Real estate transactionswww.real-estate-transactions.ch

Bürgi Nägeli Lawyers Grossmuensterplatz 9 CH-8001 Zurich Phone: 0041 (0)44 268 40 00 Fax: 0041 (0)44 268 40 05

Contact: RA Urs Bürgi, Lawyer and owner of the Zurich notary, land register and official receiver patent ubuergi@bnlawyers.ch

lic. iur. Gudrun Bürgi-Schneider gbuergi@bnlawyers.ch

www.bnlawyers.ch

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© Copyright by Bürgi Nägeli Lawyers · September 2008 ISSN-Nr. 1662-8810

DisclaimerThe Information contained in this customer newsletter is of a general nature and does not apply to the specific circumstances of individual persons or legal representatives. Although we make every effort to provide accurate and up to date information, we can give no guarantee that what we have expressed will still be applicable and correct at the time of publication or in the future. The information contained in this customer newsletter should not be used as a basis for decision-making or negotiation without first undertaking a detailed investigation and obtaining professional advice.

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Editorial

Real estate has been bought and sold since time immemorial. You could be forgiven for thinking that there was no more to be said on the subject. Rights and obligations relating to landed property, its acquisition and realisation by way of security interest have been systematically organised under the law throughout the whole of Switzerland since 1912. Buyers and sellers arranged for real estate to be valued and negotiated independently among themselves. Until the turn of the century, the brokerage sector had very little influence on the real estate market in Switzerland (the Swiss like to act on their own account). For this reason no proper procedure was developed for real estate transactions.

However, even though legislators still restrict the acquisition of real estate by foreigners – at least with regard to capital investment in residential real estate – global investors have since discovered the Swiss real estate market as a means of diversifying their capital investments. In the process, procedures from the English-speaking world such as reporting on property and markets, facility management, CREM (corporate real estate management), due diligence, structured acquisition and structured financing have found their way into the Swiss real estate industry almost unnoticed. Swiss legislation has not stood in the way of these changes, although it does regulate them in the main by way of general rather than detailed principles. Hence the principles of the six types of due diligence can be implemented despite the existing right of guarantee on the acquisition of real estate.

These new trends not only represent a challenge to buyers and sellers, but also to advisers: Detailed procedures for operating, maintaining and selling or acquiring real estate create transparency and protection against risk, in-cluding protection against the exaggerated upward price spiral. Procedural errors are traceable. These procedures have become indispensable in view of shorter economic and investment cycles. However, most tools will not be of use if their results are being embellished, interpreted incorrectly or even re-interpreted, just to fit certain purposes. To reject an opportunity to buy or sell requires endurance and consistency. Furthermore, procedures alone are not sufficient; extensive knowledge and experience of the industry are also needed in order to interpret the regulations correctly.

Below we offer you various articles on current real estate topics. We hope you enjoy reading them.

Bürgi Nägeli Lawyers Urs and Gudrun Bürgi-Schneider

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Contents

A. Real Estate Investment and the Revision of the Swiss Law on Collective Capital ....... 61. Amendments ........................................................................................................................ 6

2. Details of amendments ........................................................................................................... 6

3. REITs in Switzerland: still a hope for the future ............................................................................. 6

4. Better framework conditions for the funds economy in general – but unfortunately not for REITs ............. 9

B. Tax-optimized Real Estate Investments .............................................................. 121. Real Estate in Switzerland, owner abroad ................................................................................. 12

2. Exceptions from standard taxation contained in real estate taxation ................................................ 12

3. Conditions in the country of domicile for taxation ........................................................................ 13

4. Concept ............................................................................................................................. 13

5. Real estate obroad, owner in Switzerland ................................................................................. 14

6. Conclusion .......................................................................................................................... 14

C. Structured Financing .................................................................................... 161. Introduction ......................................................................................................................... 16

2. Covenants in real estate financing ........................................................................................... 16

3. Structuring of finance ............................................................................................................. 16

4. Financing a real estate portfolio .............................................................................................. 18

5. Asset backed securities, credit derivatives and credit syndication ................................................... 18

6. Summary ............................................................................................................................ 19

7. Conclusion .......................................................................................................................... 19

D. Real Estate Due Diligence – Increase decision-making quality and minimise risks at the same time ......................................................................................... 211. Definition ............................................................................................................................ 21

2. Objectives .......................................................................................................................... 23

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E. Contaminated Site or Abandoned Hazardous Site? ........................................... 251. Correct use of terms .............................................................................................................. 25

2. Cost bearing responsibilities ................................................................................................... 26

3. The significance of the Land Register to contaminated sites ........................................................... 27

4. Summary ............................................................................................................................ 28

F. Real Estate Taxation ..................................................................................... 301. Concepts ............................................................................................................................ 30

2. Different systems ................................................................................................................... 30

3. Tax harmonisation ................................................................................................................. 31

4. An overview ........................................................................................................................ 31

5. Demarcation problems ........................................................................................................... 32

6. Aspects of multiple taxation .................................................................................................... 32

7. Everyday tax pitfalls .............................................................................................................. 32

8. Latent taxes, chain transactions and the aggregation of land price and remuneration for building contracts ............................................................................................................. 35

9. Caution is advised ................................................................................................................ 36

G. Concluding Remarks .................................................................................... 37

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A. Real Estate Investment and the Revision of the Swiss Law on Collective Capital

1. Amendments

Registration of all collective capital investments: The new Swiss Federal Law on Collective Capital Investment (KAG) replaces the previous Swiss Federal Act on Investment Funds (AFG); the KAG goes into the subject in more detail than did the AFG, hence the new designation1). The following amendments should be noted compared to the former AFG:• Minoramendmentswithregardto(realestate)funds(seebelowfordetails)• Extensionofthenumerusclausustothepossibleformsofvehicle(seebelowfordetails)• Legalisationoftheprincipleof“SameBusiness=SameRules”• Specialsituationofthe“qualifiedinvestor”(investorswithaninvestmentvolumeofmorethan2millionSwiss

francs)

The KAG amendment approximates the law on the location of funds in Switzerland to that of Luxemburg and the EU. The Federal Law on Collective Capital Investments came into force on 1 January 2007.

