Structuring the investment
As mentioned in Section I, above, there are three main ways through which an investor can participate in the real estate market:
- the direct acquisition of real estate;
- the participation as shareholder or partner in a company that owns real estate; and
- under a real estate investment trust: in which case, the real estate investment will be canalised through the investor's interest in a real estate investment trust, to later obtain the deed of the plot or unit subject matter of the transaction, or the result of its commercialisation through the trustee.
In most cases, the decision on how to take part in a real estate transaction is not taken by the investor, but, on the contrary, is often taken by the seller or the developer based on quite diverse issues, especially tax reasons.
In every case, it should be analysed whether the stamp tax is applicable. It is recommended to seek advice on this aspect and on any and all other accounting or taxing matters before executing any kind of agreement.
From a legal point of view, when real estate is purchased, together with the assessment of permits, tax status and technical viability of the premises or the project, the certificate of title issued by the real estate registry should also be obtained, with the purpose of proving ownership and existence of taxes levied on the property. In all cases, before the execution of any arrangement it is advisable to carry out a detailed audit or due diligence on the various aspects regarding the transaction:
- aspects related to the parties of the transaction;
- aspects related to the object or purpose of the transaction (real estate, ownership background, its conditions, the legal and administrative status, the environmental situation, etc.); and
- aspects related to the target project or development (feasibility, applicable regulatory framework, etc.).
This legal audit should be completed simultaneously with other similar analysis and studies carried out by other areas or specialties: notary public, accounting and financial advisers, architects, engineers, land surveyors, etc.
On the other hand, the decision to acquire shares in a company implies a more complex analysis: besides the above-mentioned real property assessment, a profound investigation (also due diligence) should be carried out within the legal, accounting, fiscal and financial framework of the target company, with the purpose of learning about its situation, the contingencies or liabilities held by the target company, etc., and thus, for example, being able to negotiate discounts or adjustments of the purchase price or to avoid, or at least mitigate, future contingencies.
Finally, when acquiring shares in real estate developers, the analysis should include the review of the criteria used by the promoter to assess the different projects in which he or she takes part (generally, through real estate subsidiaries or trusts), because those criteria may sometimes differ from the ones applied by the investor in his or her own accounting and practices. Eventually, this will bring a different result in the valuation process of the target company or the asset.