|
Acknowledgements |
6 |
|
|
Contents |
7 |
|
|
Contributing Authors |
8 |
|
|
Real Estate Transactions |
11 |
|
|
1 Real Estate Transactions |
11 |
|
|
1.1 Definition: What Makes Real Estate Different |
11 |
|
|
1.2 Overall Transaction Volume in Germany |
12 |
|
|
1.3 Different Transactions |
13 |
|
|
1.3.1 Location |
14 |
|
|
1.3.2 Asset Classes |
14 |
|
|
1.3.3 Risk-Return |
15 |
|
|
1.3.4 Financing |
16 |
|
|
1.4 Due Diligence: Origin, Legal Concept, Terms |
16 |
|
|
1.5 Functions and Objective of Due Diligence |
18 |
|
|
1.6 Subject of Due Diligence |
21 |
|
|
1.7 Sales Process |
22 |
|
|
1.7.1 Investment Memorandum |
22 |
|
|
1.7.2 Process Letter |
23 |
|
|
1.8 Due Diligence in the Context of Real Estate Transactions |
24 |
|
|
1.9 Legal Frame of Due Diligence |
26 |
|
|
1.9.1 Statutory Provisions |
26 |
|
|
Example |
27 |
|
|
1.9.2 Contractual Provisions |
28 |
|
|
1.10 Instruction of Advisors |
28 |
|
|
Example |
29 |
|
|
References |
29 |
|
|
Legal Due Diligence |
31 |
|
|
1 Introduction |
31 |
|
|
1.1 Purpose and Objective of Legal Due Diligence |
31 |
|
|
1.2 Sources of Legal Due Diligence |
32 |
|
|
2 Vendor Legal Due Diligence |
32 |
|
|
2.1 Preparation of the Data Room |
32 |
|
|
Example |
33 |
|
|
2.2 QandA Process Sequence |
34 |
|
|
2.3 Establishing Saleability |
34 |
|
|
Example |
35 |
|
|
2.4 Non-Disclosure Agreement (NDA) |
36 |
|
|
2.5 Legal Fact Book: Reliance Letter |
36 |
|
|
Example |
37 |
|
|
3 Buyer Red Flag Legal Due Diligence |
38 |
|
|
Example |
39 |
|
|
4 Initial Bid, Letter of Intent, Exclusivity |
40 |
|
|
4.1 Initial Bid |
40 |
|
|
4.2 Letter of Intent |
40 |
|
|
4.3 Exclusivity Agreement |
42 |
|
|
5 Buyer Full Due Diligence |
43 |
|
|
5.1 Detailed Examination |
43 |
|
|
5.1.1 Examination of Title: Land Register |
43 |
|
|
Example |
44 |
|
|
5.1.2 Lease Contracts |
45 |
|
|
5.1.3 Planning and Building Law |
48 |
|
|
Example |
49 |
|
|
5.1.4 Further Issues Regarding Share Deals |
50 |
|
|
5.2 Questions and Answers (QandA) |
51 |
|
|
5.3 Due Diligence Report |
53 |
|
|
5.4 Mark-Up SPA |
55 |
|
|
5.5 Final Bid |
56 |
|
|
6 Signing/Closing |
57 |
|
|
7 Conclusion and Outlook |
58 |
|
|
References |
59 |
|
|
Tax Due Diligence in Real Estate Transactions |
60 |
|
|
1 Introduction |
60 |
|
|
2 Tax Due Diligence in Asset Deals |
61 |
|
|
2.1 Introduction |
61 |
|
|
2.2 VAT |
62 |
|
|
2.2.1 VAT Treatment of the Acquisition of Real Estate |
62 |
|
|
2.2.1.1 Background: ``Transfer of a Going Concern´´ or Transfer of a Single Asset |
62 |
|
|
2.2.1.2 Practical Relevance for the Buyer |
63 |
|
|
Input-VAT-Adjustment Obligations |
63 |
|
|
Example |
64 |
|
|
VAT Treatment of the Sale of Moveable Assets |
