Investing in Overseas Commercial Property

When evaluating the attractiveness of an overseas commercial property investment opportunity, it is crucial to have a clear understanding of the current market conditions in the relevant jurisdiction. Conditions such as the current rate of yield compression or expansion, the existing vacancy rates, the number of proposed new developments as well as many other additional factors should be carefully considered before deciding to invest in a particular market. Of course the purchaser’s own investment goals will also have to be appraised. For example, it will be necessary to determine if the purchaser is seeking: (i) a long term, blue chip fixed investment (equivalent to a bond); (ii) properties which are currently let at a level significantly below the market rate and which will (assuming favorable rent review provisions in the applicable lease) provide significant upside at the next rent review; or (iii) properties in need of redevelopment or repositioning.

The provisions of the various occupational leases which are in place in respect of the building will be of particular interest to the investor as well as of paramount importance to any prospective lending institution. It is first of all necessary to liaise with local counsel to gain a full understanding of landlord and tenant legislation for the relevant country. Certain jurisdictions (for instance, the Nordic countries) provide tenants with additional rights exceeding what would be thought of as standard in the Irish or U.K jurisdictions, while conversely landlord and tenant legislation in the U.S. is considerably more ‘pro-landlord’. A detailed evaluation of the various leases against this backdrop ensures that the purchaser is aware of the rent review provisions, any break-options / renewal options in favour of the tenants, as well as any other relevant statutory provisions which would impact on the value of the property.

During the due diligence process the investors’ legal and tax advisors will highlight any major issues which would lead to the investor either: (i) withdrawing his/ her interest in the property; (ii) reducing the level of any proposed offer or (iii) insisting on the inclusion of appropriate indemnities from the vendor in the relevant sale and purchase agreement. During the due diligence process, it will also become apparent whether there will be a direct acquisition of the property in question or alternatively, an indirect acquisition of the property through one or more property holding companies. It is important to tailor the appropriate acquisition structure to ensure that the purchaser minimises any tax payable on acquiring the property in question. Additionally, the structure should ensure that a future disposal of the property is structured so as to eliminate or minimise any capital gains tax which would otherwise be payable.

In tandem with the due diligence process outlined above, it is necessary to liaise with a number of financial institutions in order to secure the required financing. These institutions will be particularly interested in the tenants and the terms and conditions of the applicable leases and will contemplate a number of factors when considering a proposal for finance. They will pay particular attention to areas such as; the financial condition of the tenants, the existence of any break-options in favor of the tenants as well as the existence of any obligation on the landlord to provide tenants with future improvement allowances or concessions etc. In particular, it is crucial that the operating costs of the property are accurately determined during due diligence. This will enable the potential purchaser to ascertain the level of senior debt which the rental payments will be able to service. A purchaser should also investigate the implementation of a SWAP agreement with the relevant financial institution in order to insulate itself from the impact of rising interest rates.

It may also be advantageous for the purchaser to consider utilising creative finance possibilities such as a joint venture agreement with the relevant bank. It is in any case necessary to ensure that any security provided is strictly limited to the property. Typically senior lenders will insist on a first fixed charge over the property, as well as a pledge of all rental income. A charge over the shares in the relevant property holding company should (where possible) be held back to be used as security for any mezzanine / junior financing. Any attempts by the relevant senior or mezzanine lender to extend the security package to include security provided by the ultimate owner of the property would be strongly resisted. The net effect should be that the senior and junior debt is secured only by the property and the associated property holding company structure and any exposure for the ultimate investor is limited.

Brian O’Donnell & Partners have a dedicated team of commercial property and corporate solicitors with considerable knowledge of the U.K., U.S., European and Nordic markets. The firm has grown a number of close associations with commercially minded local law firms and tax advisors in each jurisdiction. These links allow Brian O’Donnell & Partners to provide overall transaction management in regard to any overseas commercial property transaction. In the past three years, Brian O’Donnell & Partners have advised Irish and international clients in relation to overseas commercial property acquisitions with a total transaction value in excess of €1 billion and have successfully created property holding company structures in numerous off-shore jurisdictions such as, Switzerland, Cyprus, the British Virgin Islands and the United States. In each case, the firm has worked closely with the relevant tax advisors to ensure that the structure is specifically tailored in order to result in a tax-neutral situation from the investor’s perspective.