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.
Hugh Clohessy 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?
Understanding the local economic and political market is essential when considering whether to invest in real estate. Foreign direct investment has been a huge driver in the Irish commercial property market in recent years. In 2019, the IDA reported that Ireland was perceived as a stable, competitive, secure and pro-business country, with the fastest growing economy in the Eurozone. Whilst FDI remained resilient in the first half of 2020, Covid-19 is expected to slow down investment in commercial property in the second half of 2020, though market commentators are still optimistic. Interestingly, residential property seems to have been less affected with sales pipelines remaining strong. An issue in Ireland at the moment is the number of units in construction which still lags behind demand.
Considering the local tax regime is also paramount. The tax treatment of the transaction can vary hugely from jurisdiction to jurisdiction so it is important to take advise from local tax advisors in relation in corporate income taxes and transactions duties.
What are some of the key elements involved in achieving an accurate valuation for a real estate portfolio prior to the deal making process?
Getting a reliable and robust appraisal of an asset is crucial before agreeing of terms for a deal. Asset valuation is very important for transactions involving acquisition, disposal, investing and lending. Valuations are prepared by specialists using market knowledge, transactional data and of course, market comparables. Depending on the type of transaction, the development potential of the assets in the portfolio might also be a key consideration.
Typically, valuations and commercials are agreed before the transaction reaches “legals”. However, it is not uncommon for issues to be uncovered in the course of legal due diligence that will affect the value of a property. These matters may not have been apparent to the valuation specialist and they will only come to light once the terms have been agreed. Rectifying title issues often require applications to the land registry which can in some instances take considerable time to be processed so in order to progress the deal parties might agree to revise the valuation placed on the asset to take into account the title defect and risks associated with it.
The key point here is that once you have received your valuation and proceed to agree the terms of the deal ensure to mark all documents as “subject to contract”.
What Tax-Efficient Vehicles Can Be Used To Hold Real Estate In Your Jurisdiction? Any examples of deals you have structured in this way?
The Irish Collective Asset-Management Vehicles or ICAVs have become one of the most popular vehicles for holding real estate in recent years. ICAVS are regulated investment vehicles as opposed to traditional company structures. ICAVs can exist as standalone funds or as an “umbrella structure” with segregated liability between sub-funds. ICAVs are particularly attractive to US investors because they are able to elect their classification under the US “check-the-box” taxation rules. This allows an ICAV to be treated as a partnership for US tax purposes, and so avoid certain adverse tax consequences for US taxable investors. This is in contrast to the status of the Irish public liability company, which was the most popular structure before ICAVS, which is not able to check-the-box for US tax purposes giving rise to potential treatment as a Passive Foreign Investment Company.
In addition to tax efficiency, there are a number of other aspects of ICAVs that attracts investors to the structure. ICAVs are regulated by the Central Banks of Ireland and are required to have a board of directors. ICAVs are also required to appoint a depository who is responsible for the provision of the safe custody of the assets of the ICAV and any sub-funds.
We have seen the ICAV structure used on a number of deals involving Irish real estate particularly those relating to social housing, which is a very active market in Ireland at the moment.
Top Tips – To Optimize a Real Estate Portfolio
- Communicate with your lawyer as soon as you anticipate any disputes with tenants or third parties. Take legal advice early to clarify your position and develop a strategy as an effective way to quickly bring matters to a conclusion.
- Engage the services of a property management agent who has the expertise and market knowledge to manage your portfolio. Effective portfolio management involves a broad spectrum of disciplines including financial reporting, occupancy management, and operations so making sure that you have the right advisors to help you protect the value of your asset is essential.
- Deal with and try to work with tenants where possible. Covid-19 has brought about an almost unprecedented situation where usually reliable tenants, of all sizes, have either had to close operationally or have been forced to seek rent reductions or rent breaks.