances change and it is not expected that the capitalised set-up costs can be recovered through the sale of units of a vehicle. For instance, when a decision is made to liquidate the vehicle or stakeholders no longer expect to recover the economic benefit of such capitalised expenses, they should be written down.

m) Acquisition expenses

Under the fair value model, acquisition expenses of an investment property are effectively charged to income when fair value is calculated at the first subsequent measurement date after acquisition. This results in the fair value of a property on subsequent fair value measurement being lower than the total purchase price of the property, all other things being equal.

Property acquisition expenses should be capitalised and amortised over the first five years after acquisition of the property.

The rationale for capitalising and amortising acquisition expenses is to better reflect the duration of the economic benefits to the vehicle of these costs.

When capitalising and amortising acquisition costs, a possible impairment test should be taken into account every time the adjusted NAV is calculated when market circumstances change and it is not expected that the capitalised acquisition costs can be recovered through the sale of units of a vehicle.  When a property is sold during the amortisation period or is classified as held for sale, the balance of capitalised acquisition expenses of that property should be expensed.

n) Contractual fees

A liability represents a present obligation as a result of past events. A fee payable at the end of the life of a vehicle or at any other time during the life of a vehicle may not meet the criteria for recognition as a provision or liability in accordance with IFRS at reporting date.

Examples of such fees include performance fees, disposal fees, or liquidation fees, representing a present obligation from contractual arrangements.

Most of these fees are normally accrued under IFRS accounting rules. The adjustment represents the impact on the NAV of the amount of the estimated contractual fees payable based on the current NAV of the vehicle in the rare circumstances in which these fees are not already recognised in financial statements produced under IFRS and it is probable that they will be incurred. In order to determine the amount of the adjustment, reference should be made to IFRS standards for the measurement (but not necessarily the recognition) of provisions or deferred liabilities.

A description of the calculation methodology and the terms of the underlying agreement should be disclosed (or reference could be made to the related party disclosures in which such agreements and terms are explained).

Effects of the expected manner of settlement of sales/vehicle unwinding

o) Revaluation to fair value of savings of purchaser’s costs such as transfer taxes

Transfer taxes and purchaser’s costs which would be incurred by the purchaser when acquiring a property are generally deducted when determining the fair value of investment properties under IAS 40.

The effect of an intended sale of shares in a property-owning vehicle, rather than the property itself, should be taken into account when determining the amount of the deduction of transfer taxes and purchaser’s costs, to the extent this saving is expected to accrue to the seller when the property is sold.

The adjustment therefore represents the positive impact on the NAV of the possible reduction of the transfer taxes and purchaser’s costs for the benefit of the seller based on the expected sale of shares in the property-owning vehicle.

Disclosure should be made on how the estimate of the amount the manager expects to benefit from intended disposal strategies has been made. Reference should be made to both the current structure and prevailing market conditions.

p) Revaluation to fair value of deferred taxes and tax effect of INREV NAV adjustments

Under IFRS, deferred tax assets and liabilities are measured at the nominal statutory tax rate. The manner in which the vehicle expects to realise deferred tax (for example, for investment properties through share sales rather than direct property sales) is generally not taken into consideration.

The adjustment represents the impact on the NAV of the difference between the amount determined in accordance with IFRS and the estimate of deferred tax which takes into account the expected manner of settlement (i.e., when tax structures and the intended method of disposals or settlement of assets and liabilities have been applied to reduce the actual tax liability).

Disclosures should include an overview of the tax structure including, for instance, details of the property ownership structure, key assumptions and broad parameters used for estimating deferred taxes for each country, the maximum deferred tax amount estimated assuming only asset sales (i.e., without taking into account the intended method of disposal) and the approximate tax rates used.

It is possible that the estimate of the amount of the adjustment required to bring the deferred tax liability related to property disposals to fair value could have a large impact on the INREV NAV. Since tax structures may differ from vehicle to vehicle, significant judgement is required and the mechanics of the calculation methodology for this adjustment may vary from vehicle to vehicle. Other components of the overall deferred tax adjustment require less judgement and are more mechanical in nature.

This adjustment should include a full assessment of the tax impact on NAV of INREV NAV adjustments.

As with IFRS, deferred tax balances are not discounted to take into account time value of money.

q) Effect of subsidiaries having a negative equity (non-recourse)

The NAV of a consolidated group under IFRS may include the net liability position of subsidiary undertakings. In practice, however, the group may have neither a legal nor a constructive obligation to fund the accumulated losses in situations where the financing of the subsidiaries is non-recourse to the vehicle.

In this scenario it is appropriate to make an adjustment when calculating the INREV NAV in order to recognise the group’s interest in such subsidiaries at nil or an adjusted negative amount rather than at a full net liability position, to the extent there is no intention or obligation on the vehicle to make good those losses.

The adjustment represents the positive impact on the NAV of the partial or full reversal of the negative equity of the specific subsidiary. If the vehicle has granted shareholder loans to the subsidiary, these should be taken into account.

Other adjustments

r) Goodwill

At acquisition of an entity which is determined to be a business combination, goodwill may arise as a result of a purchase price allocation exercise. Often a major component of such goodwill in property vehicles reflects the difference between the full recognition of deferred tax, purchaser’s costs or similar items in the IFRS accounts (which does not generally take account of the likely or intended method of subsequent exit), and the economic value attributed to such items in the actual purchase price. Except where such components of goodwill have already been written off in the NAV as determined under IFRS, they should be written off in the INREV NAV.

s) Non-controlling interest effects on the above adjustments

This adjustment represents the impact on the NAV of the recognition of non-controlling interests on all of the above adjustments.

Computation of INREV NAV per share and effect of exercise of options, convertibles and other equity interests

The INREV NAV represents the economic value of the total investment by the investors as a group. To derive the NAV per unit, managers should take into consideration any rights (such as carried interest, performance fees, manager remuneration schemes, terms or different classes of units, NAV waterfall calculation, option shares etc.) held by equity shareholders, or prospective equity stakeholders (in the case of options) of the vehicle in allocating the overall INREV NAV of the vehicle to individual classes of equity shareholders and in determining the individual value of units or shares.

In some circumstances, where the vehicle has raised and called capital, some investors may not have fully paid in their contributions. The INREV NAV per share should take into account the impact of called but unpaid capital.