65 |
|
|
Example |
65 |
|
|
2.2.1.3 Aspects to Be Reviewed in the Course of the Tax Due Diligence |
66 |
|
|
2.2.2 VAT Status and Treatment of Existing Lease Agreements |
67 |
|
|
2.2.2.1 Background |
67 |
|
|
Example |
67 |
|
|
2.2.2.2 Documents to Be Reviewed |
68 |
|
|
2.2.3 Assumption of Input VAT-Adjustment Obligations (§ 15a UStG) |
69 |
|
|
2.2.3.1 Background |
69 |
|
|
Example |
69 |
|
|
2.2.3.2 Practical Relevance for the Buyer |
70 |
|
|
2.2.3.3 Aspects to Be Reviewed in a Tax Due Diligence |
70 |
|
|
2.3 Trade Tax |
71 |
|
|
2.3.1 Background |
71 |
|
|
2.3.2 Documents and Information to be Reviewed |
72 |
|
|
2.4 Secondary Tax Liability of the Buyer for Taxes of the Seller |
73 |
|
|
2.4.1 Potential Tax Liability of the Buyer Pursuant to § 75 AO |
73 |
|
|
2.4.1.1 Background |
73 |
|
|
2.4.1.2 Aspects to be Reviewed in a Tax Due Diligence |
74 |
|
|
Tax Status Certificates (Bescheinigung in Steuersachen) |
74 |
|
|
Example |
74 |
|
|
Construction Withholding Tax |
75 |
|
|
2.4.2 Liability for Unpaid Land Tax |
76 |
|
|
2.5 Other Aspects |
76 |
|
|
2.5.1 Real Estate Transfer Tax |
76 |
|
|
2.5.1.1 Background |
76 |
|
|
2.5.1.2 Relevance for the Due Diligence |
76 |
|
|
Note |
77 |
|
|
2.5.1.3 Documents to Be Reviewed in a Tax Due Diligence |
78 |
|
|
2.5.2 Land Tax |
78 |
|
|
2.5.2.1 Background |
78 |
|
|
Example |
78 |
|
|
2.5.2.2 Relevance of Land Tax in a Tax Due Diligence |
79 |
|
|
2.5.2.3 Documents to Be Reviewed |
79 |
|
|
3 Tax Due Diligence in Share Deals |
79 |
|
|
3.1 Introduction |
79 |
|
|
3.2 Analysis of the Current Tax Status |
80 |
|
|
3.2.1 Status of Tax Filings and Tax Assessments |
80 |
|
|
3.2.2 Tax Audits |
81 |
|
|
3.2.3 Pending Appeals, Proceedings, Etc. |
81 |
|
|
3.3 Typical Potential Tax Issues to Be Reviewed |
82 |
|
|
3.3.1 Allocation of the Purchase Price to the Land and the Building |
82 |
|
|
3.3.2 Tax Depreciation |
82 |
|
|
3.3.3 Tax Losses |
83 |
|
|
3.3.3.1 Background |
83 |
|
|
Change-of-Control in a Corporate Entity |
84 |
|
|
Example |
84 |
|
|
Change-of-Control in a Partnership |
84 |
|
|
Forfeiture of Losses in Case of Certain Reorganisations |
85 |
|
|
Consequences for a Tax Due Diligence |
85 |
|
|
3.3.4 Deductibility of Interest Expenses |
85 |
|
|
3.3.4.1 Background |
85 |
|
|
3.3.4.2 Consequences for a Tax Due Diligence |
87 |
|
|
3.3.5 Trade Tax Aspects |
87 |
|
|
3.3.5.1 Trade Tax Aspects of Non-German Target Companies |
87 |
|
|
3.3.5.2 Extended Trade Tax Exemption for Real Estate Companies |
88 |
|
|
Limitation of Business Activities to Long-Term Investments |
88 |
|
|
Property Trading |
89 |
|
|
Lease of Business Fixtures |
89 |
|
|
