So far, in my limited but intense experience, I have come up with the feeling that most managers coming from international companies lack the knowledge on what is analyzed when undertaking a Real Estate Due Diligence. While this is not surprising as it could be, yet; rather than relying on their in-house legal departments, they have an inclination on hiring the services of an independient legal firm to carry out the legal audit on the assets they are looking to acquire.
With this idea, the aim of the post is to bring some light to these individuals looking for their company to grow by investing on acquiring new properties where to develop their activity. With a number of factors outside the legal sphere, considering to hire the services of a firm in the early steps of the operation seems as much unrealistic as too high on costs. This short guide can bring a grasp on understanding better what is undertaken in this Due Diligence process, Indeed, every person is capable of understanding what is taken into consideration here, saving costs, and taking the decision on wether it is relevant or not to continue with the operation and then leaving it in the hands of lawyers or find other potential sellers and save the costs of the hiring.
- Perform a legal analysis on the liens and encumbrances of the asset, which are to be found in the Property Registry from the asset's location.
In addition on deciding on the suitability of the operation, what will condition the legal analysis of it will be the information found of the asset included in the Property Registry. Such information is public, meaning saving money and headache for those intelligent enough to issue a note to the public worker asking for a certificate over the asset before issuing a bank note to the seller.
Thanks to such, you will be able to discover whether the asset is owned by the seller or leased to a third. Even more, it can be that such asset is mortgaged by a bank using a financial instrument which is expected to burden the asset by a long number of years. Even more interestingly, you can find out it is not even registered to the name of the seller, or that there are judicial procedures currently on-going. Accessing these public registries is a must before setting the objectives of your legal analysis and studying the business suitability of the operation. However, depending on what you are seeking to acquire, not all information is currently included in this registry.
- What is the main activity of the company you are looking to purchase?
Legal and administrative requirements will not be the same when looking to acquire a company whose main activity is dedicated to appartment renting in summer, than those related to a company which operates in the industrial sector producing nocive substances to the ozone.
In fact, an asset's legallity must be studied from two spheres: one regarding its physicial structure and compliance with the urbanistic planning and construction; and another one regarding its administrative compliance: activity licenses, administrative permissions to perform its activity, environmental requisites, etc.
Continuing with the above example, should you be looking for an asset whose activity is to serve for tourists as an appartment, you want to check if there is a registry where the asset must be registered, with its limitations regarding size, number of rooms, even internet connection, parking places...all of these following the guidelines of its sectorial legislation.
However, when looking to buy an asset whose main activity is that of chemicals, you should consider checking whether or not there is a national registry for pollution limits, noise limitations, how wastes are treated; even if there are required guarantees to be subscribed just in case wastes are wrongly treated. Obviously, you wanna see that asset correctly included there, without past or current administrative sanctions discussed in courts.
As you can see, it is not enough to check the ownership of the asset, or if the Final Works Certificate is subscribed by the architect and ratified by public bodies. You want to study whether or not the asset is prepared to carry out the activity it was constructed for.
- What kind of legal structure is to be used? Share Deal vs Asset Deal.
When deciding on carrying out the purchase agreement with the seller, it is important to understand there are different legal instruments on how to perform the operation, which might be more suitable for both parties, but which however affect how to conceive different encumbrances on the real estate.
When using the share deal option, the buyer will acquire company's assets, meaning all existing and potential liabilities and debts, some of these probably related to the real estate. The legal entity, the company, would be acquired as an everything, with its know how, goods, real asset, employees, mortgages, etc. However, an asset deal means acquiring some part of the business, solely acquiring determined goods, and as such discussing the suitability of the real asset you want to include in your company to grow.
- Which documents to ask to the seller.
Depending on the activity of the company, in addition to asking for all the contracts or information you found out from the Public Registry, you want to study the previous purchase and sell agreement, you want to see the licenses regarding its activity, you want to see if there are assets leased and under which conditions. It is important to set apart real estate requirements with those related to tax and business ones. Here, you are focusing on the legallity of the asset: if it is registered in the Property Registry, if its activity complies with the law, if there are administrative requirements, etc. You want to buy a green flag asset.
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