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Typical transaction structures – public companies
What is the typical structure of a business combination involving a publicly traded real-estate owning entity?
The main driving factors behind different kinds of structuring of real-estate transactions in Sweden are: applicable tax (including VAT) rules and forms of financing.
Since 2003 the typical structure of a real-estate transaction is through a sale and purchase of the shares in a limited liability special purpose vehicle (SPV) holding the real estate or property in question. In Sweden there are, as of now, no ‘thin capitalisation’ or similar rules, meaning that a dormant limited liability company (LLC) with only 50,000 Swedish krona in share capital may purchase a 100 million Swedish krona (or more, with no limitation based on legal requirements) worth real estate, establishing an SPV structure for sale of the property (ie, packaging). The background behind this structuring is that since 2003, such share transfers are, as a general rule, tax exempt, meaning that there will be zero income tax on the profits made on the sale of the shares. Applicable taxes will then be stamp duty - and principally income tax - on the property transfer into the SPV holding. However, the property transfer into the SPV will normally be made on a price or value equal to the tax residual value also involving zero income tax in this step of the structuring.
Direct real-estate transfers carry a stamp duty of (currently) 4.25 per cent for legal persons (less for physical and private persons and some other legal entities) based on the higher of the purchase price and the tax value of the property the year before the transfer. In case there is no tax value on the property - because it involves a property category, which under law, is exempt from property tax (such as certain public service properties, for instance schools, care properties etc) or involves a newly established property through land-parcelling measures - there will be a need for a valuation report. Currently, there is no stamp duty on the transfer of shares of real-estate companies.
This means that most transactions, from a processing and documentation standpoint, are made as indirect share transfer deals, rather than direct property transfers. This also means that the typical real-estate transaction is very similar in its nature to any other private mergers and acquisition (M&A) transaction, regularly including different moments of due diligence (due diligence) (legal, tax, financial, technical and environmental reviews), pre-agreement documentation based on an information memorandum (IM) and a letter of intent (LoI) with exclusivity, and a share sale and purchase agreement (SPA). Except for the obvious need of expert knowledge in real-estate law, the main differentiating factor from general M&A work is the asset base and that real-estate transactions (property SPVs) normally do not involve employees and labour law issues.
Other important structuring measures involve different kinds of land amalgamation or land-parcelling measures. Both in the transfer of properties into an SPV and as stand-alone transfers, many deals are concluded through different land-parcelling measures involving decision-making by the land survey authority. Except for the need to understand and comply with legal requirements for such measures under applicable legislation), this normally requires certain planning and flexibility with regard to the timing and consummation of the transaction. Again, such measures as part of a real-estate transaction are typically tax driven, made in order to avoid stamp duty on the property transfer. Thus, such property transfers are currently exempt from stamp duty.
However, there is a proposal for change of the tax legislation for ‘packaging’ of real estate into SPVs, involving, among other things, proposed income taxation on the sale of shares and changes of applicable rates of stamp duty, possibly also extending stamp duty charges to property amalgamation measures and to the sale of shares. A government inquiry (Sw. SOU 2017:27, Vissa frågor inom fastighets-och stämpelskatteområdet) released its report on such issues on 30 March 2017 and the legislation process has been initiated. However, several government representatives, many market players and tax experts have criticised the suggested changes and it is commonly believed that the proposal, in its current form, will not lead to legislation. The continued development may depend on the outcome of the Swedish General Election in 2018. The uncertainty following the proposal may already have affected market interest in investing in Sweden, specifically among international private equity investors. Changes in tax legislation will most likely lead to variations in structuring of real-estate deals and the market closely follows the legislative process.
During recent years, an extensive variety of real-estate financing vehicles has evolved based on international practices and market needs. Traditional real-estate asset-backed financing has been supplemented by publicly issued and traded instruments on the company holding level, such as corporate bonds and preference share structures.
From a processing and documentation standpoint, many financing structures involve the international financing market and syndications, meaning that documentation follow international standards, such as the Loan Market Association (LMA) standards.
Most value-add real-estate investments in Sweden currently involve different levels of development projects, both commercial and residential. Many such investments involve local entrepreneurs, with the need for financing also during the development phase. In such deals, involving forward purchase or forward funding elements, structuring of transfer of ownership, security interests and project management will depend heavily on the financing structure.
Publicly traded real-estate owning companies are not treated differently from other publicly traded companies. This means, among other things, that when acquiring more than 5 per cent of the votes or share capital in such a company (with further thresholds at 10, 15, 20 etc per cent) a notification must be made to the Swedish Financial Supervisory Authority (FSA) and information about the acquisition must be made public.
