Technical Standards for Closed-End Real Estate Investment Funds

NDMC-17
Effective Date: 02/01/2018

THE COMMITTEE OF STANDARDS OF THE CENTRAL RESERVE BANK OF EL SALVADOR,

CONSIDERING:

I. That Article 5 of the Investment Funds Law establishes that the Superintendence of the Financial System, within its scope of competence, is the administrative authority responsible for supervising Managers, their operations, and other participants regulated by said Law.

II. That Article 6 of the Investment Funds Law regulates that it is the responsibility of the Central Reserve Bank of El Salvador to issue the Technical Norms necessary for the application of said Law.

III. That Article 45, third paragraph of the Investment Funds Law, establishes that in a Closed-End Investment Fund, investors may make contributions in real estate assets.

IV. That Article 47, third paragraph of the Investment Funds Law, regulates that the content of the extract of the internal regulations of the Fund and the placement prospectus of participation quotas shall be established by the Central Reserve Bank of El Salvador.

V. That Article 63 of the Investment Funds Law establishes that Closed-End Funds, as well as their issuances, must be recorded in the Registry kept by the Superintendence of the Financial System for such purposes and subsequently must be registered in a Stock Exchange, complying with the requirements established in the Securities Market Law insofar as they do not contradict the aforementioned Law.

VI. That Article 97, third paragraph of the Investment Funds Law, establishes that Closed-End Investment Funds may invest in real estate located in El Salvador.

VII. That Article 99, second paragraph of the Investment Funds Law establishes that, in the case where the investment policy of an Investment Fund includes real estate, it must consider minimum and maximum limits.

VIII. That Article 9, second paragraph, items 10 and 11 of the Special Law for the Prevention, Control, and Sanction of Money Laundering, Terrorism Financing, and Financing of the Proliferation of Weapons of Mass Destruction, regulates that obligated subjects must establish internal audit mechanisms, using the principle of risk-based administration, to verify compliance with what is prescribed in said Law; and have external or specialized audit in risk management to evaluate and issue reports on the evaluation of the management of the prevention system. (5)

NDMC-17
Effective Date: 02/01/2018

IX. That Article 15, first paragraph of the Special Law for the Prevention, Control, and Sanction of Money Laundering, Terrorism Financing, and Financing of the Proliferation of Weapons of Mass Destruction, establishes that obligated subjects, in order to identify their clients and users, including the controller, recipient, or ultimate beneficiary, who manage the risks associated with them and obtain appropriate information about the commercial relationships entered into or their continuity, must take reasonable measures to carry out due diligence procedures. (5)

X. That Article 3, letter h) of the Law on Supervision and Regulation of the Financial System, establishes that it is the competence of the Superintendence of the Financial System to authorize the registrations, registry entries, modifications, and cancellations of persons, institutions, and operations that are subject to such requirement, in accordance with the laws on the matter. (5)

THEREFORE,

by virtue of the regulatory powers conferred upon it by Article 99 of the Law on Supervision and Regulation of the Financial System,

AGREES to issue the following:

TECHNICAL STANDARDS FOR CLOSED-END REAL ESTATE INVESTMENT FUNDS

CHAPTER I
OBJECT, SUBJECTS, AND TERMS

Object
Art. 1.- These Standards aim to establish the provisions applicable to Closed-End Real Estate Investment Funds regarding their operation, operability, policies, valuation of their investments, the limitations they must observe, and other related aspects.

The provisions regulated in these Standards apply to all Closed-End Investment Funds whose investment policy includes real estate fully constructed.

Subjects
Art. 2.- The subjects obligated to comply with the provisions established in these Standards are:
a) Investment Fund Managers authorized by the Superintendence of the Financial System that manage Closed-End Real Estate Investment Funds; and b) Selling Entities or Mandate Holders.