Harmful Use by the Shareholder: Operational Company Split |
89 |
|
|
3.3.6 Transfer Pricing and Constructive Dividends |
90 |
|
|
3.3.6.1 Background |
90 |
|
|
3.3.6.2 Consequences for the Tax Due Diligence |
90 |
|
|
3.3.7 Real Estate Transfer Tax |
91 |
|
|
Example |
92 |
|
|
3.3.8 Other Aspects |
93 |
|
|
3.4 Specific Tax Aspects of Partnerships |
93 |
|
|
3.4.1 German Trade Tax Aspects |
94 |
|
|
3.4.2 German Real Estate Transfer Tax Aspects |
94 |
|
|
3.4.2.1 Change of Control Within a 5-Year Period |
94 |
|
|
Example |
95 |
|
|
3.4.2.2 Retroactive Denial of Previously Applied RETT-Exemptions |
95 |
|
|
Example |
96 |
|
|
4 Consequences of a Tax Due Diligence for the Investor |
96 |
|
|
References |
97 |
|
|
Financial Due Diligence |
98 |
|
|
1 Introduction |
98 |
|
|
1.1 Goals of Financial Due Diligence |
99 |
|
|
1.1.1 Reduction of Information Asymmetry |
99 |
|
|
1.1.2 Supporting the Valuation |
100 |
|
|
1.1.3 Reduction of Risks for Decision Makers |
101 |
|
|
1.1.4 Identify Adequate Risk Mitigation |
101 |
|
|
1.1.5 Supporting the Strategic Rationale of the Buyer |
103 |
|
|
1.2 Changing Approaches to Financial Due Diligence |
103 |
|
|
1.2.1 Changing Approaches to Conducting Due Diligence |
104 |
|
|
1.2.2 Phased Reporting in Financial Due Diligence |
104 |
|
|
1.3 Understand the Transaction |
106 |
|
|
1.3.1 General Understanding of the Transaction |
106 |
|
|
1.3.2 Understanding of the Equity Story |
107 |
|
|
2 Scope of the Financial Due Diligence |
109 |
|
|
2.1 Analysis of the Quality of Financials |
109 |
|
|
2.1.1 Purpose of the Analysis of Quality of Financials |
109 |
|
|
2.1.2 Key Hypotheses and Resulting Analysis |
109 |
|
|
2.1.3 Accounting Policies |
110 |
|
|
2.1.4 Audit of Financial Statements and Management Letters |
111 |
|
|
2.1.5 Quality of Management Reporting |
111 |
|
|
2.1.6 Historical Budgeting Accuracy |
112 |
|
|
2.1.7 Budgeting and Forecasting Process |
112 |
|
|
2.1.8 Internal Processes |
113 |
|
|
2.2 Analysis of the Quality of Earnings |
114 |
|
|
2.2.1 Purpose of the Analysis of Quality of Earnings |
114 |
|
|
2.2.2 Volume Basis |
114 |
|
|
Example |
116 |
|
|
2.2.3 Risk Allocation Between Tenants and Landlords |
117 |
|
|
2.2.4 Gross Rental Income |
117 |
|
|
2.2.4.1 Gross Rental Income vs. Passing Rents |
117 |
|
|
2.2.4.2 Development of New Contract Rents vs. Portfolio Rents |
118 |
|
|
Example |
118 |
|
|
2.2.4.3 Weighted Average Lease Tenure (WALT) |
119 |
|
|
2.2.4.4 EBITDAR Rent Coverage |
119 |
|
|
2.2.5 Vacancy Losses |
120 |
|
|
2.2.6 Like-for-Like or Stabilised Portfolio Analysis |
120 |
|
|
2.2.7 Recoverable and Non-recoverable Operating Costs |
121 |
|
|
