I. What are the Special Investment Purpose Companies?. Basic characteristics, differentiating them from the remaining public limited companies.

The SIPPLC, i. e. the Special Investment Purpose Public Limited Company is a public limited company which, under the terms and conditions and following the order of a special act, the Special Investment Purpose Public Limited Companies Act, (promulgated in the State Gazette, Issue 46/from the year 2003), invests the cash availabilities collected by the issue of securities, in real property or in receivables (securitization of real property and receivables). Such a company has no right to acquire real property or receivables, representing subject of a legal dispute. The act imposes that the real properties acquired by the company have to be on the territory of the Republic of Bulgaria. The Special Investment Purpose Public Limited Companies (SIPPLC) are known in the world practices as Real Estate Investment – REITs.

SIPPLC (a Special Investment Purpose Public Limited Company) is established following the provisions of the Commercial Code, i. е. at a constituent meeting, at which all persons shall be present, who subscribe for shares. The founders of the company may not be more than 50. For establishment of the company it is necessary that not less than 30 percent of the capital is subscribed by institutional investors.

The constituent meeting shall obligatorily adopt a decision for the initial increase of the capital by the same class of shares as those subscribed at the constituent meeting as from the moment, when the company shall be issued a license by the Financial Supervision Commission (FSC). The increase has to be to an amount not less than 30 percent of the company capital. The capital of the Special Investment Purpose Public Limited Company may not be less than 500 000 BGN. The capital subscribed at the constituent meeting has to be paid in entirely as with the moment of submission of the application for entering into the commercial register. The installments into the capital may be only in cash. The Special Investment Purpose Public Limited Company is obliged to inform the Financial Supervision Commission on the fact of having been entered into the commercial register within a 7-day term. The shares of the Special Investment Purpose Public Limited Company represent book-entry securities. The company has no right to issue preference (privileged) shares giving the right to more than one vote. The Act prohibits the capital of the Special Investment Purpose Public Limited Company to be reduced by means of compulsory invalidation of the shares.

The members of the Board of directors of the Special Investment Purpose Public Limited Company are obliged not later than 6 months as from the date on which the company has been entered into the commercial register to submit with the Financial Supervision Commission an application for the issue of a license for carrying out the activity of a company with special investment purpose. The initial increase of the capital of a Special Investment Purpose Public Limited Company that is obligatory in the sense of the Act is carried out only on the grounds of a prospect confirmed by the Financial Supervision Commission.

The management of the assets of the Special Investment Purpose Public Limited Company is carried out with the care of a good merchant giving preference to the interest of the shareholders before the own one and maintaining an optimal correlation between safety and profitability. The Special Investment Purpose Public Limited Company may not provide security for other party’s liabilities or grant loans. The company may issue loan securities registered for trading on the regulated market, it may take bank credits for the acquisition or putting into operation of assets for securitization, it may take bank credits to the amount of up to 20 percent of the balance value of the assets used for the payment of interest in case the credit is for a term of not more than 12 months.

The pecuniary means and the securities of the company are kept with a bank depository. The bank- depository carries out all the payments for the account of the company under observation of the terms and conditions as provided in its statute and a prospect for public offering of securities. The bank depository may not be a creditor or a guarantor for a Special Investment Purpose Public Limited Company except for its own receivables under the contract for depository services. The bank depository makes separate accounts on the pecuniary means and other assets of the Special Investment Purpose Public Limited Company and separates the non-cash assets of the Special Investment Purpose Public Limited Company from its own assets. The depository does not guarantee its liabilities to its own creditors by the pecuniary means it owes to the Special Investment Purpose Public Limited Company. In covering its obligations the bank depository shall be ruled only by the interests of the shareholders in the Special Investment Purpose Public Limited Company.

