Capital preservation of foundations under German Investment Code

Could distributions of closed-end real estate funds violate the duty of capital preservation (Vermögenserhaltungspflicht)? - A new interpretation under the German Investment Code (KAGB)

In the 1/2013 edition of the journal Stiftungsmanagement Alexander Skowronek explained why distributions of closed-end real estate funds would not violate the duty of wealth preservation (Vermögenserhaltungspflicht) of a foundation even if the distribution would be considered to be a capital repayment due to a lack of a balance sheet profit . In our view, the reason for this is that the duty of wealth preservation is based on a fair value concept (Realwertprinzip) and not on a strict balance sheet approach. In particular, any regular deprecations on the value of the real estate should not impact the value of the fund units.

With the introduction of the new German Investment Code (Kapitalanlagegesetzbuch, KAG) and the related Investment Accounting and Valuation Regulations (Kapitalanlage-Rechnungslegungs- und Bewertungsverordnung, KARBV), the aforementioned problem has been further mitigated. According to the KARBV, the real estate held by the fund should be evaluated on a fair value basis and not on the basis of the regular rules under German GAAP (i.e no regular deprecations in particular). Therefore, as long as the real estate is not subject to a further decline in value, the profits generated by the real estate should be part of the balance sheet profit and be distributable without any impairment of the duty of wealth preservation. In his article published in the 1/2015 edition of the journal Stiftungsmanagement Alexander Skowronek discusses the recent developments.

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