INREV NAV disclosure requirements

Managers should make following disclosures related to the NAV computation:

• the reconciliation between GAAP NAV and INREV NAV should be presented in line with guideline NAV03

Managers should explain material estimates and computation methodologies to enable investors to understand the components of the reconciliation between GAAP NAV and INREV NAV. Explanatory notes to the reconciliation should describe key assumptions, methods used, and in particular:

• the basis for reclassifying certain shareholder loans or hybrid capital instruments as a component of equity;
• the basis for the determination of fair value of investment property, self-constructed or developed investment property, property that is leased to tenants under finance lease, investment property held for sale and real estate held as inventory;
• the basis of the estimate of other investments in real estate assets;
• the basis for the determination of the fair value of indirect investments not consolidated;
• details of the methodology used to calculate the fair value of financial assets and liabilities;
• the basis of the estimate of the fair value of construction contracts with third parties;
• the basis of the estimate of the fair value of contractual fees;
• details of the assumptions used to estimate the fair value of deferred tax and the tax effect of INREV NAV adjustments. Such disclosure gives an overview of the tax structure including, for instance, details of the property ownership structure, key assumptions and broad parameters used for estimating deferred taxes for each country, the maximum deferred tax amount estimated assuming only asset sales (i.e., without taking into account the intended method of disposal) and the approximate tax rates used;
• reasons for making adjustments to the carrying value of subsidiaries having negative equity (non-recourse);
• under IFRS, the fair value of investment properties does not take into account the expenses incurred by the seller when selling a property. As with IFRS, no adjustment is required to include a provision for such costs in the INREV Guidelines, unless they are held for sale. The manager should, however, estimate and disclose the amount of disposal costs likely to be incurred on the sale of properties, taking account of the intended method of exit, assuming an exit without duress and in the current market environment;
• set-up costs - Description of impairment and reasons for booking if applicable;
• set-up costs - Description of the reasons for departure from the five year amortisation period if applicable;
• acquisition expenses - Description of impairment and reasons for booking if applicable;
• acquisition expenses - Description of the reasons for departure from the five year amortisation period if applicable.

What is the rationale behind the adjustments in determining the INREV NAV whereby set-up costs and acquisition expenses are capitalised and amortised over five years? Do these adjustments not simply inflate the NAV of the entity given that the property portfolio is already included at its fair value in the NAV calculation?

The initial main aim of the INREV NAV is to help compare vehicle performance across a peer group and for the valuation of the investment in the units for accounting purposes at the investor level.

During the initial INREV NAV project in 2007 it was decided after several workshops, interviews and the white paper process to have one INREV NAV for both open end and closed end vehicles, with the intention of increasing comparability. It was noted that for some adjustments the suggested treatment would not necessarily lead to the correct approach for certain types of vehicle. However, when measuring performance of different types of vehicle (such as in the INREV INDEX), comparability would be increased if all vehicles treated adjustments in the same way.

The initial rationale for capitalising and amortising set-up/acquisition expenses is to better reflect the duration of economic benefit to the vehicle of these costs. This is for both performance measurement and valuation of investments.

This was prompted by the fact that, under IFRS, set-up costs are charged immediately to income after the start/inception of a vehicle and under the fair value model, acquisition expenses of investment property are effectively charged to income when fair value is calculated at the first subsequent measurement date after acquisition – resulting in the so-called J-curve.

Performance measurement

Based on the outcome of the analyses in 2007 it was INREV’s intention to use an adjusted NAV for performance measurement (including in the INREV Index) to mitigate the negative effects of the J-curve. If for performance measurement different types of vehicle, with different vintages, are compared in one index the treatment of set-up costs and acquisition expenses as a one-off expense would lead to an underperformance of that specific vehicle, in comparison with its point of reference, in the first years of the life of the vehicle (acquisition phase). For the years up to the disposal phase it would more easily outperform the point of reference, as the effects of the J-curve arising on new vehicles would lower the overall performance point of reference. During the disposal phase, a vehicle would generally underperform the point of reference as the one-off effects of the disposal costs would have a negative effect on the individual performance of the vehicle.

Valuation of units in investment vehicles

With the amortisation of set-up costs and property acquisition expenses the effect of the so-called “J-curve” can be eliminated in the valuation of units in investment vehicles. Some investors were using an adjusted NAV for valuation, others, at that time, were recording the investments at cost for the first three years and only starting to use IFRS NAV when the appreciation of real estate values had driven IFRS NAV above the initial cost price.

Furthermore, it was noted that investors were of the opinion that such expenses have a value, and were seen as part of the initial investment. These costs were directly incurred in order to receive direct returns from the rental income and hopefully indirect returns by way of value appreciation upon liquidation. This return would flow back to the investor during the whole holding period of an investment.

As described in module 4 of the INREV guidelines, INREV’s objective in establishing these guidelines is to provide managers with guidance on how to calculate and disclose an INREV NAV in financial reports of non-listed European real estate vehicles. This should lead to transparency and comparability of the performance of different types of vehicles.

One of the purposes of reporting is to present investors with information relevant to the performance and valuation of their investment. The NAV derived from generally accepted accounting principles (GAAP), including IFRS, does not necessarily fulfil this objective. The INREV guidelines have therefore been prepared to provide an industry specific framework to enable managers to calculate a more meaningful adjusted NAV.

For the sake of clarity, all of the adjustments presented in the guidelines are based on IFRS. However, IFRS also offer some options and INREV adjustments may differ based on the selected option (i.e: cost versus fair value). Consequently, the guidelines are describing all the adjustments which should be done in order to compute an INREV NAV.

Taking this into consideration, it is not mandatory to first calculate an IFRS NAV, adjustments can be applied directly to the chosen GAAP as long as the fund manager clearly understands the purpose of the adjustments and amends the adjustments accordingly.

If the adjustments are performed correctly, the INREV NAV should be the same whatever the initial starting point GAAP was.

How can fund managers and investors access their own materiality and disclose this?

Calculating INREV NAV, the question might arise if a certain suggested INREV NAV adjustment would have a material impact on the total INREV NAV.

The reason might be that a fund manager has to take some effort to collect, assess, calculate and evaluate all data and information that is needed to come to a correct INREV NAV Adjustment with sufficient disclosure.

Expecting only immaterial effects and considering the cost-benefit-ratio fund managers might want to decide not to include a certain adjustment.

INREV does not feel to be in the position to determine an accepted amount or % of materiality for INREV NAV Adjustments since materiality level could be different for each vehicle, fund manager, investor or other user of the INREV NAV (for example indices).

Guidance on Materiality can be found in the International Standard on Auditing (ISA) 320: Materiality in Planning and Performing an Audit.

Financial reporting frameworks often discuss the concept of materiality in the context of the preparation and presentation of financial statements. Although the topic is approached in different terms, it is generally explained that:

• Misstatements, including omissions, are considered to be material if they, individually or in the aggregate, could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements;
• Judgments about materiality are made in light of surrounding circumstances, and are affected by the size or nature of a misstatement, or a combination of both; and
• Judgments about matters that are material to users of the financial statements are based on a consideration of the common financial information needs of users as a group. The possible effect of misstatements on specific individual users, whose needs may vary widely, is not considered.

Determining materiality involves the exercise of professional judgment. A percentage is often applied to a chosen point of reference as a starting point in determining materiality for the financial statements/INREV NAV as a whole.

In the case of a regulated vehicle, the determination of materiality for the financial statements/adjusted NAV, INREV NAV as a whole (and, if applicable, materiality level or levels for particular classes of transactions, account balances, INREV NAV adjustments or disclosures) is/might therefore be influenced by law, regulation or other authority.

Based on circumstances a fund manager could assess if there is a need for a materiality. The materiality could be used to decide not to include certain adjustments.

Since assessing materiality levels might be a complex exercise, INREV recommends to request the auditor of the vehicle what the specific materiality is that he is using for the audit of the financial statements as a whole.