2. Details of amendments

New criteria for real estate investment funds Compared to the previous law on investment funds the new act on collective capital investment brings the following amendments: • Simplificationoftheregulationanditsdescriptivedocument• Permittedinvestments

– Undeveloped land must be made available and must be ripe for development– Distribution of risks and restrictions:– Land subject to planning and building laws must account for only 20% of the real estate inventory– Mortgage exposure must be maximum 50% of the current market value– Also includes foreign real estate (prerequisite: ability to assess value)– Shares in other real estate funds2) or stock exchange listed real estate companies (restriction: maximum 25%

of fund assets)– Derivative financial instruments (for hedging purposes only3) and where in accordance with investment policy)

• Issuingsharesinrealestatefunds– The number of new shares to be issued muts not be determined in advance / the planned share is sufficient

• Investmentsinkind– On approval by the supervisory authority (Swiss Federal Banking Commission [EBK])– Amendment of funds regulation required

• Valuationspecialists– Two natural persons or one legal entity

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Extension of the numerus clausus to the possible forms of vehicle The KAG regulates the remaining structures for the identified collective capital investments in the form of skeleton law. The KAG provides for the following as investment vessels / legal entities:• Previousandnew(contractual)investmentfunds• Variablecapitalinvestmentcompanies(SICAV)• Fixedcapitalinvestmentcompanies(SICAF)• Limitedpartnershipsforcollectivecapitalinvestments

Unfortunately, the Real Estate Investment Trust (REIT) is not included on the legislator’s list of capital investment vehicles.

Commercial Law Characteristics & Duty of Authorisation and Approval

Type Code Own Legal Entity

Partners Capital Purpose Duty of Authori-sation4)

Duty of Appro-val5)

Comments

Investment funds AF No Contract partner Yes Yes No significant change

Investment company with variable capital

SICAV Yes Not definable in advance/ duty of redemption at net inventory value/participation options6)

Not definable in advance / issue of new shares at any time7)

For collective ca-pital investments only8)

Yes Yes Comparable with Luxembourg SICAV

Investment company with fixed capital

SICAF Yes Analogous to incorporated company (AG)9)/investors have non-qualified status

Fixed10) Collective capital invest-ments only/no other purposes

Yes Yes

Limited partnership for collective capital investment11)

KGK12) Yes General partners must be Swiss incorporated companies (AGs)14)15)

(unlike the OR13)-KommG [limited partnership under the Swiss Code of Obligations])

Analogous to the OR-KommG (limited partner-ship under the Swiss Code of Obligations)

Collective capi-tal investments only16)/no other purposes17)

Yes Yes Comparable with a limited partnership under the law in English-speaking countries18)

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Tax CharacteristicsTyp Code Taxation of the investment institution Taxation of the investor

Subject of tax

Tax exemption Liability to taxation

General taxation 19)

Issue of shares20)

Trade in shares

General Accumulation funds21) Shares in private assets22)

Shares in business assets

Switzerland Foreigners General Affidavit-capable23)

Investment funds24)

AF No; exception: real estate funds with direct real estate holdings

Yes Yes No With-holding tax25)

With-holding tax/double taxation agree-ment26)

Yes Not in Switzerland

No Yes

Investment company with variable capital

SICAV No27) Yes Yes No With-holding tax

With-holding tax/double taxation agreement

Yes Not in Switzerland

No Yes

Investment company with fixed capital

SICAF Yes No28) Yes No With-holding tax

With-holding tax/double taxation agreement

Yes Yes No Yes

Limited partnership for collective capital investment

KGK No; exception: KGKs with direct real estate holdings 29)

Yes Yes No With-holding tax

(Limited partner) with holding tax/double taxation agreement

Ja Not in Switzerland

(Limited partner) No

Yes

3. REITs in Switzerland: still a hope for the future

Despite the economic advantages of REITs, the Swiss legislator was still unable to decide on the creation of this investment category.

Reasons for resistanceThere are many reasons for the resistance to REITs:• Swissfederalism30)

• Structuralpolicy31) • Taxlosses32)

OutlookThere are arguments on both sides as to whether tax breaks for real estate companies make sense. However, it is a fact that countries which do not have REIT vehicles are compelled to act if they do not want to witness the outflow of investment funds and/or real estate companies. Switzerland will not be able to escape this trend33).

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Interesting alternatives to the REITIn Switzerland real estate funds represent a form of investment that is similar to the REIT (no tax on capital or earnings on the asset sui generis, basic taxation only). If as is expected a Limited Partnership for Collective Capital Investment (KGK) is assessed for taxation in the same way as an investment fund, the following advantages result for the KGK’s with direct real estate holdings:• Limitedgroupofpeopleispossible• KGKpayonly4.25%federaltaxation• PartnersintheKGK(investors)arenottaxedonrevenuefromdirectrealestateholdings.

4. Better framework conditions for the funds economy in general – but unfortunately not for REITs

The KAG creates modern framework conditions for capital investment, including the real estate sector. With the exception of SICAF, the standardisation and simplification of taxation makes the investment vehicle attractive and competitivewhencomparedtoLuxembourg.Onlypracticewillshowwhetherandtowhatextentthe“affidavit-capableaccumulationfunds”willannulthesavingstaxagreementwiththeEUandwillbeofinteresttoforeigninvestors who wish to invest in a Swiss vehicle with foreign investments.

Unfortunately the legislator did not meet the wishes of the funds and real estate industries for the creation of REITs. If Switzerland wants to gear itself towards foreign real estate investors desirous of uniform standards for their invest-ments, which REITs now offer, and does not wish to remain an island, it will not be able to get around this invest-ment vehicle. The limited partnership for collective capital investment represents only a limited alternative, however benchmarking and the ability to dispose of indirect real estate investments is the first priority for real estate investors operating internationally.

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Notes 1) Althoughthe“investmentfoundation”isavehiclefor(financiallyopen)collectivecapitalinvestment,ItwasnotmadesubjecttotheKAG. 2) Including REITs. 3) To protect against market, currency and interest tisks. 4) Authorisationfor“bearers”. 5) Approvalfor“product”. 6) At the annual general meeting and by inclusion on the supervisory board (3 to 7 members). 7) Principle of the unitary share (no share certificates, profit participation certificates or preferential shares); true no-par shares; Two types of shares are

possible:companyshares(alwaysnominalshares)andinvestorshares;nosubscriptionrights(exceptforrealestateSICAV). 8) Suitability for real estate investments: not foreseeable at present. 9) AG=incorporatedcompany.10) Not listed on the Swiss stock exchange.11) Form of vehicle for real estate investments similar to private equity (practiced in the legal form of the ordinary limited partnership (KommG) prior to the

introduction of the KAG).12) KGK=limitedpartnershipforcollectivecapitalinvestment;arisingincontrasttothelimitedpartnershipundertheSwissCodeofObligations(OR-KommG)

with entry in the commercial register; partnership capable of holding legal rights.13) OR-KommG=generallimitedpartnershipregulatedbytheSwissCodeofObligations.14) Qualified investors only.15) The consequence of the voluntary resignation of a partner is dissolution.16) 100% real estate allocation possible.17) Construction and real estate projects must be possible.18) External asset managers subject to authorisation.19) NodirecttaxationandnoSwissFederalOldAgeandSurvivors’Insurance(AHV).20) No issuing tax.21) Restitutionofsharesinfunds:theyieldcontainedintherestitutionpriceissubjecttowithholdingtax(VST);Withholdingtaxisreclaimable.22) Thereisreservationfortaxationasaso-called“professionalsecuritiesdealer”,providedthattheprerequisitesaregiven;initscommunicationtheFederal

Council of Switzerland puts on record that a private person who buys or sells shares in investment funds should not be considered to be a professional securities dealer on the basis of this fact alone.