NDMC-17
Effective Date: 02/01/2018

Terms
Art. 3.- For the purposes of these Standards, the terms indicated below have the following meaning:
a) Central Bank: Central Reserve Bank of El Salvador; b) Stock Exchange: Stock Exchange constituted in El Salvador and registered with the Superintendence of the Financial System; c) House: Stockbrokerage House; authorized and registered with the Superintendence of the Financial System; d) Financial Conglomerate: In accordance with Article 113 of the Banks Law, it is a set of companies characterized by the fact that more than fifty percent of their respective share capital is owned by a controlling company, which is also a member of the Conglomerate. The controlling company of the Conglomerate may be a company with exclusive purpose or a bank constituted in the country; e) Quotas: Participation Quotas; f) Selling Entity or Mandate Holder: Stockbrokerage House, as well as any other legal entity authorized by the Superintendence of the Financial System, that has signed a mandate contract with a Manager for the sale of quotas of Closed-End Real Estate Investment Funds; g) Funds: Investment Funds; h) Real Estate Funds: Closed-End Investment Funds, which are independent estates administered by a Manager on behalf of and at the risk of the participants; their main object is investment in real estate assets fully constructed, located in El Salvador, which generate income from their lease or eventual sale; i) Manager: Investment Fund Management Company; j) Business Group: In accordance with Article 5, letter n) of the Securities Market Law, it is that in which a company or set of companies have a common controller, who acting directly or indirectly participates with at least fifty percent in the share capital of each of them or that have common shareholders who, directly or indirectly, are holders of at least fifty percent of the capital of another company, which allows to presume that the economic and financial performance is determined by common interests or subordinate to the group; k) Investor: Natural or legal person interested in acquiring quotas of an Investment Fund; l) Special Law for the Prevention of Money Laundering: Special Law for the Prevention, Control, and Sanction of Money Laundering, Terrorism Financing, and Financing of the Proliferation of Weapons of Mass Destruction; (5) m) Funds Law: Investment Funds Law; n) Market Law: Securities Market Law; o) Supervision and Regulation Law: Law on Supervision and Regulation of the Financial System; p) Participant: Investor in an Investment Fund;

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Effective Date: 02/01/2018

q) Related Persons: in accordance with Article 29 of the Funds Law, those regulated in Article 204 of the Banks Law shall be considered related persons to the Manager; (1) r) Investment Policy: In accordance with Article 99 of the Funds Law, it corresponds to the investment policy defined in the internal regulations and prospectus of each Fund, which indicates the minimum and maximum limits of investment in each of the types of assets contemplated in Article 36 of these Standards; s) Placement Prospectus: Placement prospectus of participation quotas; t) Registry: Public Stock Registry of the Superintendence of the Financial System; u) Internal Regulations: Document containing all the specific characteristics and rules that govern the operation of a certain Investment Fund; and v) Superintendence: Superintendence of the Financial System.

CHAPTER II
GENERAL PROVISIONS ON REAL ESTATE FUNDS

Applicable Regulations
Art. 4.- The provisions contained in the following Standards approved by the Central Bank, through its Committee of Standards, are applicable to Closed-End Real Estate Investment Funds:
a) “Technical Standards for the Authorization of Constitution, Start of Operations, Registration and Management of Operations of Investment Fund Managers” (NDMC-02); b) “Technical Standards for the Authorization, Registration and Operation of Investment Funds” (NDMC-06); c) “Technical Standards for the Investments of Investment Funds” (NDMC-07); d) “Technical Standards for the Calculation of the Value of the Participation Quota and Allocation of Participation Quotas” (NDMC-11); e) “Technical Standards for the Submission and Disclosure of Information of Investment Funds” (NDMC-13); f) “Technical Standards for the Transfer or Merger of Investment Funds” (NDMC-16); and g) “Technical Standards for the Registration of Appraisers and their Professional Obligations (NRP-27)”. (2) Art. 1. Art. 2.- Consequently, they must be observed in everything that does not contradict these Standards, which contain special additional stipulations, specific to the nature of Closed-End Real Estate Investment Funds.

Characteristics of Real Estate Funds
Art. 5.- Real Estate Funds are constituted as Closed-End Funds with a defined term; the investments in real estate of this type of Fund may only assume the risks inherent to the real estate activity and not the risks of the different activities carried out by the tenants of the real estate assets. Art. 3.