2.2.8 Maintenance Costs |
121 |
|
|
Example |
122 |
|
|
2.2.9 Adjusted EBITDA |
123 |
|
|
2.2.10 Current Trading Analysis |
124 |
|
|
Example |
125 |
|
|
2.2.11 Financial Results |
125 |
|
|
2.2.12 Income Taxes and Other Taxes |
125 |
|
|
2.2.13 EPRA Earnings |
127 |
|
|
2.3 Analysis of the Quality of Net Assets |
128 |
|
|
2.3.1 Purpose of the Analysis of the Quality of Net Assets |
128 |
|
|
2.3.2 Key Hypotheses and Resulting Analysis |
129 |
|
|
2.3.3 Investment Properties |
129 |
|
|
2.3.3.1 Acquisition Costs and Fair Values |
129 |
|
|
2.3.3.2 Age Structure of Investment Properties |
130 |
|
|
2.3.3.3 Regional Footprint of Investment Properties |
131 |
|
|
2.3.4 Working Capital |
132 |
|
|
2.3.4.1 Recurring Levels and Working Capital Benchmarks |
132 |
|
|
2.3.4.2 Seasonality of Working Capital |
132 |
|
|
2.3.5 Debt-Like Items and Other Non-recurring Items |
133 |
|
|
2.3.5.1 Debt |
134 |
|
|
2.3.5.2 Debt-Like Items |
134 |
|
|
2.3.5.3 Cash and Cash-Like Items |
134 |
|
|
2.3.6 Equity |
134 |
|
|
2.3.6.1 Capital Maintenance Rules for Limited Liability Companies |
137 |
|
|
2.3.6.2 EPRA NAV and NNNAV |
138 |
|
|
2.4 Analysis of the Quality of Cash Flows |
139 |
|
|
2.4.1 Purpose of the Analysis of Quality of Cash Flows |
139 |
|
|
2.4.2 Key Hypotheses and Resulting Analysis |
140 |
|
|
2.4.3 Operating Cash Flow |
140 |
|
|
2.4.4 Investing Cash Flow |
141 |
|
|
2.4.4.1 Maintenance CAPEX and Tenant Improvements |
141 |
|
|
2.4.4.2 Acquisitions and Disposals |
142 |
|
|
2.4.5 Free Cash Flow |
142 |
|
|
2.4.6 Financing Cash Flow |
143 |
|
|
2.4.6.1 Debt Service |
143 |
|
|
2.4.6.2 Flow to Equity |
144 |
|
|
2.4.6.3 FFO and AFFO |
145 |
|
|
3 Conclusion and Outlook |
147 |
|
|
Appendix |
148 |
|
|
A.1 ICAEW ``Twenty Principles for Good Spreadsheet Practice´´ |
148 |
|
|
A.1.1 The Spreadsheet´s Business Environment |
148 |
|
|
A.1.2 Designing and Building Your Spreadsheet |
148 |
|
|
A.1.3 Spreadsheet Risks and Controls |
149 |
|
|
A.2 FAST Principles |
149 |
|
|
A.2.1 Workbook Design |
149 |
|
|
A.2.1.1 General Workbook Design Principles |
149 |
|
|
A.2.1.2 Sheet Organisation |
149 |
|
|
A.2.1.3 Multiple Workbook Models |
150 |
|
|
A.2.2 Worksheet Design |
150 |
|
|
A.2.2.1 Universal Design Layout Principles |
150 |
|
|
A.2.2.2 Calculation Blocks |
150 |
|
|
A.2.2.3 Header Design |
150 |
|
|
A.2.2.4 Input Sheets |
151 |
|
|
A.2.2.5 Presentation Sheets |
151 |
|
|
A.2.2.6 Control Sheets |
151 |
|
|
A.2.3 The Line Item |
151 |
|
|
A.2.3.1 Line Item Taxonomy |
151 |
|
|
A.2.3.2 Formula Design Fundamentals |
151 |
|
|
A.2.3.3 Formula Simplicity |
152 |
|
|
A.2.3.4 Formula Clarity |
152 |
|
|
A.2.3.5 FAST Labelling Conventions |
