Real Estate Diligence in M&A TransactionsDecember 29, 2014
The recent increase in merger and acquisition (M&A) activity provides an opportunity for buyers and their advisors to focus upon how to most effectively use the buyer's diligence process. The time and effort required for that process depends upon the type and quantity of assets involved. In an M&A transaction where the target has significant real estate assets, the buyer will be better positioned to effectively diligence those assets if the buyer is aware, at the commencement of the transaction, of the following elements of real estate diligence.
The Clock Is Ticking
For many reasons, performing diligence on real estate assets is time-consuming. One of the most significant reasons is that real estate diligence requires the buyer to engage multiple third-party service providers, such as title insurers, surveyors, environmental consultants, and building inspectors, and these service providers all require time to perform their work and to interact with the buyer regarding it. Time is also required to deal with the holders of related real property interests, such as landlords who own subject leased real estate (and whose consent to the proposed transaction might be required) and lenders whose debts are secured by the subject real estate.
Which Came First, the Diligence or the Purchase Agreement?
The results of the buyer's diligence are useful not only for cataloguing the target's assets and assigning a value to them, but for negotiating the terms of the purchase agreement. Covenants, representations, and indemnifications are among the most significant elements of the purchase agreement that might be affected by that diligence. In some cases, the buyer will be able to perform a significant portion of its real estate diligence prior to signing a purchase agreement. In other cases, the buyer will not be able to undertake much diligence unless and until the purchase agreement has been signed. Before entering into a purchase agreement, the buyer should consider whether it has completed diligence sufficient to allow it to enter into that agreement or whether provisions accounting for the lack of diligence should be added to the agreement (such as additional representations, warranties, or closing conditions).
Pre-planning for Post-closing
Effective real estate diligence not only prepares the buyer for negotiating and executing the purchase agreement, but paves the way for a smooth post-closing transition. Diligence should yield recommendations from the buyer's deal team and outside advisors regarding post-closing operations and should result in decreased time between the closing of the M&A transaction and the full, efficient use of the acquired real property assets.
The real estate attorneys at Lewis Rice counsel those who buy, sell, develop, lease, and finance real property regarding those transactions. We are familiar with the zoning, environmental, taxation, and other regulatory aspects of those transactions. Please do not hesitate to contact us if we may be of assistance.