NDMC-17
Effective Date: 02/01/2018

Real Estate Funds must express their object in their internal regulations, as well as in any document sent to participants and in any information regarding the Real Estate Fund disseminated by the Manager through its website, or any advertising material. For the purposes of these Standards, the real estate in which Real Estate Funds may invest will be those that are fully constructed. In the disclosure of information and advertising carried out for the Real Estate Fund, it is the responsibility of the Manager to ensure that the name and object of the Fund do not induce error or confusion in investors or participants regarding its investment policy, its risk, or the liquidity of the quotas.

Participants of these Funds may only receive what corresponds to them from their participation quotas at the end of the Fund's term, as established in the Funds Law, and their quotas may be negotiated in the secondary market.
Investor Identification and Profile
Art. 6.- The Manager must have policies and procedures to determine the risk profile of investors in order to categorize them correctly and determine those that match the investor profile to which the Fund is directed; for this, the Manager must inform clearly, timely, and accurately about its characteristics, explaining at least that Real Estate Funds are of medium or long term and that if the investor decides to obtain liquidity from their quotas in the secondary market, this will depend on the market conditions existing at that time. It is the responsibility of the Manager to ensure that the quotas of Real Estate Funds are marketed to investors whose risk profile matches the investor profile to which the Fund has been directed. In the case where the Manager markets quotas to investors whose risk profile does not match the profile required by the Fund, it must comply with what is established in Chapter VI of the “Technical Standards for the Process and Registration of Buy and Sell Orders of Securities of Stockbrokerage Houses” (NDMC-01), documenting that the Manager issued a warning to the investor about the main risks and characteristics of the participation quotas, the object and investment policy of the Fund, and that such Funds are not in accordance with the risk profile determined in the analysis performed on the investor, and must also specify the customer category determined by the Manager or Mandate Holder. If the marketing of quotas is done through a House, it must carry out the procedure described in the previous paragraph.

Internal Control
Art. 7.- The Manager, with respect to the administration of investments in real estate carried out on behalf of the Fund, must define internal control policies and procedures that include at least the following aspects:
a) Have a file for each of the real estate assets in which the Fund invests, accepts as a contribution, or disposes of for sale or lease. This must be formed by the documentation required in articles 27, 28, 30, and 31, establishing mechanisms for the safeguarding of information; b) Have a file of tenants or lessees that contains: copy of information documentation, copy of the lease contract, and signature registration form with the names and signatures of the persons authorized to sign lease contracts on behalf of the tenants, as well as the information contained in Annex No. 4 of these Standards. In the Fund's internal regulations and in the lease contract, it must be specified whether subleasing is allowed or not, detailing the conditions under which it will be carried out, as well as the due diligence policies that the lessee will carry out on the sublessee, the Manager being able to request documentation from the sublessee at any time to comply with the prevention, detection, and control of money laundering, terrorism financing, and the financing of the proliferation of weapons of mass destruction; (5) c) Establish control mechanisms on the operations carried out by the Fund regarding the real estate assets, in accordance with Annex No. 6 of these Standards; and d) Adopt policies and procedures regarding:
i. Remodeling, maintenance, and repairs of real estate assets;
ii. Collection management for lease payments;
iii. Hiring of services;
iv. Documents or guarantees to be requested to ensure the payment of the rents agreed upon in the lease contracts celebrated on real estate assets of the Real Estate Fund;
v. Control of accounts receivable and payable, as well as the hiring of insurance;
vi. Administration of guarantee deposits;
vii. Administration and management of leases receivable;
viii. Estimation and management of amounts of leases with doubtful recovery;
ix. Acquisition, disposal, or lease of real estate assets to related persons; and
x. Hiring of appraisers, as well as the review and safeguarding of the respective reports.
Additionally, the Manager, for the control of investments in real estate carried out on behalf of each Fund, must maintain an updated register of investments in chronological order, as required in the “Technical Standards for the Authorization of Constitution, Start of Operations, Registration and Management of Operations of Investment Fund Managers” (NDMC-02), approved by the Central Bank through

