Tax Exemptions: Beware of Conflicts of Interest in the Marketing of Real Estate Developments

Investors must be informed of any potential financial ties between real estate developers, real estate brokers, and banks.

To avoid a whole series of pitfalls, it is imperative that investors receive sound advice from those who will be selling them real estate products designed to provide tax relief.

This falls under the obligation to provide advice and information and is the responsibility of marketers, wealth management advisors (CGP), and banks (to varying degrees depending on the circumstances).

Based on established case law, it is clear that these parties, when marketing the program, cannot limit themselves to a purely commercial approach.

While they may naturally highlight the benefits of the investment they are seeking to sell, they must, however, with equal seriousness, explain to the investor—especially if the investor is a layperson—the risks inherent in that investment.

This is, strictly speaking, the essence of the duty to advise and inform that applies to marketers, banks, and other financial advisors (CGPs, CIFs, etc.). They must “objectively” explain the benefits of an investment as well as the risks associated with it (it should be noted that no investment is entirely free of risk).

This “objectivity” means that the party responsible for the duty to provide advice and information must fulfill it fairly, honestly, and independently.

This last point is fundamental because, without independence, there can be no impartial advice, nor can there be advice that is beyond doubt.

Thus, the party subject to the obligation must not find themselves in a situation of “impediment” (to use a term that is more political than legal), that is, in a position where they are unable to validly advise their client, given the existence of their own interests that could influence the manner in which they perform their duties.

This brings us to the heart of our subject: the conflict of interest in which those bound by obligations to provide advice and information sometimes (often?) find themselves, which results in their inability to objectively advise their clients regarding real estate investments intended for tax avoidance.

One need only examine the corporate structures of major players in the tax-exemption sector to gain a practical understanding of this difficulty.

Take, for example (and there are many others, such as Société Générale/Primaxia, among others…), of the company I Invest, which claims to be a subsidiary of I Selection, both of which are subsidiaries of the Caisse d’Épargne (we’re not revealing any secrets here; this information is public).

Each company plays a different role in the real estate investment transaction designed for tax avoidance.

I Invest is a real estate developer, so it is the seller of the property.

I Selection is the marketer; it is the one that will sell the tax-efficient real estate product.

The Caisse d’Épargne, for its part, will lend the investor the funds needed to acquire the property.

Since these companies belong to the same group, it is undeniable that they all have an interest in recommending one another to the investor-client (this is, in fact, the purpose of this corporate trio: the transaction is largely covered by the same group of companies, which increases the group’s overall profits from the transaction).

Potentially misleading or bad advice?

Except that when I Selection recommends that a client invest in a product sold by I Invest, as well as have that investment financed by the Caisse d’Épargne, it is not, in our view, acting independently.

I Selection does indeed have its own interests (to generate business for the companies in the group to which it belongs), which, in principle, are likely to prevent it from advising its client neutrally and impartially, as required by law and case law.

Of course, this does not mean that, by definition, the advice provided will necessarily and automatically be misleading or poor.

It does mean, at the very least, that the client must be informed of these ownership ties, as they are likely to cause the client to doubt or significantly qualify the information and advice provided—which is far from always being the case…

This is, in fact, the intent of the provisions of the Code of Ethics for CGP and CIF professionals.

The French Financial Markets Authority (AMF) has also ruled in this regard.

In conclusion, we can only advise investors tempted to participate in a real estate program designed for tax avoidance to explicitly ask the project sponsors—particularly banks, marketing firms, and wealth management advisors—about any capital ties that may exist among them.

If such ties exist, the investor must then evaluate the advice provided in light of this lack of independence.