23) Funds wherein at least 80% of the taxable profits from shares is expected to originate from foreign sources; the Swiss Federal Tax Administration (FTA) on request grants authorisation for withholding tax not to be paid on presentation of a bank certificate (affidavit) confirming that the profits were paid, transferred or credited to a foreigner.

24) Unfortunately at this point it is not possible to discuss the tax situation with regard to investment funds and the depositary bank, in particular whether and to whatextenttheservicesaresubjecttoVAT.

25) Withholding tax/restitution of withholding tax.26) Double taxation agreement.27) SICAVaresubjecttothelawbutnottotaxation(sametreatmentascontractualinvestmentfunds).28) Taxation as a company under general commercial law (disadvantage: double taxation due to tax on profits for companies and tax on dividends for

partners).29) As far as the exception is concerned, the Swiss Federal Tax Administration (FTA) assumes that a KGK can be taxed in the same way as a real estate fund

with direct real estate holdings if for example it pursues a construction project, although mere open funds may be real estate funds in accordance with KAG and are required to own at least ten pieces of real estate.

30) Switzerland’s federal tax system knows 26 different real estate tax laws with different object taxes (real estate, transfer of ownership and real estate profits taxes) and different tax authorities (cantons and/or municipalities).

31) Companies which would qualify for REIT status would be exempt from real estate taxes (real estate, transfer of ownership and real estate profits taxes); one “assetclass”wouldthenbetaxedandtheothernot.

32) The financial directors of the cantons fear tax losses of approximately 150 million Swiss francs. The tax reductions already concluded, the imminent reductions from tax competition among cantons and the individual tax concessions are causing the fiscal legislators to hesitate in awarding further “taxgifts”.

33) Meanwhile in the English speaking world the next trend of PICs (Property Index Certificates or participation in rental income or value fluctuations in real estate markets) is already underway.

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B. Tax-optimized Real Estate Investments

Real estate categorisation by individual asset category, common in the English-speaking countries, has now arrived in Switzerland too. The principles of asset management not only lead to diversification, optimisation, correlation and more active real estate management, but also to the application of structures and resources which have long been prevalent in the M&A business (holding structures, due diligence, discounted cash flow value assessment, etc.).Thisalsoincludes“treatyshopping”,i.e.theinsertionofaforeigncompany–forinstanceincountrieswitha double taxation agreement (DTA) or those with an advantageous treaty network for the optimisation of the tax burden.

1. Real estate in Switzerland, owner abroad

Principlesa) Direct real estate investmentRevenues and profits from real estate are usually taxed in the Canton or state in which the real estate is located.

b) Indirect real estate investment / transfer of ownershipTheprocedureissimilarwhenamajorityinterestistransferredtoarealestatecompany(=transferofownership).As far as inter-cantonal relationships within Switzerland are concerned, such a majority interest qualifies as an immovable property asset and taxation authority is assigned to the Canton in which the real estate is located. In the international arena, in the case of all DTA’s that follow the old OECD Model Convention, taxation authority on the sale of shares more than 50% of the value of which depends directly or indirectly on real estate is assigned to the state of domicile of the seller of the shares. In the same circumstances, DTA’s which already follow the new OECD Model Convention assign taxation authority to the state in which the real estate is located.

2. Exceptions from standard taxation contained in real estate taxation

The following exceptions from standard taxation are contained in real estate taxation:• DTAproceduresinaccordancewiththeoldOECDModelConvention.(MostDTA’swithSwitzerlandfollowthe

old OECD Model Convention, which provides for taxation in the country of the seller of the share).• ProceduresaccordingtotheSwissMergerAct1), in conjunction with the Swiss Tax Harmonisation Act2), 3).

The procedure according to DTA’s or the OECD Model Convention is of interest for tax-optimised real estate invest-ment. In the case of a DTA structured on the basis of the old OECD Model Convention, the sale of an interest to a real estate company through a foreign company in the DTA partner state does not represent a change of ownership which would attract Swiss tax on profit from real estate4).

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3. Conditions in the country of domicile for taxation

First of all, check whether:

1. Profits or income from abroad (location of real estate) are taxed in the country of destination;

2. In the event of the taxation of profits from abroad the tax rate for business profits or income is lower for legal entities than the basic tax rate in the respective Swiss Canton.

The following graphic illustrates the procedure to find the best possible holding structure across national borders.

4. Concept

The optimum solution can be found by combining:• RealestateownershipinSwitzerland• DomicileinacountrywhichintheDTA5) accounts for capital gains from the sale of real estate companies at the

domicile of the seller of the interest and not at the location of the real estate;• exemptsforeignprofitsorincomefromthedestinationcountryfromtaxationortaxesatalowerrate.• Alternative:Arealestatecompanythatqualifiesasanoperatingcompany.

Evaluation of a tax-optimized acquisition structure

Analysis of taxation law

Analysis of civilian law

Switzerland

Country X

Analysis of taxation law

Analysis of civilian law

Applicable international agreements/DTA (according to OECD Model Convention) Decision on structure Acquisition on real estate

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5. Real Estate abroad, owner in Switzerland

Naturally,similarconceptscanalsobedevelopedfor“Swiss”realestateownerswishingtoacquireforeignrealestate under indirect ownership.

6. Conclusion

As attractive as the results of this analysis may be, the fact is that the management of assets across international borders is also equally risky6). Suitable means of protection are an exact, individual clarification, a tax ruling and, where appropriate, a tax agreement.

Notes1) Swiss Federal Law on Merger, Demerger, Conversion and Transfer of Assets and Liabilities (Fusionsgesetz; in brief FusG) of 3.10.2003, SR 221.301,

which entered into force as of 1. July 2004.2) Swiss Federal Law on Tax Harmonisation of 14. December 1990, SR 642.14, e.g. for the Canton of Zurich, which entered into force as of 1. January

2006.3) The goal of the new provisions on merger, demerger, conversion and transfer of assets and liabilities was to facilitate the conversion and restructuring processesofcompaniesandgroupsaswellasEuro-compatibility.VariouscivillawprocesseswhichattractedtaxationpriortotheintroductionoftheLawon Merger are no longer subject to taxation, such as for example: a) real estate companies of a certain size qualify as operating companies (no change of ownership, not subject to real estate tax) and b) tax-neutral demerger of real estate companies.

