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.
Koen De Puydt 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?
The alienation of real estate has become a very formalistic affair in Belgium. A great many laws relating to real estate, such as the provisions on spatial planning, are from the public order, which means that it is impossible to derogate from these rules. Regardless of how international the transaction may be, it is impossible to get around these matters because they can have a huge impact on the value of a real estate portfolio.
Of course, this is not only the case in Belgium, which means that this type of practice has to take place in every country where property is located. The difficult thing about Belgium is that there are three regions that have their own legislation on rent, spatial planning, environment, soil pollution – Flanders, Wallonia and the Brussels Capital Region.
The most remarkable example of this we have with concerns the sale of an industrial site to a foreign player. The buildings on this site were partly located in Flanders and partly in Brussels. It was necessary to make an evaluation in order to conduct an exploratory soil survey. Because of the different regulations in the two parts of the country, no investigation had to be carried out on the front part of the site (located in Flanders), while an investigation was imposed on the rear part of the buildings (located in the Brussels Region). The main difficulty is to explain these absurdities to an international client.
What are some of the key elements involved in achieving an accurate valuation for a real estate portfolio prior to the deal making process?
There are many formulas for valuing a real estate portfolio. From the real estate agent’s point of view, “location, location, location” will be the most important element. For the financially responsible, return on investment is of great importance. For a lawyer, the wish of his client is a crucial element.
If the client is the future acquirer of the property, we will need to know what the client wants to do with that property. Depending on the wishes of the acquirer, we can check whether the property fully complies with the rules in order to exercise the function that the future owner wants to excercise. This means reconstructing the legal status of the property. We need to find out the whole process that the property has gone through: for what purpose was it erected? Was it built in accordance with the original permit? Have any subsequent alterations been made? Were these adjustments subject to permit requirements? Were the correct permits submitted and obtained?
What should not be forgotten is that in such a legal due diligence always three different aspects need to be considered. Firstly, there is the actual execution of the construction works. Has the building been built as planned? Secondly, it needs to be verified whether the real estate is in accordance with civil law. Is there, for example, a deed of division? Is it in accordance with the current state of the property? Finally, there is the administrative law component. Is the nature or the destination in accordance with the use of the property? Has the property been constructed in accordance with the permit(s)?
Without the evaluation of these three elements and the possible cost to solve the problems, it is not possible to reach a proper valuation of a real estate portfolio.
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 nature of the property, the size of the portfolio and, of course, the wishes of the (future) owner are crucial in answering these questions. There is no single panacea. Every solution we propose will have its advantages and disadvantages. When we really talk about a large portfolio, we certainly have to mention the RREC or Regulated Real Estate Company.
A RREC is as a public real estate company with a unique REIT status. It’s subject to firm legislation with a view to the protection of its shareholders and financiers. The status provides financiers and private investors with the opportunity of having access in an even-handed, cost-effective and fiscally transparent manner to a diversified property portfolio. It is the legislator’s goal to guarantee optimum transparency about investment properties and ensure the pay-out of maximum cash-flow. The investor on the other hand will enjoy multiple benefits.
However, this company form is highly regulated and supervised by the FSMA. It is still unloved, but since the amendment of the law in 2018 it has become much more flexible than before.
Top Tips – To Optimize a Real Estate Portfolio
- Regular legal check-ups of the portfolio are essential, not only to detect problems in response to changing regulations, but also to identify any opportunities
- Follow-up and the automation of this follow-up are of crucial interest. Not only do problems such as non-payments have to be dealt with quickly, but structural problems (e.g. with permits, errors in execution, etc.) are also more easily solved if they are detected promptly.
- When it comes to new projects, do not concentrate on what the rest of the market is doing. Dare to set your own course.
- If Covid-19 has taught us anything, it is that diversity of your portfolio is indispensable in the real estate sector. Spreading your risk must also become the new standard in real estate.