If a fund manager for what so ever reason does not want to include one or more adjustments, the impact on the total INREV NAV should be assessed as a whole. Leaving out one or more individual immaterial adjustments can sum up to a total material error

Further guidance on determining materiality can be found on the website of www.ifac.org.

If the fund manager decided not to include an adjustment, since he expects that leaving out that adjustment should not have a material effect on the INREV NAV in total, proper disclose should be provided.

The fund manager shall include in the disclosure notes to the INREV NAV calculation sufficient background of his decision and the following amounts and the factors considered in their determination:

1. Which adjustments are not included as a result of materiality;
2. What the rational is for not included these adjustments;
3. A statement that in the opinion of the fund manager not including the(se) adjustment(s) does not have a material effect on the INREV NAV as a whole;
4. If applicable, the materiality level or levels for particular classes of transactions, account balances, INREV NAV adjustments or disclosures

VERNI Real Estate S.A. - and notes

The Balance sheet and Profit and Loss account of VERNI Real Estate S.A. are prepared according to IFRS accounting principles.

The Balance sheet and Profit and Loss account of VERNI Real Estate S.A. are prepared according to IFRS accounting principles.

Accounting principle IFRS

Current and deferred income tax

The tax expense for the period comprises current and deferred tax. Tax is recognised in the income statement, except to the extent that it relates to items recognised directly in other comprehensive income or equity - in which case, the tax is also recognised in other comprehensive income or equity.  

The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the date of the statement of financial position in the countries where the Group operates. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation, and establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.

Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the date of the statement of financial position and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.

Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.

The carrying value of the Group’s investment property is assumed to be realised by sale at the end of use. The capital gains tax rate applied is that which would apply on a direct sale of the property recorded in the consolidated statement of financial position regardless of whether the Group would structure the sale via the disposal of the subsidiary holding the asset, to which a different tax rate may apply. The deferred tax is then calculated based on the respective temporary differences and tax consequences arising from recovery through sale.

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.

Initial recognition exemption

DTL should be recognized for all taxable temporary differences, except when DTL arises from [IAS12.R15]:

1. The initial recognition of goodwill or;
2. The initial recognition of an asset or liability in a transaction which:

• is not a business combination and
• at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss)

No deferred tax liability should then be recognised because of the initial recognition exemption rule.

INREV NAV principle on deferred taxes

(Revaluation to fair value of deferred taxes and tax effect of INREV NAV adjustments)

Revaluation to fair value of deferred taxes and tax effect of INREV NAV adjustments Under IFRS, deferred tax assets and liabilities are measured at the nominal statutory tax rate.  

The manner in which the vehicle expects to realise deferred tax (for example, for investment properties through share sales rather than direct property sales) is generally not taken into consideration.   

The adjustment represents the impact on the NAV of the difference between the amount determined in accordance with IFRS and the estimate of deferred tax which takes into account the expected manner of settlement (i.e., when tax structures and the intended method of disposals or settlement of assets and liabilities have been applied to reduce the actual tax liability).  

Disclosures should include an overview of the tax structure including, for instance, details of the property ownership structure, key assumptions and broad parameters used for estimating deferred taxes for each country, the maximum deferred tax amount estimated assuming only asset sales (i.e., without taking into account the intended method of disposal) and the approximate tax rates used.

It is possible that the estimate of the amount of the adjustment required to bring the deferred tax liability related to property disposals to fair value could have a large impact on the INREV NAV. Since tax structures may differ from vehicle to vehicle, significant judgement is required and the mechanics of the calculation methodology for this adjustment may vary from vehicle to vehicle. Other components of the overall deferred tax adjustment require less judgement and are more mechanical in nature.  

This adjustment should include a full assessment of the tax impact on NAV of INREV NAV adjustments.

As with IFRS, deferred tax balances are not discounted to take into account time value of money.

Tax structure

• A fund is structured that it has 6 properties in different countries.
• These are held via 4 SPV's.

[1] Due to initial recognition exemption (FV at acquisition 45,000,000)

How should this adjustment be calculated? Is it appropriate to calculate this as a fixed percentage (e.g., 50%) of the deferred tax liability calculated for the vehicle under IFRS/local GAAP on a portfolio basis or any other aggregate basis?

The rationale behind this adjustment is that under IFRS (and many other GAAPs) deferred tax liabilities are measured at the nominal statutory tax rate. The manner in which a vehicle expects to settle deferred tax is generally not taken into consideration. Accordingly, the provision calculated on this basis may not be representative of the fair value of deferred tax liabilities (i.e., the actual amounts expected to be crystallised upon disposal of the property assets).

In calculating the adjustment of the fair value of the liability, based on the expected manner of settlement, the adjustment should be assessed on an asset-by-asset basis.

For each asset, therefore, consideration should be given as to the most likely form of disposal (e.g., asset deal or share deal) based on the intended disposal method and tax structuring of the asset as well as market conditions relevant to that property as at the date of calculation. Assumption of changes in disposal method based on as-yet unrealised future changes in market conditions are considered too subjective for the purposes of calculating the INREV NAV adjustments. If applicable, the history of the entity with regard to disposals should also be considered. The fair value of the deferred tax liability is then calculated in accordance with the assessed manner of settlement as well as the applicable rates at which the transaction would be taxed. IFRS allows only the rates that have been enacted or substantially enacted at the balance sheet date to be used whereas rates which have been enacted or substantially enacted after the balance sheet date can be used for the purposes of calculating the INREV NAV adjustment.

The calculation should also take into account any discounts to the sale price of a property sold via a share deal that are likely to be granted. For example, it may be that the sale of the shares of the property-owning entity is exempt from tax (or attracts minimal tax) but a deduction in respect of the latent capital gain within the property owning entity is made in arriving at the sale price. This amount in addition to any tax likely to crystallise on the disposal transaction should be taken into account when calculating the INREV NAV adjustment.

On this basis, therefore, a fixed percentage approach as outlined above will not be appropriate unless it represents a reasonable estimate of the adjustment required in respect of the deferred tax liability for each of the individual properties in the portfolio.

It is imperative to ensure that the calculation of the adjustment, either in part or in full, is not already included within the deferred tax liability calculated for the vehicle under IFRS/local GAAP, so as to avoid double-counting of the adjustment. Care should also be taken to ensure that there is no double-counting between this adjustment and the INREV adjustment on transfer taxes with regard to the valuation of property. For avoidance of doubt, transfer taxes should not be included within the scope of the deferred taxation adjustment calculation.

Given the subjective and complex nature of this calculation, therefore, it is recommended that managers document a formal internal policy with regard to the calculation methodology and review the policy on an ongoing basis (for example, with respect to changes in tax law and market conditions) in order to ensure that it remains appropriate. Disclosure should be given on the overall tax structure, including the overall ownership structure, key assumptions and broad parameters for each country, what the maximum taxation calculation would be on a traditional basis (i.e., without tax structures) and the approximate tax rate as a percentage.

How should this adjustment be calculated? Is it appropriate to compute this as a fixed percentage (e.g., 50%) of the transfer taxes for the vehicle under IFRS/local GAAP?