4) This is a tax-neutral procedure as a consequence of the absence of an actual chargeable event.5) Drawn up in accordance with the old OECD Model Convention.6) A scenario whereby both countries involved assert their power of taxation, thus turning a tax saving model into a tax horror model, must be avoided.

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C. Structured Financing

1. Introduction

Real estate strategy as characterised by the English-speaking countries is based on buying an item of property and selling it for maximum profit within a short investment horizon of between five and ten years. This philosophy demands a cash flow approach and segmentation or optimisation of operation and inventory. However, this practice of a short investment horizon also led to the adoption of similar criteria by the banks: in order to make the most realistic and timely assessment of opportunities and risks, reporting and controlling came into use in addition to cash flow and value-based business ratios, or so-called covenants.

2. Covenants in real estate financing

The purpose of covenants is to protect creditors by means of the realistic definition of goals (yield and credit repayment).

Real estate related covenantsarre:• LoantoValueRatio([LTV]1), 2), 3), 4)

• LoantoCostRatio([LCR]5), 6)

• InterestCoverRatio([ICR]7)

• DebtServiceCoverageRatio([DSCR]).

The following can also be found under this heading:• Reservationofagreementonchangesofmembersofthecompany• Reservationofagreementonagreementsrelevanttocashflow• Verifiedfinancialreportsoncompanyandrealestate• Entitlementtovaluationattheexpenseofthedebtor• Prohibitionofloanrepaymentstocompanymembers

Balance sheet related covenantsare agreements on:• Minimumnetworth• Minimumassetvalue• Minimumratioofcurrentassetsandliabilities,lessintangibleassets• Minimumliquidity

Violationofcovenantscanleadtotheterminationofcreditagreements.

3. Structuring of finance

I. PrinciplesBefore approving even the minimum requirement for a credit transaction of this nature, all banks first check whether the requested credit transaction is in accordance with its strategic focus:a) The quality of the debtor as a future partnerb) Location and quality of the real estatec) Compatibility of the customer’s request with the bank’s internal guidelines for a credit transaction of this type

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II. Cash flow based repayment potentialA cash flow summary for the desired credit term is produced from the credit application and real estate based operating data (income and expenditure) together with a list of questions as follows:a) Sustainability of lease incomeb) Calculation of credit risk on lease incomec) Realistic expenditure calculationd) Customer’s index / inflation expectationse) Subleases (as a prediction factor for the demand situation [appraisal of exercising or waiving of main tenant

options]).

The sustainability of the lease income is checked by means of the cash flow analysis:• Dependenceon

– Small, individual tenants– Large tenants

• Location• Re-lettingpotential• Thirdpartyusability.

III. Terms and conditionsThe detailed aspects are now examined, such as:

1. Interest conditions, possible use of hedging instruments (cap, floor, collar, cross-currency swap, currency swap, currency options, forward swaps, swap options and forward rate agreements etc.);

2. Reporting and the use of a security agent

3. Bank access to cash flowsa) First priority charges on propertyb) Assignment of leasec) Availability of cash flow surplus in favour of debtor only after approval by security agent

4. Distribution of risk between bank and debtor

5. Horizontal structuring (first priority or subordinated security)

6. Additional securities

7.Risksrelatingtomaturity(“Whateveryoudo,don’tforgettheexit”)

8. Purpose of financing

9. Quality of debtor as a partner

10. Creditworthiness of debtor

11. Conditioning (by property, debtor and credit rating)a) Redenomination of property, debtor and credit ratingb) Right to margin adjustment due to changes in ratingc) (Rating-adjusted) interest amendment clauses

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d) Termination rightse) Obligations/duties on transparency / reporting duties

4. Financing a real estate portfolio

Real estate investors buy or put together real estate portfolios in order to spread their risk. Due to its component parts, the associated financing of the portfolio (portfolio and cash flow analysis, credit structuring, securities concept and contract structuring) is elaborate and complex.

Direct real estate investmentsThe same key criteria are used: cash flow, proportion of own resources, reporting, controlling etc. Once again the bank and investor / debtor agree on the real estate and balance sheet related covenants. – It is recommended to define the proportions by which the overall loan will be distributed across the individual items of real estate. This is advantageous in the case of the sale of real estate, portfolio regrouping and similar circumstances. In the absence of the internal distribution of the loan amounts, questions on the preservation of portfolio quality would inevitably arise following a change to the portfolio. This is often the origin of declarations of default and legal disputes. Accountshouldalsobetakenofthe“dominoeffect”(oneitemwithpoorperformanceinagoodportfolio).

Indirect real estate investmentsIf the portfolio is made up of share stock in individual real estate companies• TheloansaremanagedasLombardcredits• Thesharesarepledged• Financialmanagementandreportingaredeterminedbywayofbalancesheetandaccountingregulations,

which mean less regulation effort due to the automatic use of existing standards (IFRS, GAAP etc.).

5. Asset-backed securities, credit derivatives and credit syndication

By means of asset-backed securities, uncertificated assets are converted into capital market viable interest bearing securities. By contrast, credit derivatives are capital market based financing instruments which serve to transfer credit risks associated with risk assets to another party, whereby the original basic relationship is neither novated nor changed.

These two instruments in addition to credit syndication serve risk management in general and credit portfolio control in particular.

The generation of capital market viability for a structured real estate loan gives rise to high initial costs as well as consultancy and control expenditure.

As of today we cannot predict whether and to what extent default or a fall in the value of the derivatives in the capitalmarketsystemmayhaveaneffectontheprincipaldebtororinvestors.Withregardtothe“sale”ofnon-performing loans, so-called NLP’s8), to hedge funds and the like, the first reports from the field in part comment on execution proceedings for the sole purpose of foreshortening realisation and increasing rates of return.

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6. Summary

7. Conclusion

Despite structured financing with many controls and regulations we must not lose sight of the relevant criteria for mutual engagement:• Agoodrating• Financialscopeforloanamortisation• Reserves• Attractiverealestateproperty(ies)• Reasonableloanamountoradequateproportionofownresources• Professionalknow-howofinvestorordecision-maker• Long-terminvestmentandmaintenancestrategy

Theprincipleof“Asmuchsegmentationasnecessary,aslittlecomplexityaspossible”applies.