152 |
|
|
A.2.3.6 Links |
153 |
|
|
A.2.3.7 Timing Flags and Partial Period Factors (PPFs) |
153 |
|
|
A.3 Excel Features Used in Modelling |
153 |
|
|
A.3.1 Excel Functions |
153 |
|
|
A.3.2 Formatting Features |
153 |
|
|
A.3.3 Excel Names |
153 |
|
|
References |
153 |
|
|
Technical Due Diligence |
156 |
|
|
1 Introduction |
156 |
|
|
1.1 Conceptual Framework |
157 |
|
|
1.2 Purpose and Objective of a Due Diligence |
159 |
|
|
1.2.1 Buyer´s Perspective on a Technical Due Diligence |
159 |
|
|
1.2.2 Vendor´s Perspective on a Technical Due Diligence |
161 |
|
|
1.3 Sources of Information |
162 |
|
|
2 The Process of a Technical Due Diligence |
162 |
|
|
2.1 Initial Phase |
162 |
|
|
Professional Indemnity Insurance |
163 |
|
|
Example |
163 |
|
|
Conflict of Interest |
165 |
|
|
2.1.1 Materiality Threshold |
166 |
|
|
2.2 Data Room Phase |
167 |
|
|
2.2.1 Information Memorandum |
167 |
|
|
2.2.2 Data Room |
167 |
|
|
2.2.3 Red Flag Report |
170 |
|
|
2.3 Phase I/Phase II Site Assessment |
170 |
|
|
2.3.1 Phase I Environmental Site Assessment |
170 |
|
|
2.3.2 Property Condition Assessment or Building Survey |
172 |
|
|
2.3.3 Site Visit |
174 |
|
|
2.3.4 Interviews |
174 |
|
|
Cover Story |
175 |
|
|
2.3.5 Reporting |
175 |
|
|
2.3.6 Phase II |
176 |
|
|
Selection of the Service Provider for a Phase II Investigation |
177 |
|
|
Example |
177 |
|
|
2.4 Contract Phase |
178 |
|
|
2.4.1 Technical Review of Contract Clauses |
178 |
|
|
2.4.2 Disclosure Lists |
178 |
|
|
2.4.3 Negotiation Support |
178 |
|
|
2.4.4 Reliance Letter and Contract Transfer Agreement |
179 |
|
|
2.4.5 Deal Closure |
179 |
|
|
2.4.6 Follow-up |
180 |
|
|
3 Methodology |
180 |
|
|
3.1 Data Collection |
181 |
|
|
3.1.1 Limitations and Safety |
181 |
|
|
3.1.2 Site History |
181 |
|
|
3.1.3 Permits/Acceptances |
182 |
|
|
3.1.4 Maintenance Status |
182 |
|
|
3.1.5 Development Options |
183 |
|
|
3.2 Assessment |
183 |
|
|
3.2.1 Basis: Regulatory Requirements |
183 |
|
|
3.2.2 Relevance Versus Materiality |
183 |
|
|
3.2.3 Top-Down Versus Bottom-Up Approach |
184 |
|
|
3.2.4 Rating of the Condition |
185 |
|
|
3.3 Cost Analysis |
186 |
|
|
3.3.1 Capital Expenditure for Deferred Maintenance Issues (Deferred Capex) |
187 |
|
|
3.3.2 Capital Expenditure Forecast |
187 |
|
|
3.3.3 Opex Analysis |
189 |
|
|
3.3.4 Reinstatement Costs |
190 |
|
|
3.4 Risk Transfer |
190 |
|
|
3.4.1 Contingencies |
191 |
|
|
3.4.2 Price Adjustments |
191 |
|
|
3.4.3 Warranties, Representations and Guarantees |
192 |
|
|
3.4.4 Indemnities |
192 |
|
|
3.4.5 Insurance Solutions |
192 |
|
|
3.4.6 Closing Conditions |
192 |
|
|
3.4.7 Retention |
192 |
|
|
