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Executive summary
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The 7 principles of INREV Corporate Governance
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CG-S01 —
Corporate governance is a cornerstone of success of non-listed real estate investment vehicles. It refers to the structure, processes, policies and laws that determine how an investment vehicle is managed and controlled. The INREV Guidelines Corporate Governance module designs a framework in line with industry best practices to establish and promote common and workable standards for non-listed real estate vehicles built on the following seven principles.
- 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.
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1. Compliance with the law
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CG-S02 —
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.
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2. Compliance with constitutional terms
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CG-S03 —
The vehicle's constitutional terms are the legal basis for investors to exercise their rights. To control and monitor adherence to the terms the manager should implement appropriate processes and systems and fully disclose the vehicle's compliance to all involved parties. The role of the non-executive officers (the terms non-executive officers, independent directors and investor representatives are used interchangeably in the corporate governance guidelines and in this summary) is to oversee the manager in this respect. The constitutional terms need to be unambiguous to enable all parties to accept and adhere to these.
Vehicle decision-making: When investing in a vehicle, investors provide a real estate investment mandate to a manager who consequently has the fiduciary obligation to execute on such mandate in a professional way within the parameters of that mandate. Investors should however retain control over the fundamental parameters underlying the investment mandate, such as changes to investment and financing strategy or remuneration of the manager. The threshold of investors required to make material changes should be defined. Approval thresholds need to be feasible, too low hurdles as well as unrealistically high hurdles should therefore be avoided (blocking votes).
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3. Skill, care, diligence and integrity
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CG-S04 —
In addition to the constitutional terms the manager is responsible to establish a code of ethics whose adherence has to be overseen by the non-executive officers and the investors. The code of ethics relates amongst others to appropriately skilled, trained and controlled staff of all parties involved in the vehicle. While the non-executive officers have to ensure that the manager has related internal controls in place the investors equally oversee the non-executive officers in this regard.
Investor default: The vehicle documentation should contain a clause determining provisions in the case that investors default on their capital calls. Included penalties and suggested remedies should address automatic default, notification of the non-executive officers or the other investors, forced sale and voting rights.
Investment committee: An investment committee should be installed to assess material changes to the investment strategy and the business plan of individual assets. The composition should be embedded in the vehicle's governance principles.
Use of third parties: The vehicle documentation should set out any use of third party service providers including assigned responsibilities and accountabilities. A system of checks and balances between the manager, the custodian and the paying agent as well as any approval requirements from the investors with respect to appointment or replacement should be disclosed.
Risk control processes: The vehicle documentation should clearly describe the related risk control processes and how the manager monitors, measures and reports these.
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4. Accountability
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CG-S05 —
The fourth principle of the Corporate Governance module outlines the manager’s primary accountability for the vehicle, its investors and its profitable operations within legal frameworks. The non-executive officers are responsible to the investors while they themselves are accountable to their own relevant bodies. To assess the manager’s abilities and trustworthiness and to communicate any related concern, access to necessary information needs to be granted for the involved parties of the vehicle.
Indemnification: The vehicle should contain an indemnification and/or exculpation clause which, under specific circumstances, may reduce the accountability of the manager to the vehicle. The constitutional documents should explain if there are restrictions on losses to the vehicle arising from indirect or consequential loss.
Removal of manager at will: The vehicle framework should contain a removal at will or "no fault removal" clause, whereby the manager’s mandate can be terminated due to request of a majority of the investors. The documentation should clearly disclose the manager’s rights regarding outstanding fees and interest payments in such situations.
Removal of manager for cause: Vehicles should have a "removal for cause" clause in place that gives investors, dependent on a defined threshold, the right to call at any time for a vote to remove the manager. The vehicle documentation should clearly describe how cause can be established.
Non-executive board: If the vehicle has a non-executive board in place the selection criteria of the independent directors should be clearly defined in the vehicle documentation and focus on the depth and breadth of relevant experience. Procedures should be in place to ensure that material decisions are recommended by the manager for consideration and approval rather than just consultation by the committee. The non-executive officers may retain an external counsel at the expense of the vehicle and have access to appropriate insurance.
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5. Transparency
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CG-S06 —
As one of the underlying principles of the overall INREV Guidelines, transparency is the fifth principle of the corporate governance framework. Transparent and comprehensive reporting is essential for every vehicle to be assessable and easily understood by its involved parties. Consequently the manager is obliged to disclose reports in a timely, proper and comprehensive manner, so as to inform on matters such as strategy, progress of targets and the performance of the vehicle. The reporting format should enable investors and non-executive officers to understand the vehicle's performance and related risks, and the extent to which the manager undertakes his responsibilities.
Rights of investors to obtain information: To provide investors with a forum to ask questions and to be heard the manager shall hold frequent investor meetings. Investors should always have the ability to convene such a meeting themselves to discuss any potential issue that needs to be heard. The same applies to the right to inspect the books and records of the vehicle and the manager or have a third party auditor conduct an audit.
Reporting in line with the INREV Guidelines: The manager should clearly state how it intends to comply, where relevant, with the INREV Guidelines and provide explanation on where it departs from the guidelines.
Side letters: The vehicle should not enter into any side letter agreements unless these are disclosed in the vehicle documents irrespective of the level of commitment or the commitment date, while the side letters’ terms should be made available on request. Investors may rely on all side letters between the vehicle and the other investors. The manager shall not accept changes to side letters with investors that may have an adverse effect on the other investors or the economics of the vehicle without the investors’ consent.
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6. Acting in investors’ interests, including alignment of interests and conflicts of interest
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CG-S07 —
The manager is expected to act in the investors’ interests and to create structures in the vehicle in such a way that the alignment of interests is enhanced and potential conflicts of interest are dealt with in a transparent way. It is essential not to encourage risk-taking inconsistent with the risk profile of the vehicle. A written protocol how to handle conflicts of interest within the vehicle has to be implemented which outlines how investors will be treated on new issues, redemptions and transfers of equity in the vehicle and co-investment opportunities. The investors on the one hand 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 and on the other hand should inform the vehicle about any conflicts of interest originating in their own bodies. In this case investors should make available any necessary information in a timely and proper manner to enable the manager to take appropriate measures.
Co-investment: The co-investment arrangements should run for the life of the vehicle and provide that key personnel and other individuals running the vehicle co-invest a meaningful amount in the vehicle.
Key personnel: A small group of individuals should be designated as key men whose departure would trigger a key man event possibly implying a suspension of the investment period. If a replacement has not been identified within a defined time period the vehicle can be terminated for fault.
Fee and carry structures: Fees should be designed to enhance the alignment of the manager’s interest with that of the investors. Best practice is that the manager receives a management fee that is sufficient to manage the vehicle and a carry structure that rewards the manager for adding value above the expected return in the base case.
Conflicts of interest: A clearly defined protocol to manage conflicts of interest should be in place and overseen by the non-executive officers or investors. The protocol should define the extent to which the manager has to offer investment options exclusively to the vehicle.
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7. Confidentiality
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CG-S08 —
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.
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