Notes1) The lower the calculated percentage value, the lower the risk of loss to the creditor.2) Estimated value: It is recommended to obtain the definition of how the estimated value was derived.3) Side effect: The ratio determines how much of its own resources the debtor has to invest to finance the purchase.4) Material structure: Real estate value definition as the reference value for the ratio, ratio for fixing the loan value (static? control? costs?), constant ratio

(ratio as upper limit, otherwise the debtor has the right to automatic loan increase /in the case of amortisation loans the residual value as the upper limit), additional ratio for falling property value despite stable profit situation to prevent an event of default, parameters for fixing a higher value.

5) Purchase of an existing property: investment costs can be determined in purchase contract.6) Construction financing: precise review of cost ratios (hard and soft factors) / dependence of ratio on advanced sales or rentals.7) Structuring options such as definition of net operating income, relevance of ratio (payout date only or for the entire term of the loan?), ratio changes (none?

sliding scale? increase?), determination of ratio (forward looking covenant or ex post looking covenant?), check intervals, dividend payouts to shareholders (highest interest coverage ratios, earliest term etc.?)

8) Non performing loans

Bank

Funds(Shareholder)

Real Estate company

Real estate purchase contract

Service contract

Fixed price / Works contract

Seller

Project developer

General contractor

Tenant / useReal estate operation

Own Resources

Distributed profitsfrom real estate

Revenue from use

PurchaseSale

Credit portfolio

Other bank transactions

Secondary Market– Syndication– Securisation– Credit derivatives

Reporting

Securityagent

Real estatevaluer

Buildingtrustee

Controlling

Mortgage forland acquisition

Buildingloan

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D. Real Estate Due DiligenceIncrease decision-making quality and minimise risks at the same time

1. Definition

Real Estate Due Diligence (REDD) is the systematic auditing of real estate by specialists using recognised methods of analysis, culminating in the presentation of results in a Real Estate Due Diligence Report (REDDR). The areas covered by the audit are:

1. Market due diligence

2. Legal due diligence

3. Tax due diligence

4. Technical due diligence

5. Environmental due diligence

6. Financial due diligence

ObjectivesWhen is REDD carried out and for whom?

This question must be asked at the beginning of every audit process.

The purpose and recipient of the procedures defined by the REDD and the content of the REDD are the determining factors.

Who?Vendor Due DiligenceWhenthevendorordersaREDDthisisthendescribedas“VendorDueDiligence”.

Buyer Due DiligenceAREDDorderedbythebuyerisknownas“BuyerDueDiligence”(also“InvestorDueDiligence”).

Owner Due DiligenceItisalsoconceivablethattheowner,thoughhavingnointentiontosell,mayrequestso-called“OwnerDueDiligence”,e.g.toverify,optimise,revalueorrefinanceanitemofrealestate.TheREDDRthenprovidesthe basis for decision-making with regard to a possible sale or a project initiative in the field of corporate real estate management (crem).

Why?Real Estate Due Diligence in general serves to:• Provideabasisfordecision-makinginarealestatetransaction• Determinethepurchaseprice

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• Identifyopportunitiesandrisks• Establishtherequirementsforregulatingthepurchasecontract• Assesswhethercontractnegotiationscanbeenteredintofromapositionofstrengthorweakness

How?Buyer Due DilgenceThe actual Due Diligence (DD) audit can be broken down as follows:• EstablishmentofaDDteam• Workpreparation• Implementation• Documentation• Vendorinterview• Evaluation/DDreport

The emphasis is on investigating deficiencies in the object of purchase and assessing its recoverability.

Vendor Due Diligence1)

The DD team undertakes the following with regard to the sale:• Allelementsofthe“BuyerDD”• DocumentationfortheBuyerDD(data)• Informationfromthevendortothebuyer• ProvisionofservicestothebuyerduringtheimplementationofDD

AttheheartoftheVendorDDteam’sactivityisaninvestigationintotheoptimisationoftheitemofrealestatepriorto sale and the preparation of a fair-minded presentation on the object of sale highlighting its advantages.

Timing?The REDD should be carried out as early as possible (for information purposes) and yet as late as possible (for cost reasons).

Therefore:• Collectionofraw,outlineinformationbeginsimmediately• Thedetailedinvestigationtakesplaceonlywhentherealisationofthetransactionisprobable

Note1) The DD team must not of course be acting for both buyer and seller in the same investment company or carrying on vendor and buyer due diligence at the

same time.

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2. Summary

The REDD processes may be summarised schematically as follows:

Old wine in new skins?Checks have always been carried out when acquiring real estate. Each person investigates in his or her own way, with or without a method. Audits until now were carried out only from the expert’s viewpoint. The REDD takes account of vendor, buyer and the other transaction partners such as banks and financial investors as providers of capital. The REDD is a systematic real estate audit. In the final analysis, the REDD makes real estate projects more transparent for all participants, improves the quality of decision-making and thus reduces risks.

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E. Contaminated Site Or Abandoned Hazardous Site?

Until 1 July 1997 subsoil pollution was punished only in accordance with the principle of disturbance contained in the water pollution control provisions. With the 1997 review of the Swiss Environmental Protection Act (USG) a foundation was created in federal law which includes not only the effects on water but also all environmental distur-bances (earth, water and air). The review which came into force on 1 November 2006 aims to clarify at the legal level the problems which have arisen in everyday legal practice until now. At this time it is not possible to assess how the new practice will develop as a result of these regulations.

Not only lay people but also many real estate professionals are unfamiliar with the different grades of environmen-tal disturbance. For this reason they are unable to classify the changes from the 2006 review, despite press reports. The results are poorly drafted contract terms and conditions in real estate deeds of sale and clauses on subsoil responsibility in construction service contracts, with cost implications in each case.

1. Correct use of terms

Contaminated site:A site the contamination of which is caused by waste and is of limited dimension (Ordinance on the Decontamina-tionofContaminatedSites–ContaminatedLandOrdinance(AltlV2Para1).Thisincludeslandfillsites,operationalsites and accident sites. Contaminated sites may require decontamination. Sites which do not require decontamina-tion may be left provided that the contamination is not moved.

Abandoned hazardous sitesAbandoned hazardous sites are contaminated sites in need of decontamination (qualified facts). A site is in need of decontamination when it occasions harmful or burdensome effects or when there is a concrete danger that such effectsmayarise(AltlV3Para2and3).

Abandoned hazardous sites do not necessarily differ in their nature from contaminated sites in need of decontami-nation; the only difference often lies in their hazard potential due to their specific location (e.g. close to ground-water occurrences). There may be so-called hotspots within the area of a contaminated site which does not require decontamination, i.e. abandoned hazardous sites which require decontamination; in such cases clear demarcation is necessary in order to avoid unnecessary investigation and disposal costs.

