New Rules Issued to Facilitate Real Property Trusts

New Rules to Facilitate Trust Business

There are several innovations under the new rules. First, under the Tentative Provisions, the number of investors under a single aggregated trust plan is no longer restricted. In the Administration of the Business of Holding Funds in Trust of Trust and Investment Companies Tentative Procedures, it was stipulated that the number of investors under a single aggregated trust plan could not exceed 200.

Second, the definition of custodian has been formally introduced to the market. According to the Tentative Provisions, only commercial banks that have met certain criteria are qualified to act as custodians. Prior to investment, trust capital must be deposited in a special account opened by a custodian. Custodians will be responsible for the supervision of the trust capital.

Third, trust companies are required by the Tentative Provisions to issue publicity material for the aggregated trust plan, and it must be filed with the China Banking Regulatory Commission or its designated institutions.

Fourth, trust companies and custodians are entitled to collect 15% and 5% respectively from the profit on the investment as commission, and the commission is not allowed to be collected before the profit is realized. Prior to the promulgation of the Tentative Provisions, the terms of commissions have always been determined by agreement between the trust company and the settlor. In practice, commissions are usually not based on realized profit.

Fifth, approval for qualifications to run real property trust projects is stricter in the Tentative Provisions. Trust companies are permitted to lend funds to real property projects only if the Land Use Certificate, the Construction Land Use Layout Licence, the Construction Project Layout Licence and the Construction Licence have been obtained. Trust companies may loan to other real property projects without obtaining the four licences only if they have met certain criteria listed in the Tentative Provisions.

Additionally, the scope for the use of trust capital has been considerably broadened in the Tentative Provisions. Originally, trust capital could only be invested in commercial real property projects. Now it can also be used in land purchases, initial stage land developments, real property enterprise developments and construction for commercial or residential purposes, purchasing and leasing land, and commercial or residential real property development. Furthermore, trust capital can also be used by way of residential mortgage loans.

New Restrictions

Though fewer restrictions have been provided in the Tentative Provisions, the qualifications for trust companies have been made more stringent. The ceiling on the number of investors for a single aggregated trust plan has been raised, but at the same time only trust companies that have been profitable over the prior two years consecutively, and in which the profit from the trust business exceeds 60% of the total income of the trust companies are qualified to operate under the new rules provided in the Tentative Provisions. Furthermore, the total assets of the aforesaid trust companies shall not be less than Rmb500 million. Such criteria for trust companies are impractical given the current development of the market.

Another new restriction is focused on the qualifications to the relevant real property enterprises and settlors. According to the Tentative Provisions, the registered capital of a real property enterprise taking investment from trust companies shall not be less than Rmb10 million. As for settlors, self-owned capital shall not be less than Rmb1 million if the settlor is an individual and not less than Rmb5 million if the settlor is a legal person or other kind of institution. Obviously, the Tentative Provisions will prevent many small and medium-size real property enterprises and settlors from entering the trust business.

What Can We Expect in the Final Version?

As we mentioned above, the Tentative Provisions provide that trust companies and custodians are not permitted to collect any commission before profit is realized. Since the total commission for trust companies and custodians is 20% of the realized profit, the financing costs of real property enterprises from trust companies will almost definitely be higher than from banks. Unless it is impossible to finance from banks, trust companies must be the last to be considered by real property enterprises.

Moreover, professionals hope that commissions can be negotiated among trust companies, real property enterprises and custodians, and can be linked with realized profit. Compared with large real property enterprises, banks provide less financial support to small and medium-sized real property enterprises. It is expected that the real property trust business can be developed as a complementary financing method for small and medium-sized real property enterprises. Therefore, comparatively lower entrance qualifications are expected to appear in the final version of the Tentative Provisions.