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Real Estate: The Asset That Is Part of Every Deal

I was talking with a prospective new employee last week, and I asked her if she had any experience with real estate matters in her transactional experience. She gave me a quizzical look and her response stated that she did corporate work and that real estate was not part of what she typically did. I wish this was the only time I encountered this response when discussing mergers and acquisitions or “corporate” representation, but it reflects a common misconception. The fact is that real estate is an asset that is a part of every deal.

Anticipating Increased Complexity

When I look at a transaction or a company, I often find that the issues involving real estate are the most intense and often the most difficult to resolve. The issues also tend to vary considerably because companies and individuals treat real estate in a wide spectrum of ways in a deal. In its simplest form, real estate could be an owned asset being purchased. However, even in these “simple” situations, if the party holds and financing the real estate separately, it can add significant complexity to a transaction, especially if it is one of the higher dollar assets related to the business.

At its most complex, the real estate may be a leased asset unrelated to the business, and the change in ownership or operation may signal an opportunity to renegotiate the lease or refinance the property. Adding to the complexity of dealing with leased properties are the practical reality of having to coordinate with a third party that is not part of the transaction to obtain a lease amendment or consent. The phrase, “Your emergency is not my emergency” comes to mind when I relive past deal trauma with landlord counsel.

The condition of the real estate can also add another layer of complexity. Issues can range from the condition of the improvements (buildings, parking lots, storage facilities, etc.) to the condition of the underlying dirt (i.e.environmental contamination).

Leveraging Real Estate as a Tool

Depending on how real estate is involved, it can be a valuable tool to achieve objectives on both sides of a transaction. Businesses may be able to use equity value in real estate to finance other acquisition objectives or to provide security for business acquisition financing. Depending on the situation, the seller may be able to take advantage of additional tax planning opportunities. A seller may also choose to retain the real estate and lease it to the operating business buyer in order to lower the purchase price for the buyer while securing a steady stream of income for the seller.

Not Only for Brick & Mortar Operations

Do not think that only traditional “brick and mortar” businesses have to deal with real estate. Nearly every business will encounter a real estate issue. Even the most virtual of companies need a location to host a server for its platform. This may be a simple storage facility or server farm lease, but given what is held on the server, it is of vital importance to understand the relationships and potential issues involved.

Consider Real Estate First

While the role of real estate in a deal has many facets — too many in fact to list — the core issue is that real estate needs to considered at the forefront of any transaction, so that the players understand the issues and can work to address them, or capitalize on them, in a timely fashion. Too often, real estate issues are not given due consideration at the start of a transaction, and then become a major source of conflict near the end, when closing is looming.

You could get lucky. The real estate issues could move along smoothly in a deal and you may be able to address them over the normal course of the transaction, but often there is a hiccup or a diligence issue relating to real estate that delays or stresses a deal unnecessarily.

To fully leverage the power of real estate and avoid unforeseen drama and perhaps even issues that undermine a transaction prior to closing, I strongly recommend considering real estate issues sooner rather than later.

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Disclaimer: The information in this blog post is provided for general informational purposes only, and may not reflect the current law in your jurisdiction. No information contained in this post should be construed as legal advice from Stephen Dietrich, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this Post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country or other appropriate licensing jurisdiction.
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About The Author: Stephen Dietrich is an attorney and author who has a passionate interest in the human side of business. His distinctive combination of legal and business knowledge, human insight, and dedication to clients makes him uniquely qualified to help corporate leaders and other C-level executives navigate high-value mergers and acquisitions, restructure transactions, and manage day-to-day operations. Through this blog, Stephen shares his extensive experience and unique personal and professional insights in the hope of stirring thought and dialogue that leads to ever deepening insights and understanding. For more information, please visit www.StephenDietrich.com.

 

 

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