4 Topics Covered by the Technical Due Diligence Assessment |
193 |
|
|
4.1 Technical Due Diligence Assessment |
193 |
|
|
4.1.1 Site Location: Topography, Setting, Neighbourhood |
193 |
|
|
4.1.2 Regional Planning and Zoning |
193 |
|
|
4.1.3 Building Permits and Building Code Compliance |
194 |
|
|
Example: Missing Construction Permits |
194 |
|
|
4.1.4 Building Envelope: Façade, Windows and Walls |
195 |
|
|
Example: Façade Failures |
195 |
|
|
4.1.5 Structural: Foundation and Framing |
195 |
|
|
Example: Mining Subsidence Damage in the Ruhr Area |
195 |
|
|
4.1.6 Roofing Systems |
195 |
|
|
4.1.7 Interior Elements: Stairways, Hallways, Common Areas |
196 |
|
|
4.1.8 Mechanical: Heating, Ventilation and Air Conditioning (HVAC) Including Indoor Air Quality |
196 |
|
|
Example: Sick of Air-Conditioning? |
196 |
|
|
4.1.9 Electrical Appliances: High/Low Voltage, Illumination, Security/Alarm Systems, CCTV and Building Automation Systems |
196 |
|
|
4.1.10 Plumbing |
197 |
|
|
Example: Biogenic Sulphuric Acid Corrosion (BSC) |
197 |
|
|
4.1.11 Vertical Transportation: Elevators and Escalators |
197 |
|
|
4.1.12 Fire Safety |
198 |
|
|
4.1.13 Energy Efficiency Including Energy Loss, Air Leakage and Roofing and Building Envelope Moisture Intrusion |
199 |
|
|
Example: Energy Audits as a Legal Duty |
199 |
|
|
4.1.14 Building Services, Operational Safety and Building Safety |
199 |
|
|
4.1.15 Exterior Areas |
200 |
|
|
4.1.16 Transport Connections and Accessibility |
200 |
|
|
4.2 Environmental Due Diligence Assessment |
201 |
|
|
4.2.1 Site History |
201 |
|
|
4.2.2 Site Sensitivity and Vulnerability |
201 |
|
|
4.2.3 Zoning and Environmental Permits |
201 |
|
|
4.2.4 Environmental Management |
202 |
|
|
4.2.5 Emissions |
202 |
|
|
4.2.6 Waste Management |
202 |
|
|
4.2.7 Water and Wastewater |
203 |
|
|
4.2.8 Storage and Handling of Hazardous Materials |
204 |
|
|
4.2.9 Soil and Groundwater |
204 |
|
|
4.2.10 Building Contaminants |
206 |
|
|
4.2.11 Environmental Risks and Resilience |
207 |
|
|
4.2.12 Unexploded Ordnance |
208 |
|
|
4.3 Social Due Diligence Assessment |
208 |
|
|
4.3.1 Corporate Level |
209 |
|
|
4.3.1.1 Different Perspectives |
209 |
|
|
4.3.1.2 Topics to Be Covered |
209 |
|
|
4.3.1.3 Health and Safety |
209 |
|
|
4.3.1.4 Labour and Workplace Conditions |
209 |
|
|
4.3.1.5 Training and Education |
210 |
|
|
4.3.1.6 CSR Reporting |
210 |
|
|
4.3.2 Asset Level |
210 |
|
|
4.3.2.1 Workplace Conditions |
211 |
|
|
4.3.2.2 Accessibility for Disabled Persons |
211 |
|
|
4.4 Governance |
212 |
|
|
5 Conclusion and Outlook |
213 |
|
|
References |
214 |
|
|
Erratum to: Real Estate Transactions |
216 |
|
|
Glossary |
218 |
|