The calculation of the adjustment to the deduction of transfer tax (and other purchaser’s costs) inherent in the property valuation based on the expected manner of settlement, should be assessed on an asset-by-asset basis.

For each asset, therefore, consideration should be given as to the most likely form of disposal (e.g., asset deal or share deal) based on the intended disposal method and tax structuring of the asset as well as market conditions relevant to that property. If applicable, the history of the entity with regard to disposals and the agreed allocation of the tax burden between the seller and the purchaser should also be considered. This is the same rationale as for the calculation of the deferred tax liability adjustment. Where the assessed disposal method would result in a reduction in the transfer taxes (and purchaser’s costs) in the fair valuation of the property, this adjustment is made in arriving at the INREV NAV. However, the adjustment should only be included to the extent to which it is not already included in the property valuation, in order to avoid double-counting.

For this reason it is important that transfer taxes and other purchaser’s costs are considered as separate components when computing the adjustment. The same reduction may not be appropriate in both cases. For example, a share deal disposal may result in lower transfer taxes but may, in fact, increase the other purchaser’s costs due to the need for additional legal expenditure and diligence required to complete any such deal.

On this basis, therefore, a fixed percentage approach as outlined above will not be appropriate unless it represents a reasonable estimate of the adjustment required for both transfer taxes and other purchaser’s costs for each of the individual properties in the portfolio.

Given the subjective and complex nature of this calculation, therefore, it is recommended that managers document a formal internal policy with regard to the calculation methodology and review the policy on an ongoing basis (for example, with respect to changes in tax law and market conditions) in order to ensure that it remains appropriate. Adequate disclosures should also be provided so that users of the financial information can understand the calculation methodology with regard to the adjustment, as well as the key assumptions that the manager has made in the calculation and how the manager expects to utilise this additional value based on the current structure and market circumstances.

How should the INREV Guidelines be applied when valuing an entity’s investment in an associate/joint venture which is accounted for in the IFRS/local GAAP accounts of the entity (using either the equity method or proportionate consolidation)?

For the purposes of the INREV NAV, management’s best estimate of the fair value of the entity’s holding in the associate/joint venture should be used. Depending on the type of investment there will be a hierarchy of valuation methods in order to assess this:

1.   If the investment is quoted on an active market then the fair value should be calculated using the quoted price as at the calculation date;

2.   For investments in vehicles where there is a right of redemption at a contractually set NAV, then this should be used to value the holding irrespective of whether this NAV is consistent with INREV Guidelines;

3.   If the investment is in a closed end vehicle or a similar type of entity and there is no fixed redemption price or listed price then the fair value of the holding should be estimated so as to be consistent with INREV Guidelines;

4.   If there is not sufficient information available to compute the INREV NAV of the investment then another valuation technique should be used including, for example, an estimate based on recent comparable transactions if these are available.

Should the INREV NAV calculation include a portfolio premium/discount where, for example, the independent appraiser’s valuation report includes a statement that the portfolio as a whole would command a premium/discount in addition/decrease to/of the individually appraised values of each property?

The portfolio premium/discount should not be included in the INREV adjusted NAV and, according to the INREV Guidelines for property valuation, should not be included within the fair value of property. Nevertheless it is recommended that any such premium or discount be disclosed separately.

Is it not the case that, for open end vehicles, there is no need for fair valuations for hedging derivatives on the basis that upon maturity the value of these should be nil?

For both closed end and open end vehicles, the diluted INREV NAV should reflect all hedging derivatives at their fair value.

Vehicle documentation should include a statement of the level of compliance with this module and of the fee and expense metrics that are expected to be disclosed to investors by the manager.

Fees and costs should be measured in line with the principles defined under INREV NAV and INREV GAV.

Fees describe charges borne by the vehicle for services provided by the manager and costs describe charges to a vehicle by external service providers. Fees charged by the manager directly to their investors are not taken into account, with the exception of fees charged for services rendered to the vehicle.

Where a single fee is charged to cover a variety of activities, the constituent elements will need to be identified, allocated to the appropriate cost category and disclosed appropriately.

An historic TER, including and excluding performance fees, based on both the time-weighted average INREV GAV and the time-weighted average INREV NAV of the vehicle over one year, should be provided annually.

TER is expressed as a percentage of time-weighted average INREV NAV. However, the degree of leverage within a vehicle distorts the comparability of the measure when it is based on NAV. It is therefore also expressed as a percentage of INREV GAV.

The components of the numerator include the vehicle fees and costs for the reporting period, as defined below.

The components of the numerator include the vehicle fees and costs for the reporting period, as defined below.

Some fees, such as property-level fees charged by the manager, should not be included when calculating the TER; they do however form part of the REER (see below). If the manager charges a single fee covering both property and vehicle management activities, it should be split into its constituent elements.

TER should be disclosed both including and excluding performance fees, due to various structural methods of distribution, and each calculation should be separately disclosed.

The formulae for TER are:

The TER is an historic or ‘actual’ figure, based on data published annually. Consequently, newly launched vehicles cannot have an historic TER.

An historic REER, based on the time-weighted average INREV GAV of the vehicle over one year, should be disclosed annually.

While the TER relates to the operating costs borne by the vehicle, the REER captures only those costs that relate to the management of the real estate assets. The REER includes the property-specific costs described below.

The numerator should include the fees and costs associated with managing the properties, while the denominator should be the time-weighted average INREV GAV.

The formula for REER is:

Forward-looking ratios and metrics are useful items in the vehicle documentation. However, they are ‘theoretical’, in that they are based on estimated costs, anticipated numbers of assets, and assumptions such as growth rate, vehicle life and tax structuring. Requirements for forward-looking fee and expense metrics at the vehicle launch stage are described below. Once the vehicle has commenced operations, there should be no further requirement for forward-looking metrics as historic metrics based on historic data should then be available.

A forward-looking TER, based on both the time-weighted average INREV GAV and the time-weighted average INREV NAV for the first year when the vehicle is expected to be stabilised, should be provided in the documentation. These measures should be calculated following the same methodology as for an historic TER, although they will be based on estimates.

The forward-looking TER is calculated after performance fees, such that all vehicle costs as set out below are taken into account.

The forward-looking TER should be accompanied by disclosure of the estimates used to calculate this metric.

A forward-looking REER, based on the time-weighted average INREV GAV of the vehicle for the first year when the vehicle is expected to be stabilised, should be provided in the documentation. This should be calculated following the same methodology as for an historic REER, although it will be based on estimates.

The forward-looking REER should be accompanied by a disclosure of the estimates used to calculate this metric.

Fees and costs should be classified consistently for the purpose of calculating the INREV fee and expense metrics.

They should be classified as follows:

Vehicle fees included in the TER comprise:

• Asset management fees (certain services);
• Fund management fees;
• Performance fees (including carried interest);
• Wind-up fees.

​​Vehicle costs included in the TER comprise:

• Audit costs;
• Bank charges;
• Custodian costs;
• Dead deal costs;
• Other/miscellaneous vehicle costs;
• Other professional service costs;
• Transfer agent costs;
• Valuation costs;
• Vehicle administration costs;
• Vehicle formation costs (amortisation for the period).

