Corporate-wrapped real estate transactions: What you need to know

A corporate-wrapped real estate transaction is one where the buyer acquires the company, partnership or other legal entity that owns the real estate, rather than acquiring the real estate itself by a direct transfer of title. So, the property is “wrapped” inside a corporate vehicle, and the subject of the sale is the equity (or the shares) in that vehicle.

Impact of acquiring a company rather than a property

In a direct real estate sale, the property moves from seller to buyer by way of a land transfer, conveyance or assignment. In a corporate-wrapped transaction, the property remains owned by the same legal entity before and after completion. What changes is the ownership of that entity. As a result, the buyer steps into the position of owner indirectly, through control of the vehicle that holds the asset.

A corporate-wrapped transaction is both a corporate acquisition and a real estate acquisition at the same time. The buyer must investigate not only the underlying property, but also the legal, financial, tax and operational position of the entity through which the property is held. This will impact the time and legal costs of doing the deal.

Why use a corporate-wrapped structure

This structure is common in institutional real estate, private equity real estate, joint ventures, portfolio transactions and cross-border investments, particularly where the property is already held through a special purpose vehicle. But what makes it popular?

Tax – as is often the case in corporate real estate deals, tax is a key driver. In some jurisdictions, a share sale or sale of interests in a property-holding vehicle may produce a different, preferable tax outcome from a direct transfer of the property.

Efficiency – where a property is held in a clean special purpose vehicle, it can be easier to transfer the shares in that vehicle than to do a direct asset transfer. This can be especially attractive where the property is subject to numerous contracts, licences or financing arrangements that are easier to keep in place if the legal owner of the asset remains the same.

Contractual continuity – since the property-owning entity remains the same legal person, existing leases, service contracts, employment arrangements and utility accounts may remain in place without the same level of assignment or novation work that might be required on a direct asset sale. It should be noted that change of control clauses can still be triggered on a sale of shares, so continuity of contracts is not automatic.

What is being sold

The simplest form of corporate-wrapped real estate transaction is a sale of all the shares in a company that owns a property. The buyer acquires the shares from the seller under a share purchase agreement, and the target company continues to own the property after closing. If the target is a limited partnership, unit trust or limited liability company, the transaction follows the same general logic, although the legal documents and transfer mechanics will differ.

In more sophisticated deals, the property-owning entity may be held through one or more intermediate companies. The parties may then transact at a higher level in the chain. For example, rather than selling the direct property owner, the seller may sell the shares in the holding company that sits above it. This can be commercially convenient, especially where the target group includes financing arrangements, management functions or multiple related assets. However, the higher up the chain the buyer acquires, the more important it becomes to understand the wider corporate perimeter and the liabilities that sit within it.

Some transactions also involve carve-outs, pre-closing reorganisations or internal restructuring. Before sale, the seller may separate unwanted assets, liabilities or operations from the property-holding group so that the buyer acquires only the intended real estate. Conversely, the seller may first transfer the property into a new special purpose vehicle so that the equity in that vehicle can then be sold. These preparatory steps can be central to the economics and risk allocation of the deal.

In joint venture settings, a corporate-wrapped transaction may involve the sale of less than 100 per cent of the equity. The buyer may acquire a majority or minority stake, with governance rights set out in a shareholders’ agreement or joint venture agreement. In that context, the transaction is not only about ownership of real estate, but also about the core provisions of a shareholders’ agreement that may operate, i.e. control, reserved matters, deadlock, exit rights and the ongoing relationship between the investors.

How the deal is done

A corporate-wrapped real estate transaction typically involves a combination of corporate M&A work, property due diligence, finance analysis and tax structuring. The buyer is not only checking that the title to the property is in order. It also reviews the legal condition of the entity that owns it, its accounts, compliance history, litigation exposure, financing arrangements, IP ownership, employee matters, if relevant, and all material contracts.

The main transaction document is the share purchase agreement or equivalent equity transfer agreement. That agreement will set out the purchase price, completion mechanics, conditions precedent, warranties, indemnities, covenants and any post-completion obligations. There will usually also be a disclosure letter, tax deed and transition services arrangements.

Completion mechanics can be more complex than in a direct property transfer. The parties will usually need to deliver board resignations, corporate approvals, stock transfer forms, share certificates, releases of security, debt pay-off letters, updated registers, beneficial ownership filings and notices to lenders or counterparties. Where the target has financing in place, the transaction may require lender consent, refinancing, debt assumption or repayment on closing.

Of the commercial terms, the basis on which the price is determined is often considered the most important. The price for the shares may be set on a debt-free, cash-free basis, an enterprise value basis or by reference to net asset value. Real estate deals of this kind often involve detailed completion accounts, with the real estate asset having a fixed value and a true up post completion or a locked-box mechanism, particularly where rental income, debt balances, working capital and cash sweeps affect value.

Due diligence in corporate wrapped deals

Due diligence is broader in a corporate-wrapped transaction than in an asset purchase. The buyer will still conduct real estate due diligence, including title, leases, planning, environmental matters, easements, insurance and disputes affecting the property. However, the buyer must also carry out corporate diligence on the target vehicle and, where relevant, the wider group.

Corporate diligence typically covers incorporation, constitutional documents, capitalisation, ownership of shares or interests, corporate authorities, historical transactions, compliance with company law, shareholder arrangements and any encumbrances over the equity. Financial diligence will focus on accounts, indebtedness, contingent liabilities, related-party transactions and the quality of earnings if the platform has operating activity.

Contractual diligence must also be undertaken, as even though the property stays in the ownership of the same entity, material agreements may contain restrictions on change of control. Leases, management agreements, development contracts, financing documents, hedging arrangements, licences and concessions may all need to be reviewed for consent rights, termination rights or pricing adjustments triggered by a transfer of equity.

Tax diligence is often one of the most important aspects of the process. Since the buyer is acquiring the corporate vehicle, it may inherit exposure to unpaid taxes, filing failures, transfer pricing issues, VAT problems, employment tax issues or historic stamp duty risks. The buyer will therefore often seek detailed tax warranties and a tax indemnity or tax covenant.

Warranty and indemnity insurance is almost always a feature of corporate wrapped deals, bringing the need for further expertise.

Teamwork making the dream work

Leading corporate wrapped transactions have been the author’s most fulfilling parts of being a lawyer. The workstreams (negotiating the share purchase agreement, tax review, direct real estate diligence, financing etc.) usually run in parallel, with multiple lawyers across different departments of the firm involved. Add in external advisers, such as accountants, insurers, overseas counsel, surveyors, agents and very soon there is a significant team all looking to the lead corporate lawyer to pull the transaction together. It is like being the conductor of a large orchestra – full of specialists and experts but needing one person to arrange their output so that the final product is one of excellence.

Conclusion and our experience

Corporate wrapped transactions bring together multiple areas of legal knowledge. Whilst more complex than direct asset sales, if structured properly, they can be financially and commercially advantageous to seller and buyer.

Burges Salmon’s Corporate Real Estate team has in-depth experience in undertaking corporate wrapped transactions, on the sell-side and the buy-side.

With a team of Built Environment lawyers qualified across England, Wales, Scotland and Northern Ireland, we support clients on real estate matters across jurisdictions and project types. Our Corporate Real Estate team works closely with colleagues in construction, planning, tax, litigation, environmental and finance to provide integrated support throughout the lifecycle of real estate assets.

We have experience across many sectors including logistics, hospitality, office, residential (including build-to-rent and student accommodation), and large-scale regeneration schemes.

If you would like to explore any of the topics discussed above, please contact Jonathan Cantor (Partner, Corporate and M&A).