When acquiring 30 per cent of the votes or share capital, an acquirer must make a mandatory takeover bid to all shareholders. At 90 per cent the holder of such shares has a squeeze-out right in relation to the remaining shareholders.
In a takeover situation, the board must issue a recommendation to the shareholders regarding whether to accept the bid or not.
Typical transaction structures – private companies
Are there are any significant differences if the transaction involves a privately held real-estate owning entity?
The structure itself would typically be the same as described under question 1, but the requirements of disclosure of information, reporting to the FSA, regulations regarding mandatory bids and certain deadlines would not apply.
Typical transaction process
Describe the process by which public and private real-estate business combinations are typically initiated, negotiated and completed.
See questions 1 and 2. Real-estate-related business combinations are often enacted through structured bid auction processes led by professional brokerage firms. In the Swedish/Nordic market there are a few dominating brokers, or corporate finance houses, which, during the last years, many have become part of larger international firms, such as JLL, Cushman & Wakefield, CBRE etc, but there are still also a few large independent firms such as Brunswick Real Estate and Pangea.
In such processes, the transactions are typically initiated by the distribution to selected investors of an IM, the collection of indicative bids and the selection of a short list of bidders, of which one bidder will be extended exclusivity for a certain period of time through an LoI. In certain cases, from time to time, two or three bidders are invited to compete during a phase one round of negotiations, with limited due diligence and a first round of comments to the seller’s SPA. Normally, this requires the seller to carry an amount of sunk transaction costs for the bidder(s) not winning the competition.
Other transactions, arguably many, are made off-market through direct contact between seller and buyer. Sweden contains a transparent and transaction intense real-estate market, which regularly involves repeat business and restructuring second sales after larger transactions. In addition, it is not uncommon - specifically in larger transactions - for different investors to form bid consortia, for instance, combining international capital with local asset management and development knowledge.
Negotiations will normally be relatively friendly; very much based on finding pragmatic common ground solutions, with reference to developed standard market practice regulations. Negotiations and drafting may be conducted in Swedish or English, depending on the parties’ needs. Other languages are very rarely used in drafting. International investors are well advised to use local representatives. Legal documentation is by tradition relatively short, compared to Anglo-Saxon standards, but has under international influence become more extensive during recent years.
Completion may rely on different market standard conditions precedent to closing, such as approval of the transaction by the parties’ boards, sufficient buyer financing and authority decisions (eg, regarding land-parcelling measures gaining legal force, enactment of a new detailed development plan etc). The need for other authority decisions, such as clearance from the competition authorities in Sweden and the EU, is limited, depending on the size of the transaction.
The actual completion measures at closing of the transaction are completely within the control of the parties (ie, the sellers and buyers). Normally, the financing banks will attend the closing meeting and will prepare relevant documentation in advance. Thus, there is no need for third-party notarisation, or similar formalities, at closing, irrespective of whether the transaction is a direct property transfer or a transfer of the shares in a property-owning SPV. However, certain closing and post-closing actions, such as necessary registrations with the Swedish Companies Registration Office and the Land Registry will require involvement of different authorities.
Law and regulation
Legislative and regulatory framework
What are some of the primary laws and regulations governing or implicated in real-estate business combinations? Are there any specific regulations or laws governing transfers of real estate that would be material in a typical transaction?
The primary real-estate laws are found in statutory law, involving the Swedish Land Code and the Swedish Property Formation Act, supplemented by many other important laws, such as the Swedish Planning and Building Act and the Swedish Environmental Code and case law from the Swedish general and administrative courts. In addition to this, since most of the transactions are made as share transfers as noted above, the transactions regularly involve the Swedish Companies Act) with supplementing legislation and case law.
Since Sweden’s entry into the European Union in 1995, many formerly applicable restrictions on the purchase of real estate have been abolished. As of now, there are no restrictions for foreigners and international investors investing in Swedish real-estate relating to their nationality and domicile. However, generally applicable rules on, for example, anti-money laundering measures, tax domicile legislation and certain requirements on nationality for representatives in Swedish companies may pose specific requirements to be considered. The only remaining limitations regarding purchase and ownership of land relates to agricultural properties according to the Swedish Act on Purchase of Agricultural Property.
On a secondary level, mandatory lease law (both on commercial and residential properties) must be taken into account when evaluating Swedish real estate. However, this follows from statutory laws and well-established market practice and rarely (never) affects an investor’s will to invest.