The costs incurred by Special Purpose Vehicles (“SPVs”), which sit above the acquisition structure in the holding structure, are included in vehicle expenses. Costs of this nature that are charged to the acquisition vehicle should also be included in this category.

Property fees included in the REER are directly attributable to the management and the maintenance of specific properties. These fees comprise:

• Asset management fees (certain services not included in the TER);
• Internal leasing commissions;
• Property acquisition fees (amortisation for the period);
• Property management fees.

Property costs included in the REER are directly attributable to the management and the maintenance of specific properties. These costs comprise:

• External leasing commissions;
• Property acquisition costs (amortisation for the period);
• Other/miscellaneous/sundry costs;
• Property insurance costs;
• Property management costs;
• Repairs and maintenance costs;
• Taxes on property-related activities;
• Utilities costs (non-rechargeable portion).

Fees and costs excluded from the TER and REER comprise:

• Deferred taxes on property-related activities
• Development costs;
• Disposition costs;
• Fair value adjustments;
• Financing costs;
• Financing fees charged by managers;
• Gain/loss on currency exchange rates;
• Gain/loss on investment disposition;
• Goodwill write-off;
• Impairment of goodwill;
• Losses on disposal of subsidiaries;
• Payments related to financial derivatives;
• Project management fees;
• Provisions and allowances;
• Receivables write-off costs;
• Rent free/discounts;
• Securities handling charges;
• Share of losses of associates and joint ventures;
• Taxes on real estate transactions;
• Unwinding of discounts and effect of changes in discount rate on provisions.

The constituent elements of the metrics calculations should be disclosed annually.

The following notes clarify the components of each fee and expense metric and should also be read in conjunction with the classifications shown in the fees and costs matrix.

A.    Includes vehicle fees and costs
B.    Includes vehicle fees and costs, and any performance fees which have either been paid, accrued, or disclosed as a potential liability, and were included in the INREV NAV and INREV GAV
C.    Includes property fees and costs

There should also be a clear disclosure of all the fees charged by the manager and the activity to which they relate. A disclosure table should be presented annually providing an analysis of all components of the fees (including any element of performance fee) earned by the manager or by any other affiliate or related party of the manager, for the management of the vehicle.

The fees included in this table should be accounted for in the financial statements for the financial reporting period concerned, in accordance with accounting conventions used by the vehicle.

For the disclosure of the INREV TER and REER a calculation based on INREV NAV and INREV GAV is required.

In using/preparing the INREV TER and REER the question might arise about which components should be included in calculating the (INREV GAV) denominator of these ratios.

The fund manager should be transparent in its reporting to investors and explain the methodology and assumptions used for the calculation of the GAV, as required by both INREV NAV and Fee and Expense Metrics modules.

The Total Assets derived from Generally Accepted Accounting Principles (GAAP), including IFRS, could be used as a starting point in the calculation of the denominator of the ratios presented in the Fee and Expense Metrics module.

INREV suggests to start from the same accounting framework as it was used in calculating the INREV NAV, i.e., IFRS, local GAAP or other vehicle specific GAAP.
From there, the various adjustments should be included, or excluded, to come to an INREV GAV that can be used in the calculation of the INREV TER and REER.

In preparing this Q&A the guidance provided to the users should be read in light of the requirements included in the Fee and Expense Metrics module.

It should be noted that the INREV GAV used for the INREV TER and REER calculation might be different than an adjusted GAV used for performance measurement or other disclosure requirements. Additional adjustments could be included, or excluded, to come to an adjusted GAV to better suit a particular purpose.

The INREV GAV guidance overrides the accounting principles by making adjustments to the results arrived at by following the chosen GAAP.

INREV GAV adjustments require some material judgment by the manager. Consequently, it is important to include sufficient disclosures to allow investors to understand positions taken by the manager.

In this Q&A, direct links will be made to IFRS as a basis for calculating the required adjustments, and if needed, to other fair value concepts. If another basis of GAAP is used as a starting point, further adjustments may be required to align with IFRS for determining the INREV GAV. References to further guidance by INREV on the interpretation of fair value and provision accounting are also included.

For the use of calculating the INREV TER and REER, a vehicle GAV calculated in accordance with IFRS should be adjusted for the following items:

INREV GAV adjustment table:

Fair value of assets

a) Revaluation to fair value of investment properties

If a real estate vehicle uses the option to account for investment properties under the cost model, this adjustment represents the impact on GAV of the revaluation of the investment property to fair value under the fair value option of IAS 40.

The effect of straight-lining of lease incentives, rent guarantees, insurance claims (for damages, lost rent, etc.) should be taken  into account when valuing the property at fair value in accordance with IAS 40 and SIC 15 to ensure that any asset is not double counted in the GAV.

b) Revaluation to fair value of self-constructed or developed investment property

If a real estate vehicle uses the option to account for self-constructed or developed investment property under the cost model, the adjustment represents the impact on GAV of the revaluation of the self-constructed or developed investment property to fair value under the fair value option of IAS 40.

c) Revaluation to fair value of investment property held for sale

Some investment properties may be classified as assets held for sale or as a group of assets held for sale. The carrying value of such investment properties depends on the chosen accounting treatment under IAS 40 (either fair value or cost).

The adjustment represents the impact on GAV of the revaluation of the investment property intended for sale, measured at fair value or cost, to the net realisable value (fair value less disposition costs).

d) Revaluation to fair value of property that is leased to tenants under a finance lease

Property that is leased to tenants under a finance lease is initially measured on a net investment basis and subsequently re-measured based on an amortisation pattern reflecting a constant rate of return.

The adjustment represents the impact on GAV of the revaluation of the finance lease receivable to fair value.

e) Revaluation to fair value of real estate held as inventory

Properties intended for sale and accounted for under IAS 2 (Inventory) are measured at the lower of cost or net realisable value in the financial statements. This adjustment represents the impact on the GAV of the revaluation of such properties to net realizable value (fair value less disposition costs). This adjustment should be included under the caption ‘revaluation to fair value of real estate held as inventory’.

Where the likely disposition date is more than one year from the date of the GAV computation, disposition costs should not be deducted from fair value in calculating this adjustment..

f) Revaluation to fair value of other investments in real assets

Under IAS16 other investments in real assets are normally accounted for at cost.

The adjustment represents the impact on GAV of the revaluation of other investments in real assets to fair value in accordance with the fair value assumptions under IFRS 13.

g) Recognition to fair value of indirect investments not consolidated

Indirect investments in real estate, such as investments in associations and Joint Venture ">joint ventures, have different accounting treatments and carrying values under IFRS. Such investments can be valued at cost, fair value or NAV.

The adjustment represents the impact on GAV of the recognition of indirect investments not consolidated and depending on the type of investment at fair value.

Under this adjustment, two situations can be identified:

1. Investments for which fees and costs are proportionally taken into consideration in the calculation of the fee and expense metrics

The adjustment represents the impact on GAV when including the proportional GAV of the associations and joint ventures based on the share that the vehicle holds.

