Foreword by Andrew Chilvers
For ambitious companies eager to expand into overseas markets, often the conventional route of organic business development is simply not fast enough. The other option to invest in or buy a business outright is far quicker but often fraught with unforeseen dangers. And even the biggest, most experienced players can get it badly wrong if they go into an M&A with their eyes wide shut.
If you search for good and bad M&As online the Daimler-Benz merger/acquisition with Chrysler back in 1998 is generally at the top of most search engines on how NOT to undertake a big international merger. Despite carrying out all the necessary financial and legal measures to ensure a relatively smooth deal, the merger quickly unravelled because of cultural and organisational differences. Something that neither side had foreseen when both parties had first sat down at the negotiating table.
These days the failed merger of the two car manufacturers is held up as a classic example of the failure of two distinctly different corporate cultures. Daimler-Benz was typically German; reliably conservative, efficient, and safe, while Chrysler was typically American; known to be daring, diverse and creative. Daimler-Benz was hierarchical and authoritarian with a distinct chain of command, while Chrysler was egalitarian and advocated a dynamic team approach. One company put its value in tradition and quality, while the other with innovative designs and competitive pricing.
Andrea Vasilova discussed The Art of Deal Making: Using External Expertise Effectively as part of the Real Estate chapter.
How important is local market intelligence to effective cross-border real estate transactions, in your view, particularly in the current Covid-19 market? Any examples of how you have helped clients using expert insight into your jurisdiction’s real estate market?
Local market intelligence is important for effective cross-border real estate transactions and domestic real estate transactions in general. Our society is an information society whose main pillars are information technology. This has become the growth potential for almost of every organisation or entity and is important on every level of management. There is a growing need for comprehensive and systematic access to information that cannot be achieved without the use of new information technologies. Also increased activity in individual sectors of the real estate market have brought with it the growing demands for information on individual aspects of the real estate market, from the immediate actors (i.e. the contracting parties of the real estate transactions) to the various relevant institutions and analysts.
The real availability and reliability of the necessary data is not always ideal. Therefore, it is necessary to use the services of reliable providers or partners that are engaged in the analyses of information about the real estate market. The request on local market intelligence was a part of real estate transactions before Covid-19 as clients wanted to make the correct decisions about their transactions on the basis of all available and relevant information.
When helping clients to search for investment in real estate we engage a real estate agent or a real estate agency with a high credit score to analyse the client´s requirements on their investment using local real estate market intelligence. There are very few international companies with their local branches in Slovakia that focus on local commercial real estate partners that provide high quality analysis of the local market.
What are some of the key elements involved in achieving an accurate valuation for a real estate portfolio prior to the deal making process?
The price of real estate is determined by a number of economic, social, political and demographic factors. The most important is GDP, interest rates, population growth and disposable income. In addition to these macroeconomic factors, the price of real estate is also affected by factors related to the type of specific real estate. This includes locality (according to the location of the village, city, district, neighbourhood, street etc.); the location of the property (floor, view, brightness, flat land etc.); availability of the local services and the civil amenities (work, hobbies, culture, restaurants etc.); safety and security, transport connections, traffic and parking availability, civil engineering networks (water, gas, sewerage, public lightning); noise level, amount of greenery; layout of the property and legal defects (burdens, existing tenancy, the land under the building owned by other person or entity etc.). Psychological aspects on the part of the seller are also important.
The most common tool and the key element to value real estate is to ensure clients have a comprehensive valuation of the real estate in question by a professional expert. A Decree by the Ministry of Justice (No. 492/2004 Coll.) on determining of the general value of the assets and its Annex. No. 3 regarding the value of the real estate and buildings is the legislative framework for determining the real estate. The price of real estate determined by an expert is often lower than the market price, but it is a good starting point for negotiations about transactions, whether on sale or purchase of the real estate.
What Tax-Efficient Vehicles Can Be Used To Hold Real Estate In Your Jurisdiction? Any examples of deals you have structured in this way?
Within the framework of tax obligations by both parties of the transaction, obligations regarding income tax are decisive. All parties need to consider two aspects. On the seller’s side there is a question as to what extent the revenues from any sale will be taxable. For the buyer the issue is to what extent will it be possible to apply the paid purchase price for reducing future tax obligations?
Other relevant questions are the tax deductibility on transaction costs on both sides. There are no special tax efficient vehicles in the Slovak tax system that can be used to hold real estate in Slovakia. But there is no real estate transfer tax nor inheritance and donation tax, thus the transfer of ownership of real estate is burdened only by relatively negligible fees for notaries on signatures and for registration in the real estate registry. The income from the sale of real estate is exempted from tax after five years of ownership (the natural persons) or after five years from decommissioning (the legal entities) if the real estate was booked in the firm´s property. Hence, this vehicle is more advantageous for natural persons than for the legal entities.
Top Tips – To Optimize a Real Estate Portfolio
- The client should know what kind of real estate they are looking for and what amount of investment they are going to invest into the real estate.
- To carry out research and analysis of the real estate market.
- To diversify their real estate portfolio (and the investment portfolio, in general) to diversify the risk of the investments.