Cross-border combinations and foreign investment
Are there any specific material regulations or structuring considerations relating to cross-border real-estate business combinations or foreign investors acquiring an interest in a real-estate business entity?
No, as noted above there are currently no restrictions on foreigners or international investors investing in Swedish real estate relating to their nationality and domicile. Considerations relating to domicile for holding structures and international financing structures involved in cross-border combinations generally follow international tax considerations or structures, which are not further elaborated in this context.
However, it should be noted that in addition to the proposal for changes of Swedish tax legislation as briefly noted above, there is also a discussion on changes of the Swedish tax legislation regarding interest deduction limitations, which may further affect tax domicile and holding structures for investments in Swedish real estate.
Choice of law and jurisdiction
What territory’s law typically governs the definitive agreements in the context of real-estate business combinations? Which courts typically have subject-matter jurisdiction over a real-estate-related business combination?
For transactions involving Swedish real estate, Swedish law will apply. This is market standard practice and generally accepted by international investors, also in relation to Pan-Nordic portfolio investments, where each jurisdiction of the relevant property will apply to all property related matters. The same applies to Swedish asset-backed real-estate financings, with a few exceptions. The rationale behind this follows international practice; land laws are typically mandatory and traditionally quite specific for each country regarding title issues and similar important rights, including the system for mortgages involved in bank financing.
Different pre-agreements, such as non-disclosure agreements or LoIs may sometimes refer to other jurisdictions, such as the laws of England and Wales, but this is quite unusual.
The courts that will have subject-matter jurisdiction over a real-estate business combination will normally be Swedish general courts, although most commercial transactions include agreement on the exclusive jurisdiction of Swedish arbitration instead, normally conducted (by reference) to the internationally well-established Arbitration Institute of the Stockholm Chamber of Commerce. In cases of indirect transfers of real-estate business combinations, the parties could to some extent agree on other jurisdictions, but as stated above this would normally not be considered a practical solution.
Approval and withdrawal
What information must be publicly disclosed in a public-company real-estate business combination?
If financial instruments are issued in relation to a public-company real-estate business combination, it may be subject to EU regulations on market abuse, requiring inside information to be publicly disclosed. The scope of the disclosure may vary, but would generally include any non-public information that, if disclosed would be likely to have a significant effect on the prices of the financial instruments, including deal specific information such as pricing, terms and timing
In connection with a public takeover, the bidder is required under statute to prepare public takeover documents that must be reviewed, approved and disclosed by the Swedish Financial Supervisory Authority. Such documentation must include information on, among other things, the bidder’s identity, takeover conditions, offered consideration, bidder financing, takeover motives etc.
Disclosure requirements may also follow from stock exchange regulations (such as the Nasdaq stock market), which generally stem from the above-mentioned EU and domestic legislation.
There are no specific requirements relating to real-estate business combinations. As regards regulations on public information and confidentiality, transactions are not treated differently because of the inclusion of real-estate elements. Neither do requirements on disclosure and confidentiality necessarily vary, due to the form of consideration. However, supplemental documentation would be needed should payment be in the form of shares.
Duties towards shareholders
Give an overview of the material duties, if any, of the directors and officers of a public company towards shareholders in connection with a real-estate business combination. Do controlling shareholders have any similar duties?
See question 1. There are no specific duties of the directors and officers of a real-estate company towards company shareholders and controlling shareholders, other than what follows from general rules and principles of the Swedish Companies Act. In brief, this means a general duty of care of the directors and officers towards the company and equal treatment of all the shareholders. There are also important minority interests, involving a minority shareholding of at least 10 per cent of the shares or voting rights, containing principles to safeguard the minority, again of general application to Swedish LLCs.
What rights do shareholders have in a public-company real-estate business combination? Can parties structure around shareholder dissent or rejection of a real-estate business combination, and what structures are available?
The shareholders (as a collective) have the ultimate power of the company and are entitled to approve or object to any suggested business combination, as proposed by the board of directors. The general meeting is the company’s top decision-making body and the forum for any necessary shareholder approval. The company must hold a general meeting if requested by the owner(s) of at least 10 per cent of the shares.
Any sale of shares or interests in a public or private company is in principle voluntary, unless a specific shareholder has purchased more than 90 per cent of the shares or voting rights in a company, in which case such, majority shareholder, may, under certain conditions and formal procedures, request to purchase the rest of the shares. However, these issues are of a general character in public M&A, not specific to real-estate-related public companies.
Are termination fees typical in a real-estate business combination, and what is their typical size?
