Introduction
In the present market environment, with more readily available finance and the general improvement in the rental market, Irish investors are increasingly turning their attention to the property market. However, many investors are understandably wary of investing solely in Irish commercial property and are seeking value in other jurisdictions. In particular, the Land and Conveyancing Law Reform Act 2009 which effectively ended “upward only” rent review clauses in new commercial leases is a disincentive to Irish investors (and in particular lendors) who require the comfort of knowing that no matter what happens in terms of the domestic economy, the rent payable by a tenant under a commercial lease can only go one way…. up.
It is of course important for any prospective investor to have a very good understanding of the market conditions in the jurisdiction in which they are considering investing. For example the commercial property market in the U.K. is very different to that of the U.S., Scandinavia or France. Each jurisdiction inevitably has its own unique tax regime, legislation, and market conventions which a prospective purchaser will need to be fully familiar with before deciding to invest. In this regard, a thorough “due diligence” exercise should identify any major issues which would lead to the investor either: (i) withdrawing his interest in the property; (ii) reducing the level of any proposed offer or (iii) insisting on the inclusion of specific clauses in the relevant sale and purchase agreement to protect the investor.
Due Diligence – The Value of the Investment is in the Lease
One of the most important matters to be considered by the investor in deciding whether or not to invest in a particular property will be the provisions of any occupational leases which are in place. As outlined above, landlord and tenant legislation will invariably differ from country to country. Certain jurisdictions such as the Nordic countries are decidedly more ‘pro tenant’ than the Irish jurisdiction. In contrast, landlord and tenant legislation in the U.S. favours the landlord (tenants in the U.S. typically have far less statutory protection than in E.U. countries). In addition, certain countries allow for “upward only rent reviews” (which are no longer permitted in the Irish jurisdiction) and this will be of particular concern to the investor as well as any financial institution.
A thorough review of the relevant occupational lease will ensure that the purchaser is aware of the following major issues prior to entering into a binding agreement with the vendor:
- the rent review provisions (an upward only rent review clause is beneficial);
- any break-options / renewal options in favour of the tenants (the existence of any break option in favour of a tenant is obviously perceived as a negative factor); and
- any other relevant statutory provisions which would impact on the value of the property (e.g. any statutory right of renewal etc.).
Deciding on the Acquisition Structure – Minimise the Investor’s Tax Liability
A key concern of any investor is that any potential tax liability in connection with the acquisition and subsequent disposal of the property should be minimised as far as possible.
It is often possible to take advantage of double taxation treaties between various jurisdictions in order to eliminate / reduce the investor’s ultimate tax liability. For larger investments this can involve very complex multi jurisdictional corporate structures. The issue of deciding on an acquisition structure is dealt with during the due diligence process. The commercial property team at Adrian Burke and Associates have experience of setting up corporate structures in the United States, France, Luxembourg, Sweden, Switzerland, Cyprus, Malta, the UK, the British Virgin Islands and many other jurisdictions.
Financing the Acquisition
In order to finance the acquisition in question the investor will need to start liaising with various financial institutions at a very early stage in the due diligence process.
Banks and other financial institutions will pay particular attention to the existing tenants as well as the terms and conditions of the applicable leases when considering a proposal for finance. For example, they will require confirmation of:
- the financial condition of the tenants (any risk of insolvency etc.)
- the rent review provisions of the various leases;
- the existence of any break-options in favor of the tenants;
- the existence of any obligation on the landlord to provide tenants with future improvement allowances or concessions (tenant improvement allowances are especially prevalent in the U.S. jurisdiction); and
- the operating costs of the property in order to determine the level of senior debt which the rental payments will be able to service.
- In terms of security, senior lenders will always insist on a first fixed charge over the property, as well as a pledge of all rental income in respect of the property. Any attempt by a lender to extend the security package to include security provided by the ultimate owner of the property (including personal guarantees) should be strongly resisted in order to limit any exposure for the ultimate investor.
The implementation of a SWAP agreement with the relevant financial institution should also be considered in order to provide certainty and ensure that rising interest rates do not jeopardise the investment.
Adrian Burke & Associates’ team of commercial property and corporate lawyers are experienced in commercial property transactions in numerous jurisdictions including the U.K., Scandinavia, the United States and throughout Europe. We have developed strong links with specialist law firms and tax advisors in each jurisdiction which enables us to advise clients in relation to any overseas commercial property transaction. If you are an investor considering investing in overseas property (either on a smaller or larger scale) please contact Adrian Burke & Associates at info@adrianburke.ie.