In this case, all assets should be included proportionally for the share that the vehicle holds in the assets of the associations or joint venture. These assets should be valued in accordance with the guidance provided herein. All corrections should be taken into consideration and should be reflected, as applicable, when calculating the INREV GAV for the purpose of preparing the INREV TER and REER.

2. Investments for which fees and costs are not taken into consideration in the calculation of the fee and expense metrics

The adjustment represents the impact on GAV of the revaluation of indirect investments to fair value, if not yet accounted for at fair value. Reference is made to the INREV NAV guidelines, and more specifically to Q&A-4 of the INREV NAV module.

h) Revaluation to fair value of financial assets

Financial assets are generally measured at amortised cost, taking into account any impairments (when applicable). The adjustment represents the impact on GAV of the revaluation of financial assets to fair value, as determined in accordance with IFRS, if not yet accounted for at fair value.

i) Revaluation to fair value of construction contracts for third parties

Under IAS11, construction contracts for third parties are normally accounted for based on the stage of completion.

The adjustment represents the impact on GAV of the revaluation of construction contracts for third parties to fair value in accordance with the fair value principles of IFRS 13.

Adjustments to reflect the spreading of one-off costs

As described in further detail below, set-up costs and acquisition expenses should be capitalised and amortised. The rationale for these adjustments is to spread these costs over a defined period of time to smoothen the immediate impact of costs on the vehicle’s performance. Furthermore, it is a simple mechanism to spread costs between different investor groups entering or leaving the vehicle’s equity at different times. Such adjustments are taken into account in the calculation of the ratio numerator included in the Fee and Expense Metrics module.

Since the INREV GAV is primarily intended to facilitate comparability between different vehicles, the INREV approach is a simple but stable methodology where these capitalised costs are subject to an impairment test each time the GAV is calculated and therefore should always be recoverable over time. 

j) Set-up costs

Under IFRS, vehicle set-up costs are charged immediately to income after the inception of a vehicle. Such costs should be capitalised and amortised over the first five years of the term of the vehicle.

The rationale for capitalising and amortising set-up costs is to better reflect the duration of the economic benefits to the vehicle. Furthermore these costs are taken into account in the calculation of the ratio numerator included in the Fee and Expense Metrics module.

When capitalising and amortising set-up costs, a possible impairment test should be taken into account every time the adjusted GAV is calculated when market circumstances change and it is not expected that the capitalised set-up costs can be recovered through the sale of units of a vehicle. For instance, when a decision is made to liquidate the vehicle or stakeholders no longer expect to recover the economic benefit of such capitalised expenses, they should be written off.

k) Acquisition expenses

Under the fair value model, acquisition expenses of an investment property are effectively charged to income when fair value is calculated at the first subsequent measurement date after acquisition. This results in the fair value of a property on subsequent fair value measurement being lower than the total purchase price of the property, all other things being equal.

Property acquisition expenses should be capitalised and amortised over the first five years after acquisition of the property.

The rationale for capitalising and amortising acquisition expenses is to better reflect the duration of the economic benefits to the vehicle of these costs. Furthermore these cost are taken into account in the calculation of the ratio numerator included in the Fee and Expense Metrics module. When capitalising and amortising acquisition costs, a possible impairment test should be taken into account each time the adjusted GAV is calculated when market circumstances change and it is not expected that the capitalised acquisition costs can be recovered through the sale of units of a vehicle. When a property is sold during the amortisation period, or is classified as held for sale, the balance of capitalised acquisition expenses of that property should be expensed.

Effects of the expected manner of settlement of sales/vehicle unwinding

l) Revaluation to fair value of savings of purchaser’s costs such as transfer taxes

Transfer taxes and purchaser’s costs which would be incurred by the purchaser when acquiring a property are generally deducted when determining the fair value of investment properties under IAS 40.

The effect of an intended sale of shares in a property-owning vehicle, rather than the property itself, should be taken into account when determining the amount of the deduction of transfer taxes and purchaser’s costs, to the extent this saving is expected to accrue to the seller when the property is sold.

The adjustment therefore represents the positive impact on the GAV of the possible reduction of the transfer taxes and purchaser’s costs for the benefit of the seller based on the expected sale of shares in the property-owning vehicle.

Disclosure should be made on how the estimate of the amount the manager expects to benefit from intended disposition strategies has been made. Reference should be made to both the current structure and prevailing market conditions.

Other adjustments

m) Goodwill

At acquisition of an entity which is determined to be a business combination, goodwill may arise as a result of a purchase price allocation exercise. Often a major component of such goodwill in property vehicles reflects the difference between the full recognition of deferred tax, purchaser’s costs or similar items in the IFRS accounts (which does not generally take account of the likely or intended method of subsequent exit), and the economic value attributed to such items in the actual purchase price.

Except where such components of goodwill have already been written off in the GAV as determined under IFRS, they should be written off in the INREV GAV.

n) Financial derivatives

This adjustment relates to the derecognition of any financial derivatives which are reported on the asset side of the balance sheet.

This relates to all financial derivatives as interest instruments, cash flow instruments and or currency exchange instruments. The rationale is that all the expenses/charges in respect to these instruments are linked to a liability or exempted for the calculation of the ratio numerator included in the Fee and Expense Metrics module.

o) Deferred tax assets

This adjustment relates to the derecognition of any deferred tax assets which are reported on the asset side of the balance sheet. The rationale is that all the expenses/charges in respect to taxes are linked to a liability or exempted for the calculation of the ratio numerator included in the Fee and Expense Metrics module.

It may happen that some vehicles have hired employees. Related staff costs should be allocated based on the activity of the employees.

For instance, the wage and related costs of employees working on property related matters should be allocated to property expenses and therefore included in the REER.

How should fee and expense metrics be determined in case a fund manager wishes to disclose quarterly ratios?

INREV Guidelines require the computation of the fee and expense metrics on an annual basis. Fund managers may provide investors with quarterly ratios. INREV Guidelines do not propose any methodology to compute quarterly ratios.

Fund managers can indeed disclose quarterly fee and expense metrics to investors. The methodology should be consistent with the methodology used for the fee and expense metrics in the annual reports, particularly on the cost classification and computation methodology.

The quarterly metrics should be presented on a rolling four quarter basis.

The fund manager should be transparent in its reporting to investors and explain the methodology and assumptions used.

In case a fund manager discloses quarterly ratios, the fund manager is still required to disclose the annual metrics in the annual report to comply with requirements included in the fee and expense metrics.

The vehicle’s constitutional and marketing documentation should include liquidity rights of the investor and how to execute these rights, in both normal and exceptional circumstances, as well as detailed consideration of the exit strategy, and existing redemption arrangements.

The fund documentation should include a liquidity protocol document explaining how all investors will be treated in different liquidity events including new equity issues, redemptions, secondary market transfers and exit. This document should be reviewed and updated throughout the life of the vehicle and made available to both existing and prospective investors.

