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Real estate investments can basically be realized in three different ways composing of a direct purchase of real estate, a purchase of share of real estate investment partnership, and a purchase of fund participation certificate. A great deal of capital is needed for direct real estate investments. For real estate investments by purchasing the share of real estate investment partnership, variations occur between the value of investment and price of the shares since the shares are traded in the stock exchange. However, such troubles which are faced in these other two real estate investment instruments are not in question for funds and the fund becomes more attractive with some other advantages it provides and its privileged legal position for investors.
In this study, the funds which have an important place among real estate investment instruments and which have gradually become a more popular investment instrument is examined. In this context, the functioning of the funds has been herein addressed from the aspect of the qualified investors, within the framework of the Communiqué on Principles for Real Estate Investment Funds (“Communiqué”) issued by the Capital Markets Board (“CMB”) in order to establish the legal infrastructure of the funds. Within this scope, significant matters such as advantages and disadvantages of real estate investment funds, legal structure, management of the fund, responsibilities arisen from the management of the board and legal position of the investors have been analyzed.
 Erkan Özgüç, “Gayrimenkul Yatırım Fonları: Çeşitli Ülkelerdeki Uygulamalar ve Türkiye İçin Öneriler”, Research Report of Capital Market Board, 03.04.2008, http://www.spk.gov.tr/yayingoster.aspx?yid=960&ct=f&action=displayfile, (Last access: 25.04.2017).
 Published in the Official Gazette (OG) dated 03.01.2014 and numbered 28871.
- REAL ESTATE INVESTMENTT FUND
- Definition of Fund
The fund has been defined in Article 4/1 of the Communiqué. As per the said provision, fund is an asset which does not hold a legal personality, established by portfolio management firms and real estate portfolio management firms for a specific or an undefined term, with the monies collected from qualified investors in exchange of participation shares, in order to operate the portfolio consisting of assets and transactions specified in the Communiqué on behalf of shareholders pursuant to the principles of fiduciary ownership. However, in the following sentence of the said provision, it is accepted that the fund has legal personality limited to the transactions of title registration, alteration regarding the registration, deletion or correction. As a result of such limited legal personality, it becomes possible to register the real estate held by the fund in the fund’s name and thus the ownership of the said real estate is transferred to the fund along with its registration as per Article 1022 of the Turkish Civil Code numbered 4721. Also, as per the principle of publicity stipulated in Article 1020 of the Civil Code, no one would raise a claim about the real estate registered under the name of the fund that he or she had not known that its ownership belonged to the fund.
- Structure of the Fund
The structure of the fund consists of three main elements which are portfolio management firm/founder, custodian institution and qualified investors who invest in the fund. Portfolio management firm manages and represents the fund, in accordance with its responsibilities arising from laws and by preserving the qualified investors’ rights. The custodian institution which needs to be authorized by the CMB to operate is obliged to follow financial assets belonging to the fund, keep the records and to check the cash and asset flows. Furthermore, the title transactions which have to be conducted on behalf of the fund can be cosigned by portfolio manager and custodian institution to be executed. The qualified investors hold the capacity as the owners of participation share.
- Qualified Investor
Qualified investors, in other words the investors who can invest in the fund, are professional clients including those who are defined in the regulations of CMB regarding investment institutions and who are accepted as professionals upon their request, as per Article 4/1-m of the Communiqué on the Sale of Capital Market Instruments (II-5.2). Similarly, pursuant to Article 32/3 of the Communiqué on the Establishment and Operation Principles of Investment Organizations (III-39.1) and within the scope of the definition of qualified investors in relevant regulations of the CMB, only those who meet the condition of having financial assets, including cash deposits and capital market instruments, exceeding 1.000.000,00 Turkish Liras in total are deemed qualified investor in the process of specifying the clients to be accepted as professionals upon request. In brief, the persons who have a financial asset exceeding 1.000.000,00 Turkish Liras can invest in the fund. Such investors can be domestic or foreign investors.
- Fiduciary Ownership
It is necessary to discuss the concept of ownership before explaining the concept of fiduciary ownership. The right of ownership is defined in Article 683 and subsequent provisions of the Civil Code as a right which can be put forward against anyone. On the other hand, such right is regulated in the Civil Code in a restrictive way (Numerus Clausus). Therefore, it is not possible to give a new dimension to the right of ownership apart from restrictive provision of the Civil Code by executing a reciprocal contract and to limit the holder’s rights arising from the law. In parallel, neither the right of ownership is given a new meaning nor the powers of the believed person arising out of being holder of the right of ownership is limited, in fiduciary ownership. For this reason, fiduciary transactions are deemed lawful within the scope of Turkish law.
