EUROPE - Regulators have been urged to focus on who controls portfolio and risk management decisions when defining property joint ventures and exempting them from the Alternative Investment Fund Managers (AIFM) regime.

INREV, the association for European non-listed real estate funds, has told the European Securities and Markets Authority (ESMA) that investor control rather than legal structure should differentiate joint ventures from regulated alternative investment funds (AIFs).

Joint ventures will be exempt from the incoming AIFM regulations, but the Directive itself does not define what is meant by the term.

The UK Financial Services Authority (FSA) raised concerns about this in January and ESMA is currently consulting the market on whether there is a need for clarification.

The eventual outcome will have repercussions for investors in real estate joint ventures and club deal partnerships, which have risen in prominence in recent years.

In its response to an ESMA discussion paper, INREV said: "It is necessary to clarify further the term 'joint ventures' in order to have consistent intepretations across different national jurisdictions."

It added: "For the purpose of the AIFMD, a distinction should be drawn between a non-listed real estate 'AIF' and a 'joint venture' by assessing who has effective control over the significant strategic portfolio and risk management functions."

Joint ventures should be able to outsource non-strategic "day-to-day administrative management functions" without losing their exempt status, INREV also argued.

The FSA had already called for clarification in its AIFMD implementation discussion paper in January, in which it suggested one criterion - "all participants are to some extent involved in the day-to-day management of the vehicle".

It also said difficulties could arise where some joint venture participants play no part in the running of the venture.

Melville Rodrigues, a partner at CMS Cameron McKenna, said: "The joint venture exemption was added rather late in the Directive legislative process, and the addition made to a recital.

"It would have been preferable for a provision - detailing the nature of the exemption - to be contained within the body of the Directive."

Rodrigues, who worked with INREV in drafting its response to ESMA, said: "It is encouraging that the FSA in its January discussion paper took the lead in suggesting a definition, including reference to participants being involved in the day-to-day management of the venture.

"This is a sensible solution, though the solution should have a de minimis benchmark - so that, for example, a single passive participant will not necessarily result in the venture becoming an AIF."

INREV has sought to address the issue of investor passivity by arguing that 'negative control', such as the power to veto investment decisions, should be sufficient to confirm joint venture status.

There is also uncertainty over whether so-called 'club deals' will be considered joint venture and exempt from AIFMD.

INREV said this should not be an issue as long club deals meet the joint venture criteria.

Jeff Rupp, director of public affairs at INREV, said: "Club deals should be considered to be joint ventures if they meet the 'all participants exercising control' test."

He added: "Club deals for which control over these significant issues is delegated to external fund managers and club deals in which only some but not all participants exercise control would not be considered joint ventures."

Rupp said the overlap between the definitions of joint ventures and club deals was consistent with INREV's recent white paper on the growing variety of non-listed real estate vehicles.

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