The vehicle’s constitutional documents should include a statement of risk factors relating to liquidity. These should include as a minimum an analysis of the potential impact on the investors’ interest if the manager exercises its rights in full to either defer payment or adjust the price payable on redemption. For open end vehicles the risks associated with the vehicle not reaching the optimal size should be clearly set out, with particular reference to the impact on portfolio construction and any liquidity events.

Investment managers should ensure that all documentation relating to liquidity is fit for purpose.

Investors should ensure they fully read all relevant vehicle documentation and material provided as part of the liquidity process.

Within any subscription agreement signed by investors when entering the vehicle, there should be a specific acknowledgement that they fully understand the liquidity restrictions in the fund documentation which should be written in a clear and comprehensive manner.

For open end vehicles the timing for issuance and redemption of units should reflect the independent valuation cycle for the assets. This will help to ensure that all investors are treated fairly.

Any adjustment to the basis of valuation adopted by the manager which impacts the price of subscription or redemption should be disclosed to all investors in the vehicle documentation, including the rationale for the adjustment.

The pricing mechanism for the issue of new units should, subject to local laws and regulations, be fair to all investors and be clear and unambiguous.

New issues should be based on a price determined using an up-to-date independent valuation of the underlying real estate assets and an up-to-date assessment of all other assets and liabilities of the vehicle. 

Any special assumptions used by either the manager or the independent valuer should be disclosed to all parties.

The manager should maintain its anti-money laundering or “know your client” requirements for each type of investor that may subscribe to the vehicle.  This should reflect the requirements of all those regulated bodies involved in the administration or management of the vehicle (including trustees, depositories and administrators).

The issue of new equity into a vehicle would normally be based on either the NAV at the time or at cost with a form of equalisation payment from those investors who commit after the first close of the vehicle.

In the event that the NAV approach is used, managers should:

• identify any subscription premium that is payable and explain the approach to its calculation;
• ensure that the NAV is based on an up-to-date independent valuation of the underlying real estate assets;
• identify any special assumptions used by either the manager or the independent valuer in the calculation of NAV.

In the event that the cost plus equalisation approach is used, managers should provide a worked example to show the calculation of the equalisation amount to the incoming investor.

The manager should regularly advise investors of the redemption process, including the notice periods, redemption dates, pricing policy and timing of payments.

The manager should be required to disclose any rights it has to use discretion in setting the redemption price or the assumptions adopted by others in key components of the redemption price (e.g., property valuation). Any changes to normal practice as a result of the exercise of these rights should be communicated to investors without delay.

The manager should be under an obligation to disclose all its rights to defer payment of redemption proceeds. In circumstances in which such rights are exercised, the manager should communicate this to the redeeming investors without delay and provide reasons.

In the event a manager exercises its rights to either defer payment or materially amend the expected redemption price, the redeeming investors should have the right to withdraw their redemption request within a defined period.

The manager should document a policy on secondary transfers setting out which factors it will take into account when considering any transfer request. The policy should explain how fairness to all investors is achieved, including how any potential conflicts between primary and secondary issues are dealt with.

The manager should identify their anti-money laundering or “know your client” requirements for any potential investor. This should reflect the requirements of all those regulated bodies involved in the administration or management of the vehicle (including trustees, depositaries and administrators).

The manager should state within the constitutional documents if a confidentiality agreement is required for the release of information to a third party (including potential investors, placement agents and third party trading platforms) and, if so, the manager should make a standard confidentiality agreement available for the respective parties’ use at all times. A clear definition of “qualifying investor” should be incorporated into the constitutional documents identifying any specific restrictions in respect of domicile, financial strength, type of investor (e.g., any restrictions on competitors), minimum or maximum holding.

If pre-emption rights for holders are required by the founding investors, they should be drafted on the basis of a right of first refusal during a limited period from service of notice. In the event that investors choose not to exercise their rights, the selling investor should be free to sell its interest in the open market, within an agreed range of the original offer price during an agreed period.

A draft transfer agreement should be provided at launch, incorporating the minimum representations and warranties required from the relevant parties on any transfer, subject to any variations reasonably required by the manager from time to time. It is acknowledged that the final form of transfer agreement will be negotiated by all parties including the buyer, selling investor and the manager.

Investors should carefully review the constitutional documents and the liquidity protocol document or section to ensure that both documents suit their needs.

The non-executive or compliance officer, if any, should oversee the establishment of a fair pricing mechanism for the issue and redemption of units and an appropriate secondary market transaction framework.

The manager should maintain an up-to-date protocol on liquidity mechanisms for the vehicle including its policy on secondary transfers. The policy should explain what services the manager will perform in relation to any secondary transfers and any fees or expenses to be charged by the manager or the vehicle. It should also state how the manager will interact with any placement agent appointed by the selling holder and any third party trading platform.

The manager should facilitate secondary trading by its existing investors (whether the trade is executed by the manager, via a broker or otherwise) by:

• Using all reasonable endeavours to co-operate with any investor wishing to sell its interest, subject to the agreement of reasonable representations and warranties to reflect the services being undertaken in the sale by the manager and any fees agreed between the parties for those services;
• Providing regular reports to investors which contain the information set out in 9.3.7 Reporting Requirements;
• advising all holders as soon as reasonably practicable when it becomes aware of any equity available on the secondary market. The manager is not obliged to release details of the seller.

If the vehicle does not have external valuations carried out at least quarterly, then the manager should be under an obligation to disclose all reasonable information required by a valuer and other financial advisers appointed by the selling investor and/or potential investors, subject to all parties entering into a confidentiality agreement restricting the use of the information.  It is reasonable for a manager to refuse consent to a transfer under certain valid circumstances.  These could include:

• if it is prejudicial to the tax status of the vehicle or its investors;
• if it affects the regulatory status of the vehicle;
• if, in the manager’s opinion, the proposed transferee has insufficient financial strength to meet any undrawn commitments or is unwilling or unable to provide acceptable guarantees;
• if the proposed transferee is unable to comply with all reasonable anti-money laundering requirements of the manager;
• if the proposed transferee is not a “qualifying investor” as defined.

In the event the manager becomes aware of any information which, in its opinion, renders any document or announcement materially inaccurate, incomplete or misleading or results in the failure to comply with any obligations in the constitutional documents, the manager may require the selling investor to cease distributing the offending document or announcement and/or make a correcting announcement.

The selling investor should be able to communicate with potential investors, subject to certain consents and indemnifications:

• subject to appropriate consent, be permitted to provide any potential investor introduced by an existing investor or its adviser with the information set out in the most recent annual and interim report and the SDDS. The manager should be indemnified against any claims by any third party, although it is reasonable for the existing investor to expect the manager to co-operate in the disclosure of material to assist in the verification of any marketing material that the investor produces;
• indemnify the manager in respect of any third-party costs incurred by the manager or the vehicle in facilitating any transfer request;
• indemnify the manager and the vehicle in respect of any costs arising out of any misrepresentation in respect of the vehicle in any selling documents.