In a similar way with the fund examples based on fiduciary ownership, it is regulated in the Communiqué that the fund is managed based on the principle of fiduciary ownership. The fund is established via a fiduciary contract and in principle; it does not have the legal personality as mentioned above. Fiduciary contract can be defined as a contract in which the believing party guarantees to transfer the ownership of a property to the counterpart of the contract as a security of a debt, whereas the believed party guarantees to use such property within the scope of the purpose of the contract and to retransfer the said property to the believing party, once the secured debt is paid.
The transfer of fiduciary ownership bears all legal consequences of an ordinary ownership transfer in respect of the relationship between the parties of fiduciary contract and the relationship between the believed party and the third parties. Limiting the powers of the believed party via a fiduciary contract does not affect the essence of the right of ownership. Actions of the believed party against the limitations of power only results in violation of the fiduciary contract. The damages arising out of such actions may be claimed from and compensated by the believed party as per provisions of contradiction to contract.
- FUNCTION OF THE REAL ESTATE INVESTMENT FUND
The share of the construction sector in the economic development of Turkey is significant. Especially, in order to prevent the construction of slums and to ensure Turkey, which is located over fault lines, with stronger buildings, urban transformation projects are conducted all around the Turkey. The construction sector assumes a major role in the application of urban transformation. However, this raises the problem of financing, since the investments in real estate sector require remarkable amounts to put in. Such finance gap is usually eliminated by banks. However, such kind of financing method causes a serious financial burden on firms or persons because of additional costs charged by the banks. Funds are created in order to prevent the said problems and to create source of finance for enormous real estate investments in Turkey. The management power of the funds is given those persons that are experts in their fields, under the relevant legal provisions. Thanks to funds, for the local economy, savings of the investors of the funds are turned into investments, while creating source of finance for large-scale investments at the same time. The investors can invest in sizeable and high-yielding real estates which they cannot normally invest in and they profit from value increase or rent income based on their shares in the fund. Managers of the fund, on the other hand, earn a commission in return for operating the fund.
Another significant advantage of the fund is that it assures the foreign source input to the Turkish economy since foreign investors are also given the opportunity to invest in the fund. Thanks to this opportunity contributing to the development of the country, the saving deficit existing in Turkey is eliminated over foreign sources.
- Advantages of the Fund
The most significant advantage provided by the fund is the exemption of corporation tax over fund incomes. The investors also have some other tax advantages. Another important advantage of the fund is that it enables the securitization of the real estate. By this means, real estate, which is difficult to trade and requires a long legal procedure to acquire, can be easily traded in the market. Other factors also increase the trustworthiness of the fund such as inspection of the fund by administrative authorities, assets of the fund being managed by management firms specialized in the field and obligatory real estate appraisal by independent appraisers at the moment of purchase and sale. Furthermore, since every real estate investment bears a certain amount of risk, investing in a single real estate is not allowed, apart from the exceptional cases, and within the framework of principle of risk distribution, real estate in the asset of the fund is diversified. Thus, in the event of a loss in a project, the financial situation is balanced with other investments.
As mentioned above, another important advantage of the fund is that it ensures financing for the large-scale real estate investments. Sources are created with the participation shares for projects which cannot be invested by individual investors. Besides the qualified investors, foreign investors also have an important role in creating such source. Through funds, some restrictions of obtaining real estate for foreign investors which arise out of regulations are somewhat eliminated and it becomes much more possible for foreign investors to invest in the fund. Also funds constitute a good investment opportunity for qualified investors who wish to invest in real estate, but do not have time or knowledge.
Participation shares of the fund is not traded in the stock market and by this means, they are not affected by the share price movements in the stock market. Although the participation share is not traded in the stock market, in the event that the investors want to leave the fund, they can easily do so according to bylaw. Furthermore, the asset of the fund which does not have legal personality in principle is separated from the assets of founder and custodian and rights of the investors are strictly protected.
- Works of the Fund
As per Article 4/3 of the Communiqué works can be done by the fund are restrictively listed. Apart from such works, it is not possible for the fund to deal with other businesses. The funds can conduct such works related to (i) real estate and rights based on real estate, (ii) public and private sector debt instruments, shares of joint stock companies established in Turkey including those which are in the scope of privatization, (iii) foreign public and private sector debt instruments and shares of joint stock companies which can be traded, (iv) time deposit account and participation account, (v) participation shares of investment funds, (vi) repo and reverse repo transactions, (vii) lease certificates and real estate certificates, (viii) warrants and certificates, (ix) money market transactions of Takasbank, (x) premiums and cash collateral of derivative transactions, (xi) specially designed foreign investment instruments and loan participation notes which are deemed suitable by CMB and (xii) other investment tools deemed suitable by the CMB.
