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December 21, 2023

Collaterals, Mortgages and Sureties that may be Provided by Real Estates Investment Trusts and Venture Capital Investment Trusts

1. INTRODUCTION

Real Estates Investment Trusts (“REIT”) and Venture Capital Investment Trusts (“VCIT”) which has a significant role in financial markets provides financing for the investment of various projects with more than one investor becoming a partner. From this standpoint, REIT and VCIT have been subjected to stricter rules within the framework of the legislation issued by Capital Markets Board (“CMB”) in order to operate in the sector in a more corporate, more transparent, accountable and compliance manner with the corporate governance principles aiming to reduce the risk of investors and protect their investments. That is to say, like the restrictions imposed on external borrowings of REIT and VCITs, the collateral, pledges, mortgages and sureties that they can provide in favor of third parties and their subsidiaries over the assets in the portfolio have been restricted within the scope of the regulations issued by the CMB.

2. COLLATERAL AND LEGAL FRAMEWORK

In the scope of III-48.1 Communiqué on Principles Regarding Real Estate Investment Trusts (“Communiqué III-48.1”) and Communiqué III-48.3 Communiqué on Principles Regarding Venture Capital Investment Trusts (“Communiqué III-48.3”), the collaterals, pledges, mortgages and sureties that can be provided by REITs and VCITs in favor of third parties and their subsidiaries over the assets in the portfolio are limited. Thus;

a. Pursuant to Article 30 of Communiqué III-48.1, REITs are allowed to establish mortgages, liens, and other rights in rem, or provide collateral, guarantees, and sureties under the following circumstances:

  1. in projects involving land-share and revenue-sharing agreements, if the landowners transfer the land to the partnership free of charge or at a low cost, or if a superior right is established in favor of the partnership, the landowners may have mortgages, liens, or other limited real rights on the real estate assets within the partnership’s portfolio as project collateral.;
  2. other limited real rights on the assets in their portfolio on the assets within their portfolio for financing obtained in favor of their legal entities for the financing to be provided up to five times their equity capital; and 
  3. on the assets within their portfolio in favor of their wholly-owned subsidiary companies in which they hold a 100% stake

REITs are prohibited from establishing mortgages, pledges and other rights in rem in favor of third parties and making any other dispositions on their assets other than for the purposes listed above in accordance with Communiqué III-48.1.

b. Pursuant to Article 20/f.2 of Communiqué III-48.3, VCITs have the following restrictions regarding collateral, guarantees, and mortgages, except in the following cases:

  1. Collateral and guarantees may be provided, and mortgages may be established, in favor of venture companies that meet the criteria defined in the SME Regulation.
  2. Agreements may be concluded for the provision of collateral and guarantees in the form of the shares held or to be held in venture capital companies that are currently will be part of the VCIT’s portfolio, for financing the investments made in those venture companies.
  3. Can provide short-term financing to venture companies in their portfolio exclusively as working capital. 

However, under no circumstances can collateral be provided, become a guarantor, or establish mortgages or liens on the assets within the portfolio in favor of third parties, except in the mentioned cases. 

It is important to emphasize the significance of diversity in accessing financing for investments made by REITs and VCITs. As a matter of fact, various collaterals are requested by financial institutions and banks in order to obtain financing. Therefore, the ability of investment partnerships to provide collateral, even to a limited extent, has facilitated project financing.

However, pursuant to Article 11/A, paragraph 10 of Communiqué III-48.1, an exception has been made by stipulating that the limitations set forth in paragraph a) above shall not apply to REITs that are exclusively intended to invest in infrastructure investments and services. Specifically, for partnerships established solely to operate portfolios consisting of infrastructure investments and services, or partnerships that have transformed into such entities, the provisions regarding collateral, liens, mortgages, and guarantees as stipulated in the Corporate Governance Communiqué (II-17.1) under Communiqué III-48.1, Article 11, will be applied. In this context, the provisions of Article 12 of the Corporate Governance (II-17.1) are applied to the collateral, pledge, mortgage and surety transactions of the aforementioned REITs.

3. CONCLUSION

As stated above, the use of financing by REITs and VCITSs and the transactions of collateral, pledge, mortgage and rights in rem facility are subject to certain terms and conditions by the CMB communiqués and the related transactions are limited by the communiqués.  

In order not to face any sanctions and legal invalidity in the financing and other specified transactions to which the aforementioned partnerships are parties; It is of high legal importance to establish procedures in accordance with these limitations imposed by legal legislation.

Sincerely, 

Kılınç Law & Consulting – Capital Markets Law Department 

Authors

Sevinç Jafarova

Sevinç Jafarova

Lawyer