The manager should take specific steps when facilitating or arranging secondary trading in the manager’s vehicle:

• inform all holders of the services that it is willing to provide for facilitating a secondary market in the vehicle and the fees charged for these services;
• publish a policy statement on secondary transfers setting out what factors it will consider when considering any transfer request. For open end vehicles the statement must explain how fairness to all investors is achieved, including how any conflicts between primary and secondary issues are dealt with. This should be freely available to existing and potential investors at all times;
• provide potential investors with reasonable access to its staff to explain the strategy of the vehicle and to arrange access to properties where appropriate subject to reimbursement of appropriate costs;
• advise the seller if any potential investor or group of potential investors would be considered unacceptable as a qualifying investor if requested to do so;
• provide a standard confidentiality agreement which it finds acceptable on request or, if appropriate, provide input into a confidentiality agreement prepared by the selling investor. The manager shall act reasonably in dictating the terms of any such agreement;
• maintain a statement of anti-money laundering requirements identifying the information required from any new investor or transferee. The statement should reflect the requirements of all those regulated bodies involved in the administration or management of the vehicle, such as trustees and administrators, to ensure that the requirements are comprehensive;
• treat all information provided to it on potential investors as confidential and not disclose it to any third party without consent unless required to do so by law;
• take all reasonable steps to ensure that the register of investors is updated without delay once in receipt of all valid documentation. 

The compliance officer should oversee the activities of the manager in relation to secondary market transactions, to ensure they are in compliance with the law and constitutional terms of the vehicle.

The selling investor should:

• inform the manager of its intention to market its interest or part of its interest in the vehicle;
• prior to commencing any marketing of an interest in a vehicle, review the constitutional documents to ensure it is fully aware of its rights and obligations;
• consult with the manager on the acceptability of potential investors at an early stage;
• investigate fully any selling restrictions imposed in any jurisdiction in which it intends to sell;
• ensure that any advisers instructed to act as placement agents on its behalf are properly authorised to act in that capacity in the countries in which the selling investor intends to market its interest;
• ensure that any marketing material used for the sale of its interest and any distribution of the material is in accordance with the terms of the vehicle’s constitution and all relevant regulatory requirements; 
• take all reasonable steps to restrict the marketing of its interest to “qualifying investors” as defined in the vehicle’s constitutional documents;
• in any public statements regarding the sale, make it clear that it is speaking in its capacity as an investor and its comments do not necessarily reflect the views or beliefs of the manager and other investors.

The manager should seek to mitigate the scale and duration of any ongoing liabilities when making management decisions towards the end of the vehicle life so that all underlying vehicle entities can be wound up as early as is reasonably possible. 

The manager should keep investors advised of any ongoing liabilities once assets are sold and the impact on the timing of the ultimate winding up of the vehicle. Ongoing liabilities should be reported as a percentage of capital commitments s to each project and in aggregate.

The manager should limit the amount of capital that can be recalled by the manager once distributed to investors. The period in which the capital can be recalled should also be limited in time and clearly disclosed in vehicle documentation and reports.

The manager should keep investors regularly advised on the level of recallable capital and the manager’s expectations for its use.

Any investment restrictions imposed on a closed end vehicle should cease to apply during the liquidation phase of the vehicle.

During the vehicle wind-up process, any conflicts should be declared by the conflicted party at the earliest opportunity. If the conflict occurs because of the sales process, the investment manager should ensure an independent representative is involved, investor agreement is reached and valuations properly reflect market conditions. When a portfolio is to be sold and the investment manager potentially retained by the buyer, two deal teams should be created by the investment manager with ‘Chinese walls’ in place and senior representation on each team.

During the vehicle wind-up process, asset management and wind-up fees earned by the investment manager or appropriate third party should suitably reflect the amount of work involved. For example, any fixed fee asset management arrangement should to be adjusted if few assets remain.

The vehicle’s constitutional documents should state the rights and obligations of unit holders and the manager regarding extensions (e.g., investor approval rights and changes to management fees during an extension period).

Where the manager has discretion to extend the vehicle life, the manager should disclose in the annual and quarterly reports well in advance whether it believes such an extension will be necessary.

If the manager elects to extend the life of the vehicle, the manager should provide a clear business case, including the financial benefits to the investors expected from doing so. 

Where the manager wishes to extend the vehicle term with the consent of its investors, the manager should provide the following information to all investors:

• financial analysis of the effect of liquidations now as against during a delayed period;
• full impact assessment of deferred exit (e.g., debt maturities, hedging instruments, joint venture termination provisions etc.);
• cost implications; 
• revised business plan for each asset; 
• confirmation of the manager’s terms of appointment (including fees) during the extension period. The presumption is that fees will be discussed for the extension period.

Investors should have the right to appoint advisors to act for them jointly at the vehicle’s cost. Appointments are to be approved by the Investment Advisory Committee (IAC) or a majority of investors if there is no IAC.

In the event the vehicle life is extended beyond the original term, best practice is for the manager’s appointment to be terminable without cause with the approval of a supermajority (usually 75%) of investors at any time after the original term. ​

In quarterly and annual reports to investors, the manager should provide data on the vehicle’s equity and on key risks related to liquidity:

• Provide a table showing the equity issued, equity redeemed, and equity transferred during the financial year.
• State the outstanding redemption or subscription requests and outstanding lock-in restrictions as at year-end.
• Identify the risks to the vehicle or to the pricing of the vehicle NAV as a result of liquidity events. Liquidity events should include equity inflows, redemptions and any actual or potential breaches of debt covenants.

The managers should advise all investors of the risks that any one investor, or a group of investors controlled by one decision-maker/adviser, may gain negative control over key decisions of the vehicle.

If appropriate, the investment manager should provide vehicle extension proposals as soon as it becomes clear that an extension may be required, and in any event a minimum of one year prior to the original vehicle termination date.

If appropriate, the investment manager should provide appropriate notice of the decision to wind up a vehicle to investors, no later than one year before the end of the vehicle life but ideally two years.

The investment manager should provide a clear timetable for any wind-up or extension process. The timetable should be part of the vehicle documentation and include a set of procedures for the investment manager and investors to follow during the entire wind-up or extension process.  Details of any information provided by the investment manager to investors should also be disclosed.

The investment manager should allow investors a minimum period of eight weeks to consider proposals prior to a formal vote.

Investors should respond fully to any proposals within the timeframe provided.

Both investment manager and investors are obliged to ensure suitably senior management time is given to the end of vehicle life process. Managers and investors should also ensure that those involved are actively engaged in the consultation process. Where possible, an alternative senior manager (appropriately experienced) is responsible for the extension process rather than the individual investment manager.

An investor should have a consistent, documented house view of a vehicle shared by all personnel involved to avoid last minute difficulties.

At the end of the vehicle’s life, it is recommended an investor advisory committee be put in place, if it does not already exist, to participate in the wind-up or extension process.

The investment manager should be prepared to wind up the vehicle if agreement on an extension cannot be reached.

This section breaks down the long term strategy described in ESG-LTS 1.1 and ESG-LTS 2.1 and translates it into a practical action plan on annual basis; including targets, investment and costs, action points. Targets should be quantified as far as possible

In this section it should be reported against the annual targets described in ESG-ANN 1.1 and ESG-ANN 2.1. Report on the progress that has been made, on the status of initiatives and on what has been achieved.