Furthermore, the thresholds which qualify a contaminated site to become an abandoned hazardous site are different depending on the potentially endangered property (e.g. groundwater or surface water). The demarcation must therefore be considered to be much differentiated.

WasteWhen material is excavated from a contaminated site – whether or not this site requires decontamination – this becomes waste and must be disposed of in accordance with the regulations. Due to the fact that the material from an abandoned hazardous site can have the same characteristics as those of a contaminated site which is not in need of decontamination, the price for disposing of or cleaning such materials is the same.

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2. Cost bearing responsibilities

for contaminated sites with no duty of decontaminationIn last November’s review of the USG a new article was added to the law, namely USG 32 b bis with the title “Financingincasesoftheexcavationofmaterialfromcontaminatedsites”.However,thearticlecoversonlymate-rial excavated from contaminated sites with no duty of decontamination, i.e. where no harmful or burdensome effects – or the danger that such may arise - exists.

Since due to its contamination the proper disposal of material excavated from contaminated sites can have the same high cost implications as the excavation of abandoned hazardous sites, a need for regulation arose because many land owners possess land which they acquired at a time when the high costs of contaminated sites with and without duty of decontamination were not or barely an issue; accordingly no corresponding regulations were made at that time.

The legislators have indeed taken account of the needs of such land owners, however the regulation has been provided with reservations: thus in general two thirds of the additional costs for the investigation and disposal of materials may be demanded from the originators of the pollution and the former owners of the site provided that the following conditions are met on a cumulative basis:• Theoriginatorpaidnocompensationforthepollutionortheformerownersgrantednopricereductioninrespect

of the pollution on the sale of the land.• Theremovalofthematerialisnecessary(fortheconstructionormodificationofbuildings).• Thecurrentowneracquiredthelandbetween1July1972and1July1997• Enforcementdoesnottakeplaceafter1November2021.

In the case of sites which are merely contaminated there is no contingent liability on the part of the community and no right to claim cost sharing from the public authorities.

In matters of public law enforcement before the local civil court represents an exception.

for contaminated sites with duty of decontamination (abandoned hazardous sites)The regulations in accordance with USG 32c et seq. apply to contaminated sites with duty of decontamination. The restrictions set out in USG 32 b bis cease to apply in their entirety; instead the following applies:• Theoriginator(howevernotaformerownerwhooriginatednocauseorwhoonexercisingduediligence

would have had no cause to have knowledge of the pollution) can be prosecuted in full measure for the costs arising from the actions necessary for the investigation, monitoring and decontamination of contaminated sites.

• Inthecaseofseveralpollutersthecostsaredividedinaccordancewiththeallottedshareofresponsibility.• Intheeventthatitisnotpossibletoidentifytheoriginator,ortheoriginatorisinsolvent,theresponsiblelocal

community becomes liable for that originator’s share of the costs (contingent liability).• Anoriginatormaydemandthespreadingofcostsfromtheauthorities.• Theresponsiblelocalcommunitybearsthecostsofinvestigationswhichitordersbutwhichdeterminethatthe

land is not contaminated.

for wasteThe owner of waste bears the cost of its disposal (USG 32). When a contaminated site is excavated, the owner of the site becomes the owner of the waste and is primarily responsible for its proper disposal. It is therefore absolutely essential to make timely regulations with regard to the responsibility for costs and to specify the right to immediate cessation of excavation activities in the service contract with the excavation company. In this case recourse beyond the provisions described is otherwise no longer possible and the owner of the site must bear full responsibility for the costs of waste disposal.

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3. The significance of the Land Register to contaminated sites

The Cantons operate a Land Register in which all identified contaminated sites are recorded. It is accessible to the public and an important element for an initial orientation on any pollution of a piece of land. The Land Register provides support to the authorities for the identification and prevention of threats to public property. When acquiring real estate it is risky to rely on the land register alone because the register of contaminated sites makes no claim as to completeness.

4. Summary

Terminology

Liability party

Contingent liability of state

Claim for cost sharing available

Fixed

Requires decontamination

Abondoned hazardous site

1/1 originator contractual agreement

yes

yes

Not fixed

Waste

1/1 owner

(current owner or excavation

company

Contamined site

Bought between 1.7.1972 and

1. 7.1997

No compensation for pollution and

no price reduction

Enforceability before 1.11.2021

Generally 2/3

originator + former owner

1/3 current owner

Contractual regulation

according to contract

Does not require decontamination

Bought before

1.7.1972

1/1 current owner

Bought after 1.7.1997

1/1 current owner

Non contractual regulation

none

none

Intervention in subsoil due to building works Decontamination

Cost responsibility

Change

Acquisition

No compensation

Prosecution of Claim

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ConclusionWhile the new articles added to the USG on its revision do indeed create clarity in the law, they do not discharge either buyers or sellers of real estate from their obligation to pay attention to careful regulation of sale and service contracts.

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F. Real Estate TaxationAn Overview, Conflicts with Other Taxes and Pitfalls

1. Concepts

“Realestatetaxation“isagenerictermforanumberoftaxesrelatingtorealestate:• Realestategainstax• Realestatetransfertax• Realestatetax

Real estate gains taxisa“propertytax”ortaxleviedonthepropertyitself(asopposedtoincometaxorwealthtax,whichis“personaltaxation”).Thesolebasisofassessmentistheprofitontheproperty,calculatedasthedifference between revenue and investment value. The investment value is determined by the purchase price plus allowable expenditure.1) Real estate transfer tax, which as in the case of real estate gains tax is charged when a propertyistransferred,isaso-called“legaltransactiontax”.DependingontheCanton,theassessmentbasisinthiscase is the purchase price, the official value or the current market value of the real estate. Real estate tax is linked totheownershiporuseoftherealestate.Itisa“specialtax”associatedwithpersonaltaxationwhichleadstodouble taxation on the real estate holding. In most cases tax is charged on the current market value; in the case of agriculture and forestry real estate it is charged on the capitalised value.

2. Different systems

Today two different systems can be identified2):• St.Gallensystem• Zurichersystem.

The St. Gallen system only charges property tax on real estate held in the form of private assets, agricultural real estate and the real estate gains of property dealers located outside of the Canton. Otherwise real estate gains are accounted for in ordinary income tax or corporation tax. The Zurich system subjects all gains realized on immovable assets to real estate gains tax; hence it charges real estate gains tax on private and business assets. Real estate gains in respect of business assets and legal entities are taxable as profits in the context of ordinary income tax or yield tax, where purchase price and value-adding expenditure, including construction credit interest, exceed the value of the gains tax (§§ 18 Clause 4 and 64 Clause 3 of Zurich tax law [StG ZH]). Due to this peculiar formulation of recovered amortisation in the tax law, amortisation previously allowed by the tax office does not need to be substantiated. The law therefore assumes that the difference between the value of income or gains tax and the (higher) investment costs according to real estate gains tax represents the property gain subject to state taxation.