In addition to the fact that the works that can be done are listed restrictively, according to Article 18/1-g of the Communiqué, it is regulated that the sale, purchase and lease transactions of real estate abroad cannot be carried out by the fund. The main reason behind such restrictions are preventing the fund to operate out of its field and creating financing for the domestic investments. The funds cannot deal with construction works and invest in real estate projects regardless of whether these works or projects take place in Turkey, either.
III. ASSET OF THE REAL ESTATE INVESTMENT FUND
The fund consists of equity, since the sources of fund are in the form of capital, not loan. According to Article 5/1 of the Communiqué, the asset of the fund is separate from the asset of the founder, custodian and portfolio manager. By this manner, benefits of the investors are intended to be protected by keeping the asset of the fund free of debt from the debts of the portfolio manager or custodian to third parties. Pursuant to the second paragraph of the said provision, the asset of the fund cannot be pledged or be provided as collateral save for hedging derivative transactions and loans provided that it is on behalf of the fund and stipulated in bylaw and issuance document (within the scope of Article 23 of the Communiqué). It should be emphasized that the fund cannot be distrained even for the purpose of collection of public receivables, be subject to injunctive relief and be included in the bankrupt’s estate. The debts of the founder and the portfolio manager to third parties cannot be set-off against the receivables of the fund from such third persons. All regulations bear the purpose of protecting the benefits of investors and asset of the fund is given a privileged position by virtue of its public aspect. As a result of such privileged position, as per Article 35 of the Communiqué, the merger of the fund with another fund or conversion into another fund is prohibited in order to prevent possible abuses.
Pursuant to Article 19 of the Communiqué, 80% of the total value of the fund must consist of real estate investments. The total of real estate investments which separately exceed 20% of the total value of the fund shall not exceed the 60% of the total value of the fund. However, such restriction shall not be applied to the funds which shall invest in only one real estate or operate in a particular sector. The risk is aimed to be reduced by diversifying it with the restrictions towards diversifying the portfolio. Nonetheless, as such provisions are thought to hinder reasonable investments, the funds which shall invest in only one real estate or which shall operate in a particular sector are excluded from such limitations.
- MANAGEMENT OF THE REAL ESTATE INVESTMENT FUND AND PARTICIPATION SHARE
- Power and Responsibility of the Founder
The founder is responsible for the representation, management, supervision of the management and its activities in accordance with the provisions of the bylaws and issuance documents in order to protect the rights of the owners of fund’s participation share. Pursuant to Article 7 of the Communiqué, founder is authorized to dispose of the assets of the fund on its behalf and for the account of fund, in accordance with the legislation, bylaws and the issuance document and to use the rights arising out of them. The use of outsourced services, including portfolio management services, during the execution of the fund’s activities will not remove the responsibility of the founder. Therefore, the power of the fund’s founder that emerges from the proxy is determined in concrete terms and prevents the founder from acting beyond the limit of its authority.
The provisions between Articles 502 and 514 regulating the proxy agreement of the Turkish Code of Obligations No. 6098 shall be applicable mutatis mutandis in cases where there is no provision in the relevant legislation, bylaws and issuance document about the relationship between the founder and owners of participation share.
- Representation of the Fund
According to Article 10 of the Communiqué, fund is represented by the board of directors established by the founder at the execution of all its activities. The board of directors may transfer such authority to one or more executive members. However, it is obligatory to conduct some transactions such as the establishment of the fund, the issuance of share certificates, liquidation, increase in management fees and other transactions that may affect the investment decisions of the owners of participation shares, via a resolution of the board of directors. Thus, transfer of important transactions to third parties is restricted and such transactions are ordered to be carried out by the board of directors. The representation authority given to whole of the members of the board regarding important actions prevents stand-alone representation and impulsive transactions.
- Participation share
Participation shares can only be purchased by qualified investors. According to Article 15 of the Communiqué, participation shares do not hold a nominal value. Fund unit share value is obtained by dividing the total value of fund by the number of participation shares. Fund unit share value is calculated at least once a year and reported to qualified investors. As a consequence of the mentioned provision, the participation shares are not issued at a fixed value and the value of the investment made by every person is calculated based on the total investment rate of the individual investments. Thus, unreal valuations are prevented and the value of the shares is determined over the values of tangible investments.
