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Sustainability and ESG criteria have been driving the agenda of many industries throughout the last few years.
The current political environment and a corresponding shift in the agenda of many governments emphasize the need for more resilience and, in consequence, prioritize investments in the defense and security sector. Not least, the German government has launched massive investment programs, enabling unprecedented investments in both critical infrastructure and the German armed forces. Companies that supply, or are expected to supply, the armed forces are booming. Several key considerations should be noted when examining these developments from a real estate perspective.
Military-used properties
Following the fall of the Berlin Wall and the perceived end of the Cold War, military-used properties were put on the market. Military training areas were cleared of unexploded ordnance or designated as nature protection areas. The German state-owned real-estate agency BImA tried to sell former barracks to municipalities or investors to allow for a conversion into civil uses such as business parks, schools, offices or residential. Buildings used by the administration of the military, frequently located in prime spots, were given up and sold to private investors. The period of shrinking demand will end.
German law provides for a variety of effective instruments allowing German authorities and armed forces to procure land that is deemed to be needed to reshape Germany's defense-related capabilities. The German Federal Act on Land Procurement for Defense Tasks (Land Procurement Act—Landbeschaffungsgesetz) allows for the expropriation of land if required for military purposes—including, for example, the need to procure land to compensate the relocation of businesses.
Furthermore, the German Federal Act on the Restriction of Real Property for Military Defense (Military Protection Area Act—Schutzbereichsgesetz) establishes specific permitting requirements for use of real estate including the erection of buildings in specifically designated areas; landlords may even be obliged to tolerate the demolition of building or the erection and operation of buildings; municipalities cannot enact zoning plans applicable to such designated land—the right to set-up zoning plans for such land re-emerges only once the military use is abandoned formally again. Municipalities may also be pre-empted by military authorities when exercising their statutory pre-emption rights in relation to certain properties.
Military-used properties, and especially buildings constructed on such sites, are subject to a wide range of highly specific regulations. The Construction Codes of the German Federal States (Landesbauordnungen) exempt buildings required for defense purposes from the usual building permit requirements and construction standards.
Similarly, the German Federal Emission Control Act (Bundes-Immissionsschutzgesetz) and the 14th Federal Ordinance on Emission Control (14. BImSchV) provide exemptions regarding substantive requirements and permitting procedures. The German Federal Building Energy Efficiency Act (Gebäudeenergiegesetz) also exempts such buildings from energy efficiency standards.
In accordance with EU law, the German Federal Environmental Impact Assessment Act (Gesetz über die Umweltverträglichkeitsprüfung) allows for simplified procedures. At the EU level, the EU Nature Restoration Regulation provides for special treatment of land used for national defense purposes.
Military-used properties are usually owned by Germany. Private companies are, however, frequently engaged in the construction of buildings or as suppliers, service providers or as a partner in more complex Public-Private-Partnership models. Any such engagement requires the award of a contract—meaning that private companies interested in getting engaged should get comfortable with public procurement rules laid down in a variety of regulations including the German Federal Act Against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen) the German Federal Ordinance on the Award of Contracts in the Defense and Security Sector (Vergabeverordnung Verteidigung und Sicherheit) or the German Federal Act on the Acceleration of Defense related Procurement Procedures (Bundeswehrbeschaffungsbeschleunigungsgsetz).
Complexity in this area is not only increased by the fact that a variety of different authorities are involved in such procurement procedures (military and civil, federal and state level authorities) and that specific rules apply to NATO related procurement procedures—an additional driver for complexity is the German Federal Regulation on Price Caps applicable to Public Procurement Procedures dating back to 1953 and allowing authorities to reduce agreed prices if prices seem to be excessive benchmarked against a calculation that meets the specific method foreseen in the said regulations.
Finally, even the execution of an awarded contract is complex given that private contractors must comply with security requirements including the use of security cleared personnel, the enactment of security concepts including physical security measures like access control or the protection of sensitive or even classified information and documents by implementing a strict-need-to-know policy or IT security tools.
Properties used by the defense industry
The defense industry is growing—manufactures of ships, tanks, airplanes, drones, and ammunition are expanding as are logistic companies or IT and engineering companies with a focus on defense and security capabilities including specifically designed data centers, just to name a few.
A common challenge for sites and offices used by all those stakeholders is increasing security standards. Sites used for production purposes but also for the operation of IT units or offices face—and will continue facing—increasing requirements as regards physical sabotage protection, i.e., there must be space for areas allowing for the establishment of sufficient access restrictions and control or simply massive fences.
Space for emergency power supply and protection of cables and lines is becoming more important than ever and to be considered when making the decision to buy or rent a location. Details are frequently stipulated under contractual agreements between the company and authorities such as the German Ministry of Economy in line with the German Security Manual (Geheimschutzhandbuch). The up-coming German Federal Framework Act on the Protection of Critical Infrastructure (KRITIS-Dachgesetz-Entwurf) will be a corner stone defining future security requirements in relation to properties used by the defense industry.
Depending on the specific nature of the use of a property, particularities under planning and permitting regulations take on significance. Manufacturing sites for vessels, tanks and ammunition face specific hurdles from a planning law perspective—federal, state and regional planning laws may provide for defense related particularities, municipalities may consider the need to establish defense industries but have nevertheless to consider the protection of the existing neighborhood, e.g., against the risk of explosions (e.g., Seveso risks).
Permitting may require going through complex procedures including public consultations as foreseen in the German Federal Act on Emission Control (Bundes-Immissionsschutzgesetz) and the actual manufacturing of specific products may be subject to additional permitting requirements such as pursuant to the German Federal War Weapons Control Act (Kriegswaffenkontrollgesetz).
Neighboring properties
Properties located in the neighborhood of properties used for military purposes or used by the defense industry may be subject to obligations to tolerate a higher than usual level of disturbances.
Such obligations may result from planning law related specifics as foreseen in the German Federal Building Act (Baugesetzbuch) or from the fact that properties used for military or defense purposes benefit from lower emissions thresholds.
In practice, renewable energy generation assets face more and more concerns triggered by defense and security considerations: wind turbine generators, in particular, may have an adverse effect on radar systems and thereby infringe military intelligence and early detection, resulting in a rejection of permitting applications. Similarly, PV facilities may disturb safe flight operations and may therefore be prohibited or restricted.
Additional considerations
Investment in real estate to be used by the military or by defense companies may be evaluated against Environmental Social Governance (ESG) criteria and other sustainability regulations or commitment that the investor must or aims to comply with. The closer the asset or target company is linked to the actual operation of military or defense activities, the more restrictions may apply.
A similar approach can be taken from the perspective of German foreign direct investment (FDI) regulations. The mere acquisition of land does usually not trigger a mandatory filing requirement for Non-EU/Non-EFTA investors. However, the stronger the nexus to military or defense-related operations is, the higher the likelihood that foreign investors may consider a mandatory or at least voluntary filing to avoid that the transaction will be called in by the Ministry of Economy and be screened post signing or even post-closing from a national security perspective.
As regards transactional tax aspects, it should be taken into account that sellers will typically not be able to waive the VAT exemption for the sale and transfer of the real estate. This may have negative effects for past input VAT deductions incurred on the asset by the seller and thereby commercially reduce the purchase price.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