3. Tax harmonisation

The Tax Harmonisation Act (StHG) of 14 December 1990, which entered into force on 1 January 1993, in the main has only been implemented by the Cantons in recent months due to the impending expiry of the legal adap-tation period. The result of tax harmonisation was that all Cantons are now obliged by Swiss law to charge real estate gains tax. A consequence of this, for example, is that there was a change in loss offsetting in Cantons which previously did not levy real estate gains tax3).

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In order to take an investment decision, therefore, and indeed in general, it is necessary to clarify how the real estate gains tax system is structured (indirect loss offsetting, mitigation of double taxation by setting off Canton and local authority taxes against real estate gains tax, progressive tax rates etc.).

4. An overview

Real estate taxes are cantonal and/or local taxes. The following overview provides information on the real estate tax situation in the individual Cantons.

Overview of Real Estate Taxation in Switzerland (as of 1 January 2001)

Tax Authority Real Estate Gains Tax

Real Estate Transfer tax

Property Tax4)

Natural Person Legal EntityZH L – – –BE C L C (L) (L)LU C L C L L LUR C C7) – –SZ C –5) – –OW C L C L – –NW C C – –LL C C7) – –ZL L C – –FR C L C (L) (L) C (L)SO C L C – –BS C L C – CBL C C – (L)7)

SH C L C7) – –AR C (L) – –AI C C (L) (L)SL C L L LLR C (L) (L) (L) (L)AL C L C6) – –TL C C C CTI C C L C LVD C C (L) (L) C (L)VS C C L C LNE C C (L) C (L)LE C C C CJU C L C L L

C = Canton, L = Local Authorities, (L) = Facultative Local Authority Taxation

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5. Demarcation problems

In Cantons with real estate gains tax, in general the ordinances on income tax and real estate gains tax are not concisely or consistently harmonised. We differentiate between:• Demarcationproblemsand• Realconflicts

Demarcation problems mostly occur when so-called non-property items such as fixtures and fittings, goodwill, chattels etc. are purchased in conjunction with the real estate at an unitemised lump sum price. It is recommended to define the values of the non-property items which are part of the overall purchase in the purchase contract.

Real conflicts of a tax nature relating to profit and real estate gains taxation arise in particular in the case of transfer of ownership due to the transfer of shares to a real estate company: under certain circumstances the sale of shares (albeit moveable assets) is handled in the same way as the direct transfer of the property from a tax point of view. As far as inter-cantonal relationships are concerned, the Swiss Federal Supreme Court when deliberating on this qualification conflict has decided in favour of real estate gains tax or in favour of the Canton in which the property is located.

6. Aspects of multiple taxation

The fact that multiple taxes are allowed in relation to the same legal procedure may be disturbing to the lay person; however, the tax specialist is able to unravel the technical aspects of this situation. The tax authorities donotinformthepublicaboutsuchdualities.This“non-information”bythetaxauthoritiesandthesurpriseeffectmake the occurrence an unpleasant experience for the uninformed taxpayer. For the contract parties, however, it can be useful to structure their contract not only from the viewpoint of civilian law but also in accordance with tax optimisation considerations. The information below aims to draw the reader’s attention to such pitfalls:

7. Everyday tax pitfalls

Tax Cause Effect (on change or sale)Old age pensions (AHV)

Independent employment

Personal additions on property pertaining to a business assetAt the time of the sale, the owner claims that he carried out works himself; these costs should be acknowledged as increasing the value of the property, such that a lesser profit and hence a lower tax burden would result due to the higher investment cost.

Property is a business asset

The personal additions and their added value are assessed further. The consequence:– Cantonal income tax– Direct Federal taxation–Pensioncontributions(AHV)The amount:Many times higher than the real estate tax saved, especially in cases of long-term ownership

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Tax Cause Effect (on change or sale)Old age pensions (AHV)

Gifting of property pertaining to a business asset1. Assumption of transfer of property from a

business to a private asset.

2. Depending on Canton and family relationship

Charging of real estate gains tax and/or incometaxandpensioncontributions(AHV)on hidden assets.

Gift tax

Direct Federal taxation

Classification as a commercial property dealer (expressed simply, any person who buys and sells properties which he does not himself occupy / the same principles as for the assumption of a commercial securities dealer apply /no tax free capital gains) – with the exception of family residences all property is classified as a business asset.

Person subsequently qualified as a commer-cial property dealer, no accounting

Renunciation of business activityAn entrepreneur or property dealer ends his business activity.

Community of heirs builds new building (commercial building, apartment building with individually owned apartments)Implicit distribution of estate and establish-ment of an ordinary company or partnership among the participants with the same distri-bution of ownership.

Zurich systemAssessment of gains with real estate gains tax anddirectFederaltaxation/pension(AHV)Taxation on earlier depreciation on sale.

St. Gallen systemAssessment of gains with state and local authority taxation as well as direct Federal taxation/pension(AHV)

Non-recognition of depreciation for tax for lack of accounting

Triggering of gains tax

Loss of deferred tax status.

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Tax Cause Effect (on change or sale)Direct Federal taxation

– for resaleTax authorities will attempt to qualify the actions of the former heirs or present company as gainful activity (property dealer).

– for transfer to an heirDistribution of estate with deferred taxation no longer possible

Foreign real estate dealer or broker

Further assessment of transactions with regard to:– Cantonal income tax– Direct Federal taxation–Pensioncontributions(AHV)(quantitative: 40–50%)

Assessment for real estate gains and change of ownership tax

Shared liability of buyer and seller for foreign dealer or broker’s income or gains tax, up to max. 3% of the purchase price

Tax on income or profits

Please see explanations under old age pensions(AHV)

Inheritance and gift tax

The payment for the real estate transfer is > 25% below the current market value (so-called partial gifting [advance on inheritance, gift])

Depending on the Canton, generally gift tax, tax deferral on real estate taxation (no accumulation of real estate and inheritance with regard to gift taxes)

Valueaddedtax Options on lease propertiesDeduction for all expenditure such as tradesmen’s and supplier’s invoices etc.

Commercial property, insofar as used for taxable activitiesDeduction for all expenditure such as tradesmen’s and supplier’s invoices etc.