Before acquisition of real property and before receivables the Special Investment Purpose Public Limited Company assigns its evaluation to one or more experts with the qualification and experience in the field and these shall meet the requirements of the law. The prices under which the Special Investment Purpose Public Limited Company acquires real property or receivables may not be considerably higher and the prices at which is sells these may not be considerably lower than the evaluation made, except in case of exceptional circumstances. In such case the persons, who manage and represent the company, have to explain their actions in the next periodical report. The real properties or receivables owned by the Special Investment Purpose Public Limited Company are evaluated at the end of each financial year or upon the occurrence of a change by more than 5 percent in the index of the prices for real property or in the index of inflation as specified by the National Statistical Institute. The assessments are to be represented in the financial reports of the Special Investment Purpose Public Limited Company meeting the requirements of the legislation on accounting.

The Special Investment Purpose Public Limited Company assigns to one or more commercial companies, disposing of the necessary organization and resources (servicing company), the servicing and management of the acquired real property, the carrying out of building projects and improvements, respectively the servicing of the acquired receivables, the conducting and preservation of the accounting and other reporting and correspondence as well as the carrying out of any other necessary activities. These are the functions of the so called Property Manager and usually the remuneration represents a percentage of the rents and /or the value of the building project. The law permits the Special Investment Purpose Public Limited Company to invest up to 10 percent of its capital in the servicing company.

II. Investments and profits.

The investments in the Special Investment Purpose Public Limited Companies are on the way to establishing themselves as investments with the lowest risks.

The coming into existence of the Special Investment Purpose Public Limited Companies investing in real property provides the opportunity to persons disposing of smaller financial possibilities to enter that kind of market. However the fact has to be stressed that it is possible to invest in such type of companies even a smaller sum of, say, 1000 BGN, which investment may provide the investor benefits in accordance with its investment.

According to the world practices the Special Investment Purpose Public Limited Companies invest in different types of real property that might be arranged into several categories and, certainly, the companies are not restricted to making investments in one field only:

• Special Investment Purpose Public Limited Companies, investing in residential buildings for the purpose of giving under lease;
• Companies, investing in trade centers, the so called malls;
• Special Investment Purpose Public Limited Companies investing in office buildings occupy the biggest share of the market. In that case characteristic are the lease relations with longer terms and more easily foreseeable cash flows. The greatest number of Bulgarian companies direct their efforts namely in the purchase and building of office buildings;
• Investing in real property in the field of health – hospitals, medical centers, house for handicapped persons, etc.;
• Investment in storage premises and leasing under rent;

When speaking on investment of free pecuniary means in shares of a Special Investment Purpose Public Limited Company we could point to several basic advantages of that type of investment.

One of the basic advantages is the avoiding of double taxation – the Special Investment Purpose Public Limited Companies pay no tax on the profit and the shareholders pay only a 5% tax on the dividend obtained. According to the Special Investment Purpose Public Limited Companies Act, the company distributes as dividend not less than 90 percent of the profit for the financial year, i. е. Enables the obtaining of an annual income (in case of profit available). Other advantages are the professional management – the Special Investment Purpose Public Limited Companies are managed by a team of experts with experience in the management of assets, with good knowledge of industry and market as well as the risk restriction for the investor, that is if an individual investor buys a real property he/she usually takes a loans from a bank, which he/she guarantees with his/her own property. In case of eventual failure of the project the consequences might be grave. In new profit bearing opportunities for investments appear, a Special Investment Purpose Public Limited Company may easily collect means by public offering while an individual investor has limited possibilities in this regard. Secondly, the price of the shares of the Special Investment Purpose Public Limited Companies is comparatively stable and an investment in shares provides the opportunity for the obtaining of an income not due for taxation because of the fact that in Bulgaria the profit from capital is not due for taxation.

The investment in a Special Investment Purpose Public Limited Company bears profit in two ways:

The first one is from a change in the prices of the shares in the case when the shares bought at one price become more expensive after a certain period of time, and the second one is in the form of a dividend.

Here the advantage for the funds for real property is that these funds are obliged to distribute 90% of the profit in the form of dividend. Another public company might decide to set aside the profit or to reinvest but with the Special Investment Purpose Public Limited Company this approach is not allowed.