Pursuant to Article 16 of the Communiqué, the sale of participation shares can be carried out by full payment of the fund unit share value in cash; return of the participation share to the fund, by liquidation of the investors’ shares by returning them to the fund in accordance with the issuance documents. An entrance and exit commission may be applied for the sale and return of the shares to the fund. However, such commissions are registered as revenue to the fund. The founder and the firm which carries out the activities of marketing and distribution of participation shares are severally responsible for the damages to arise out of a breach. Thus, return of the investment is secured for the investors and they are provided with the foreseeability. It is possible to transfer the participation shares between qualified investors as well as returning them to the fund.
Participation share is not only important for valuations, but also for dividend distributions. Pursuant to Article 27 of the Communiqué, the fund can distribute dividend to owners of the participation shares according to rules stipulated in the issuance document. Therefore, owners of participation shares can profit from dividend distribution in the course of shareholding along with the increase caused at evaluation.
- Obligation to Inform and Supervision of the Fund
It should be stated that the information documents of the fund consist of bylaw of the fund, issuance document and investor information form, if present. The said documents can be defined as follows; bylaw of the fund is a contract, between the owners of the participation shares, the founder, portfolio manager and the custodian, which includes general transaction conditions about the management of the fund’s portfolio in accordance with the provisions of proxy contract, operation of the fund’s portfolio according to the principles of fiduciary ownership and keeping the fund’s portfolio; fund issuance document is a document which provides information on characteristic of the fund and terms of the sale; investor information form is a brief form which exhibits the structure, investment strategy and risks of the fund.
Thanks to the documents defined above, the funds have a transparent and trustworthy investment environment. Likewise, the fund must be managed in manner that a transparent and trustworthy investment environment requires, within the framework of the principle of publicity.
In parallel, as per Article 31 of the Communiqué, the founder and the portfolio manager (if present) informs the owners of participation shares about the real estate investments, (if present) together with the information about the relationship between the said investments and executives of the fund, within 15 days from the date of investment, with the most suitable means of communication. Therefore, transparency in the management is achieved and the investors are informed about the investments. Along with the said informing obligation, pursuant to Article 33 of the Communiqué, all transactions and accounts of the founder, portfolio manager (if present) and custodian are subject to supervision of CMB.
- POSSIBLE CRISIS AND PRECAUTIONS
The fund crisis in the past of the Germany, Netherland and Hungary are caused by remarkable decreases in real estate prices. As a result of such significant decreases in real estate prices, investors tried to sell their participation documents collectively since they thought that the value of participation documents was going to decrease. Then, they tried to make arbitrage profit by purchasing participation shares for a lower price. However, as a result of large-scale sales, the funds run out of cash reserve and faced a serious liquidity problem.
It is seen that the expectations towards a decrease in the real estate prices have an important role in the occurrence of crisis rather than actual loss in real estate prices. Even though the value of the fund does not decrease, the investors try to return the participation documents to the fund because they are concerned that the other investors would sell participation documents in significant amounts and the fund will face a serious liquidity problem. In such a scenario, even the possibility of closure of the fund may come to the fore.
The funds are subject to a strict supervision of the CMB in order to prevent the expectations of investors which are effective in the emergence of the crisis and liquidity problem faced by the funds. Primarily, only the qualified investors are allowed to invest in the funds and it is aimed for the investors to take more professional decisions and to not act under the effect of information pollution in the market. Secondly, in order to overcome a liquidity problem, the funds are given the opportunity of obtaining loan up to 50% of the portfolio value. Thus, immediate cash needs can be met by indebtedness.
Several precautions are taken in order to increase the resistance of the funds against possible crisis in Turkey. It is an obligation for the conditions of leaving the fund to be present in the information documents. In extraordinary cases, trading of the participation shares can be ceased depending on the approval of the CMB. By this means, the resistance of the fund is increased against a possible liquidity crisis. The real estate in the portfolio of the fund is subject to an evaluation by an independent appraiser at regular intervals and fund unit share value is calculated and reported to the qualified investors at least once a year. By this means, it is aimed to keep the value of the participation shares close to the real value of the real estate. In order to sustain objectivity in valuation, for each asset in the fund’s portfolio, the valuation service can be obtained from the same appraiser for maximum three successive years. The asset of the fund is separate from the assets of the founder and the portfolio manager and by this means; it is protected against claims from third parties. Participation shares can only be sold to the qualified shareholders for the purpose of decreasing the manipulations to the minimum. Also, in order to prevent the information pollution about the funds, any kind of public announcement and advertisement regarding the fund is prohibited apart from advertising to the qualified investors.