Options for sale of real estate[Option available for building value only – not for land value]

From the Seller’s viewpoint:Conditions:– SellerandbuyersubjecttoVAT– Property is used wholly or partly for

commercial use in the context of taxable activity.

Of interest to sellers who made investments and claimed input tax.

Taxed for personal use

Taxed for personal use

Not taxed for personal use

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Tax Cause Effect (on change or sale)Valueaddedtax No option or option unavailable

=changeofuse=taxonpersonaluse>increaseinpurchasepriceor“leftintheair”as a cost factor for seller

From the Buyer’s Viewpoint:IfheisliabletoVAT,heisatnodisadvan-tage as regards the seller’s choices

Sale of the property together with all or part of the operating assets

Taxed for personal use

But:Risk exists in the event of any subsequent change of use on the issuing of invoices for correct accounting for tax on personal use.

– VATnotpayable– Submit Form 764Report to the Swiss Federal Tax Authority (EstV)ifthepropertyisusedagainfortaxablepurposes.

Property or capital tax

The owner causes a lower official value or land register value to be set.

Depending on the Canton:1. (Retroactive) supplementary tax on assets2. Lower investment costs if the Canton

allows official or land register value, with the consequence of higher real estate gains tax

PS: Cumulative real estate taxation (real estate gains, change of ownership and possibly property tax) is typical and therefore not presented in the above table.

8. Latent taxes, chain transactions and the aggregation of land price and remuneration for building contracts

The following tax-related pitfalls should be avoided:• So-calledlatenttaxes• Thetaxationofsuccessivelegaltransactionsandchaintransactions• Theaggregationoflandandbuildingcontractvalueintaxation

In the case of real estate transfers under tax deferral status (e.g. gifts, advances on inheritance, distribution of estate etc.), the accepted value can not be claimed as the authoritative investment cost. The tax authorities apply the acquisition price paid by the previous owner. Despite the loss, in relation to the acquisition price paid by the previous owner a taxable profit has arisen. If the transferee sells below the price charged to him, i.e. at a loss, a profit may have arisen nonetheless from the point of view of real estate taxation: in the case of deferred taxation the period of ownership in addition to earlier increases in value will be imputed to the transferee. If the transferee does not wish to pay this amount of tax out of his own pocket, the accepted value must be reduced on transfer by the amount of the so-called latent taxes or a negotiated lump sum.

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Owners of large areas of real estate (mostly inherited), who are willing to sell, normally are unable to do so without a project study or even an approved building project. To realise a sale, they can rarely get by without the help of professionals, such as architects and building contractors who, although not interested in buying the land as it would tie up their financial resources, nonetheless wish to offer new housing to potential buyers. Typically, the owner sells the land to the ultimate purchaser with whom the professional builder closes a contract for building works. This interaction between landowner and professional builder generally leads to a chain transaction and the aggregation of land price and building costs. If the tax authorities assume the formation of a simple company (con-sisting of landowner and building contractor), first the acquisition of half of the share in the land is assumed (chain transaction), then the value of the land is added to the building costs (real estate tax is also charged on the value of the buildings!). If a simple company did not exist (the owner selling the land did not take part in the realisation of the building project), the tax authority works on the basis of transfer of ownership of the building land (land acquisi-tion by the building contractor) and then aggregates land and buildings for the real estate tax declaration. – Chain transactions and aggregations can subsequently be regulated by the tax authorities and may be assessed on a different basis than agreed in the purchase contract or original provisional declarations: A long period in posses-sion has an effect in the case of transfer of ownership tax in the community of heirs/building contractor relationship while in the building contractor/ultimate purchaser relationship, supplementary taxation on the basis of the short period in possession comes into play with a higher tax rate and the aggregation of land and buildings. As far as real estate gains tax is concerned in the community of heirs/building contractor relationship, the basis is the land purchase price (long time in possession, low tax rate); in the building contractor/ultimate purchaser relationship the land price and building costs are aggregated, whereas low building prices due to competition and marketing costs normally only generate low profit (short time in possession, high tax rate due to progression; the building contractor is the main party affected). – “Chain transaction and aggregation taxation” in the case of the building contractor lead to a greater tax burden and in the case of the ultimate purchaser higher transfer of ownership tax or greater liability risks (shared liability for higher transfer of ownership tax / too low coverage of real estate taxes or risk of real estate tax liens for two or more legal transactions with a higher total amount). The transfer of these additional taxes from the ultimate purchaser to the building contractor often causes disputes and depends on the business practices and/or liquidity of the building contractor.

9. Caution is advised

For the purpose of tax optimisation and to avoid unpleasant surprises, it is recommended that you come to an agreement with your tax adviser on the following: the form of legal entity as the purchaser (natural person or legal entity), the object of purchase (e.g. shares in a real estate company instead of direct acquisition, applicable can-tonal real estate law) and transactions and accounting actions outside the realms of normal day-to-day business.

Notes1) In the Canton of Zurich, in the case of a period of ownership of more than 20 years the value for which the property was purchased 20 years earlier is

applied as the acquisition price.2) The Zug system, which was valid until the end of 1990, was almost identical to the Zurich system; however it reduced double taxation on the real estate

gains of persons and property dealers subject to obligatory accounting by allowing cantonal and local authority taxes raised on book profits to be offset against local real estate gains tax. As of 1 January 1991 the Canton of Zug changed to the Zurich system and as of 1 Janaury 2001 now operates the St. Gallen system.

3) Previously, a taxpayer in a Canton with no real estate losses from his business operations or other real estate losses was able to fully offset his real estate gains. Direct loss offsetting was of particular interest to professional developers (architects, building contractors, general contractors, investors, real estate companies etc.).

4) No account is taken here of the minimum taxation which some Cantons / local authorities levy in addition to or in place of property tax5) Decided by initiative the 28 September 2008, date of implementation unknown.6) Land Register fee7) Normally only levied on legal entities exempted from direct taxation

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G. Concluding Remarks

It is clear from the above explanations that profit-oriented real estate investment begins with a precise examination of the real estate in question (due diligence and contaminated site inspection) and an optimum holding structure (direct or indirect real estate acquisition/use of DTA’s etc.). By skilful organisation of real estate acquisition, return on investment need not be generated from optimisation of use, favourable refinancing or a high resale price alone. Rather, the objective of gross or net profit is placed in the foreground. The EXIT often offers potential for optimisation too; however in the main the direction for this is determined, firstly, during the acquisition process and, secondly, during the holding period. If one or the other direction is not set correctly, other than achieving a good selling price not much more can be optimised with regard to the EXIT. What is needed, therefore, from the start, is an integrated strategy which must also be lived and breathed and should not be changed unless absolutely necessary.

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