Bill on REIT – controversy related to limitation of the scope of REIT’s investment activities to residential real estate

The bill on companies investing in real estate lease (REIT), on which Polish Sejm is currently working, triggered a lively discussion among politicians, lawyers and representatives of the real estate industry regarding the limitation of the scope of application of the Act to residential real estate.

Bill’s specifiactions

The bill states that the predominant activity of REIT or its subsidiaries is the lease of residential real estate. Having REIT status will depend among others on:

1. maintaining the value of the residential real estate owned by them and shares in subsidiaries at a level not lower than 80% of the carrying amount of the company’s assets;
2. obtaining at least 90% of income from renting of residential real estate owned by it or from sale of these properties, which were rented by REIT before their sale for at least a year, or from shares in subsidiary companies or from the sale of shares in subsidiary companies;
3. obtaining income from at least five residential properties located on the territory of the Republic of Poland.

The bill defines a residential property as:

1. a residential building or a share in such a building together with the land or share in the land or the right of perpetual usufruct of land or share in such right, which are related to this building;
2. a residential flat being a separate property, together with the land or share in the land or the right of perpetual usufruct of land or share in such right, which are related to this flat;
3. the premises for which the cooperative ownership right to housing is entitled,
4. a building or premises constituting a separate property together with land or a share in the land or right of perpetual usufruct of land or share in such right, which is used:

• to run an office that provides round-the-clock care for people with disabilities, the chronically ill or the elderly;
• for purposes of meeting the housing needs of pupils, teachers, students, PhD students or academic teachers, and in particular for running dormitories, student dormitories and student residence hall.

In addition, according to the bill, a building is considered residential if at least 70% of the total usable area of ​​this building, determined in accordance with the provisions of the Act on Local Taxes and Charges, is used for purposes of meeting housing needs.

Controversies

The bill clearly limits the scope of admissible activities of REIT to residential real estate, excluding the possibility of investing in commercial real estate. In the opinion of many representatives of the real estate industry, such a restriction is unjustified and may result in less interest of investors in the purchase of REIT shares. The Ministry of Finance refutes these allegations, pointing out that the basic objective of the Act is the development of the rental market for residential real estate in Poland, and the tax preferences provided for it in the Act are to encourage investors to invest in this real estate sector.

Another practical problem in applying the provisions of the Act may be the issue of qualifying a garage as a residential property. The bill does not specify whether the area of ​​the garage located in the body of the building will be included in the usable area of ​​the building serving the needs for housing. This may be a significant problem in the situation of garages constituting a separate object of ownership (possessing a separate land and mortgage register), as well as garages constituting the common part of the building, in which no separate premises were extracted. In such situations, garages may not be considered as part of the housing space, and therefore do not fall within the minimum required floor area of ​​the building (70%). In such situations, maintaining the status of a residential building for the purposes of the REIT Act will depend on whether the area of ​​such garages together with other non-residential parts of the building will not exceed 30% of the total usable area of ​​the building.

The Supreme Court drew attention to the above problem by reviewing the bill at the stage of the legislative process. So far, the Sejm has not amended the bill in this regard.

For more information on the bill on companies investing in the lease of real estate, as well as the services of our Law Firm in the area of ​​creating and registering REIT, please visit [email protected]