In order to prevent the chance of arbitrage that may be applied by investors, investors have been entitled to gain an exit commission from the sale and return of the participation shares to the fund. It is an obligation for the founder and the portfolio manager to establish a risk management system in a manner to include the management of financing risk regarding real estate investments, liquidity risks and other probable risks as minimum. Also the founder is responsible for providing necessary liquidity at the return of the participation shares to the fund. For the purpose of providing necessary liquidity, the funds may borrow loans up to 50% of the fund’s total value calculated as of the recent accounting period.
The funds have a privileged position and are protected by government on a legal basis because of their importance. By virtue of the legal structure of the funds, the funds are considered as important investment instruments in the course of development of Turkey. It is admitted that the funds have a major role in financing large-scale real estate investments. The funds have been regulated in detail under the Communiqué as issued by the CMB and in order to protect the investors while accomplishing the fund’s purpose, the founders and the managers of the fund have been obligated to follow the rules in the Communiqué and also the management has been subjected to the supervision of the CMB.
Considering that the majority of the investments in Turkey takes place in real estate sector, the funds are considered to be a reasonable investment instrument for Turkish investors. On the background of such opinion lies the legal infrastructure of the fund. The investments to be realized on the behalf of the fund are executed by persons specialized in the field whose transactions are supervised by the CMB. By this way, the risks that may be incurred by investors are reduced to a minimum level and thus the investors are encouraged more to invest in the fund.
1- Ahu Ayanoğlu Moralı, Mülkiyet Hakkının Teminat Amaçlı Devrine Yönelik İnançlı İşlemler, Unpublished Doctoral Thesis, Galatasaray University Institute of Social Sciences Department of Private Law, Istanbul 2006.
2- Erkan Özgüç, “Gayrimenkul Yatırım Fonları: Çeşitli Ülkelerdeki Uygulamalar ve Türkiye İçin Öneriler”, Research Report of Capital Market Board, 03.04.2008, http://www.spk.gov.tr/yayingoster.aspx?yid=960&ct=f&action=displayfile (Last access: 25.04.2017).
3- Kasaroğlu Law Firm, Gayrimenkul Yatırım Fonu ve Yabancıların Gayrimenkul Yatırım Fonu Kapsamındaki Avantajları, http://www.kasaroglu.av.tr/tr/28035/Gayrimenkul-Yatirim-Fonu-Ve-Yabancilarin-Gayrimenkul-Yatirim-Fonu-Kapsamindaki-Avantajlari (Last access: 25.04.2017)
4- Saibe Oktay Özdemir, “Teminat Amaçlı Mülkiyet Devri Sözleşmeleri”, Milletlerarası Hukuk ve Milletlerarası Özel Hukuk Bülteni, 1999-2000, V. 19, N. 1-2, pp. 657-683
5- Capital Market Board, Gayrimenkul Yatırım Fonu Tanıtım Rehberi (Guide for Real Estate Investment Funds), (“CMB Guide”), Ankara, June 2016
 OG dated 08.12.2001 and numbered 24607.
 Kasaroğlu Law Firm, Gayrimenkul Yatırım Fonu ve Yabancıların Gayrimenkul Yatırım Fonu Kapsamındaki Avantajları, http://www.kasaroglu.av.tr/tr/28035/Gayrimenkul-Yatirim-Fonu-Ve-Yabancilarin-Gayrimenkul-Yatirim-Fonu-Kapsamindaki-Avantajlari (Last access: 25.04.2017)
 OG dated 28.06.2013 and numbered 28691.
 OG dated 17.12.2013 and numbered 28854.
 Saibe Oktay Özdemir, “Teminat Amaçlı Mülkiyet Devri Sözleşmeleri”, Milletlerarası Hukuk ve Milletlerarası Özel Hukuk Bülteni, 1999-2000, V. 19, N.1-2, p. 671.
 Ahu Ayanoğlu Moralı, Mülkiyet Hakkının Teminat Amaçlı Devrine Yönelik İnançlı İşlemler, Unpublished Doctoral Thesis, Galatasaray University Institute of Social Sciences, Department of Private Law, Istanbul 2006, p. 234.
 Özgüç, p. 21.
 Özdemir, p. 662.
 Art. 5/1-(d) – 4 of Corporation Tax Law dated 13.06.2006 and numbered 5520.
 Capital Market Board, Gayrimenkul Yatırım Fonu Tanıtım Rehberi (Guide for Real Estate Investment Funds), (“CMB Guide”), Ankara, June 2016, p. 8.
 OG dated 04.02.2011 and numbered 27836.
 CMB Guide, p. 8.
 CMB Guide, p. 7
 Özgüç, p. 31.
 Özgüç, p. 33.