NDMC-17
Effective Date: 02/01/2018

its Committee of Standards and which includes at least the information detailed in Annex No. 3 of these Standards.
The information regarding the investments carried out by the Manager on behalf of each Fund must be available to the Superintendence whenever it requests it.
Likewise, the Manager must document the aspects taken into consideration in the investment process.
The files referred to in letters a) and b) of this article must be updated at the time changes occur in the Fund's investments or in the characteristics of its tenants.
CHAPTER III
AUTHORIZATION AND REGISTRATION OF REAL ESTATE FUNDS

Fund Registration Request and Authorization of Documents Art. 8.- For the authorization of the entry in the Registry of Closed-End Funds, the legal representative or attorney-in-fact of the Manager must present to the Superintendence a request accompanied by the following documentation and information:
a) Certification of the agreement of the Board of Directors of the Manager in which the constitution of the Real Estate Fund was agreed upon, as well as the approval of the internal regulations and the placement prospectus; b) Draft deed of issuance of participation quotas; c) Internal regulations, which must include the minimum content defined in Annex No. 1 of these Standards; d) Placement prospectus of participation quotas, which must include the minimum content defined in Annex No. 2 of these Standards; e) Model of subscription contract of participation quotas between the Manager and the participant; f) Draft of the documents related to the guarantee that the Manager will constitute or modify for the Real Estate Fund, according to its nature, in consideration of what is established in Article 22 of the Funds Law; g) Certification of the agreement of the Board of Directors of the Manager in which the entity that will be the representative of the beneficiaries of the guarantee is designated; h) Acceptance of the entity as representative of the beneficiaries of the guarantee; i) Method of valuation of investments in securities, according to what is established in Article 102 of the Funds Law; j) Manual of procedures and policies for the handling of operations carried out in the administration of the Real Estate Fund, responsible personnel who will intervene in said procedures, including flowcharts that describe the process of the management of the Real Estate Fund in which the activities, departments, the hierarchical levels that intervene in them, and the models of forms that will be used in the administration of the Real Estate Funds are identified, such as: signature registration, customer identification forms,

NDMC-17
Effective Date: 02/01/2018

statements of account, daily availability control, among others; k) Name of the person(s) designated as investment manager(s), specifying the date of authorization of the registry entry by the Superintendence; l) Projections of income and expense flows for the first five years of the Real Estate Fund. If the term is less than that established in this letter, the projections will be presented for the term of maturity of the Fund; m) Projections of the types of real estate that the Fund plans to acquire and of the income it expects to obtain from the lease or sale of these for the first five years of the Real Estate Fund. If the term is less than that established in this letter, the projections will be presented for the term of maturity of the Fund; n) Accounting system of the Real Estate Fund that will be used by the Manager and the description of the computer platform on which it has been developed, description of its information systems, description of information backups, security and controls in the systems; and o) Other documentation and information that by the nature of the Fund is necessary to present. In the request, the means to receive notifications and the designation of the persons commissioned for such effect must be established. (3) The projections referred to in letters l) and m) of this article will be carried out in accordance with the model established by the Manager, documenting the basic assumptions of said projections, which must be coherent, supporting each of the variables of the model used. The request and documentation may be presented through the means made available by the Superintendence, which may be electronic. In any case, the term referred to in the first paragraph of Article 11 of these Standards will begin to run from the next business day after the request has been presented. (3)

Model of Subscription Contract of Participation Quotas Art. 9.- The model of subscription contract must include at least what is established in the “Technical Standards for the Authorization, Registration and Operation of Investment Funds” (NDMC-06) and will observe what is regulated in Article 22 of the Consumer Protection Law and what is established in the Regulation of the Consumer Protection Law relative to the contract of adhesion. Extract of Internal Regulations and Placement Prospectus Art. 10.- The Manager must prepare an extract of the internal regulations and placement prospectus, which will form part of the internal regulations and placement prospectus respectively. These extracts will contain in summary form the information detailed in Annex No. 1, item 5) and Annex No. 2, item 6) of these

NDMC-17
Effective Date: 02/01/2018

Standards.

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