Real Estate Due Diligence in Corporate and M&A Transactions

By: Joseph M. Marger, Reed Smith LLP.

In almost every asset purchase, stock purchase, and merger transaction (generally referred to in this article as M&A transactions), the purchaser will acquire an ownership or leasehold interest in at least one real estate asset. However, the real estate asset(s) do not drive a typical M&A transaction. In most cases, a particular real estate asset will only have significance because of how it will be used in the purchaser’s business operations after closing (i.e., the real estate only has incidental value).

IF REAL ESTATE IS NOT DRIVING THE TRANSACTION, the purchaser may be inclined to forego, substantially limit, or postpone the real estate due diligence commonly performed in a real estate transaction. This article provides general guidance and practice tips for a real estate attorney assisting with the real estate due diligence in such an M&A transaction.

Preliminary Items

Timing

The real estate component of an M&A transaction runs more smoothly if real estate due diligence is addressed in the early stages of the transaction. M&A transaction agreements rarely include a due diligence period, and much of the due diligence is performed before contract signing. By addressing real estate due diligence early in the transaction, the purchaser can:

• Identify real estate costs (e.g., transfer taxes) that may be material in the purchaser’s pricing decision
• Gain negotiating leverage on real estate issues
• Modify the deal structure to mitigate real estate issues
• Account for real estate due diligence items requiring significant lead time in the deal timeline
• Otherwise factor real estate due diligence considerations into its decision-making process

Confirm the Transaction Structure

The real estate due diligence process varies depending upon how the M&A transaction is structured. At the outset, make sure you completely understand the applicable transaction structure. The three most common structures are asset purchases, stock purchases, and mergers.

• Asset purchase. In an asset purchase, the purchaser acquires all (or a portion) of the seller’s assets. Unless successor liability is imposed pursuant to applicable laws, the purchaser is only liable for those obligations of the seller (if any) that the purchaser expressly assumes under the transaction documents.
• Stock purchase. In a stock purchase, the purchaser acquires all of the ownership interests in the target company, and the target company’s assets and liabilities remain the same.
• Merger. In a merger, two companies are combined, and the surviving company succeeds to all assets and liabilities of the disappearing company.

For a complete understanding of the applicable transaction structure, you must confirm specific factual information. For stock purchases and mergers, confirm whether the purchaser is acquiring an entire company or a division. For asset purchases, confirm the specific real estate assets to be acquired and how the purchaser intends to take title to those assets; for example, the purchaser may want each asset to be transferred to a separate single-purpose subsidiary company. For mergers, confirm the type of merger and whether the surviving entity is the target, the purchaser, or a subsidiary of the purchaser. Ask whether pre- and post-transaction structure charts are available. Structure charts provide a clear and concise summary of the transaction and are likely to include the above factual information.

To read the full practice note in Lexis Practice Advisor, follow this link.

Joseph Marger is a Partner in Reed Smith’s Real Estate group. He has substantial experience in all aspects of the sale and acquisition of real estate, both single asset and portfolio transactions, including industrial and commercial single-user facilities, shopping centers, hotels, office buildings and multi-family residential properties. He is equally experienced in real estate finance, including saleleaseback and build-to-suit financing transactions, traditional loan documentation for borrowers and institutional lenders for construction and development and stabilized assets, including securitized transactions.

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