Any termination fees in the form of penalties for non-performance at closing are individually negotiated. Normally, a deposit at signing of the SPA is only agreed with buyers of less strong financial standing. The normal level of deposit would be 5 to 10 per cent of the transactional value (real estate value) of the transaction, which amount will become forfeited and kept as compensation by the seller, should the buyer not perform at the agreed date for closing of the transaction. Such termination fees are permissible, both in the context of an indirect sale of real estate through the transfer of shares in a property SPV and in a direct sale of a property. However, in both cases the amount will have to stand a test under general principles of law that the amount is fair and reasonable in the context of the transaction (considering the actual damages or losses of the seller).
In the context of a direct real-estate transaction this forms a kind of exception to the general rule that options and other future arrangements on real-estate transfer are generally not valid (null and void), unless the parties follow the strict regulations on the form of agreement contained in the Swedish Land Code.
Are there any methods that targets in a real-estate business combination can employ to protect against an unsolicited acquisition? Are there any limitations on these methods?
These issues are of a general character in public M&A, and are not specific to real-estate-related public companies.
There are no particular methods the target can use to avoid an unsolicited acquisition. The board of the target entity is required to present a recommendation to the shareholders, based on the offer made by a potential buyer. However, the right to accept or reject an offer remains with the shareholders.
How much advance notice must a public target give its shareholders in connection with approving a real-estate business combination, and what factors inform this analysis? How is shareholder approval typically sought in this context?
These issues are also of a general character in public M&A, not specific to real-estate-related public companies. If a contemplated transaction needs the approval from shareholders, such approval is generally sought at a general meeting with the entire shareholder collective. A public company must give its shareholders at least three weeks’ advance notice before a general meeting is held.
Taxation and acquisition vehicles
Typical tax issues and structuring
What are some of the typical tax issues involved in real-estate business combinations and to what extent do these typically drive structuring considerations? Are there certain considerations that stem from the tax status of a target?
See question 1. As noted there, one of the main driving factors behind different kinds of structuring of real-estate transactions in Sweden are applicable tax (including VAT) rules. Except for the considerations mentioned above, the tax residual value of the target property will be of importance in the negotiations, increasingly so in the current state of uncertainty relating to the government inquiry on potential changes of the tax legislation. Market standard practice indicates a price deduction of part of the deferred taxes, ranging between zero and 50 to 100 per cent.
Mitigating tax risk
What measures are normally taken to mitigate typical tax risks in a real-estate business combination?
The normal measures to evaluate a potential transaction, including tax and VAT issues, are to complete full due diligence using well-renowned specialists and to involve tax expertise (all tax and VAT considerations) in negotiating and drafting the transaction documentation. Since many transactions are made through the transfer of shares of a real-estate owning SPV - only for tax reasons - few buyers have an appetite for any historical activities in the SPV. In such case, one of the main points in order to reduce risks relating to the company and tax or VAT issues is to request restructuring if the property ownership into a newly established SPV (newco), without any historical business activities, or (in certain cases considering the tax implications) to conduct the transaction through a direct property purchase.
For most investors, tax issues are instrumental in evaluating structuring alternatives in the context of a Swedish real-estate-related business combination. Exceptions may include regulated entities (Swedish or international) that may only conduct transactions in a certain manner.
Types of acquisition vehicle
What form of acquisition vehicle is typically used in connection with a real-estate business combination, and does the form vary depending on structuring alternatives or structure of the target company?
See question 1. As noted above the most common acquisition - and target - vehicles are Swedish LLCs in holdco structures. On top of that it is very common by international investors to establish a Luxembourg-based holding-structure.
Before 2003 it was common to establish structures based on limited partnerships and some companies still use such entities for long-term holdings. In connection with an acquisition of a limited partnership the buyer will need to establish at least (and most commonly) two purchasing companies, normally LLCs, of which one will become a limited partner and the other will have unrestricted liability for the obligations of the partnership. Limited partnerships are tax-exempt on an entity level, for instance pass-through entities.
LLCs will limit the financial obligations of the company and owners, principally to the registered share capital of the company, unless there is additional security such as a parent company guarantee. There is no general statutory rule under Swedish law on piercing the corporate veil, although limited case law indicates that such principles may apply under exceptional circumstances, such as in connection with under-capitalised businesses with very burdensome environmental or tax liabilities. Thus, the general rule of law is that LLCs will ring-fence ownership and liabilities to the actual Swedish company involved in the transaction.
Board considerations in take-private transactions
What issues typically face boards of real-estate public companies considering a take-private transaction? Do these considerations vary according to the structure of the target?
These issues are of a general character in public M&A, not specific to real-estate-related public companies.
Time frame for take-private transactions
How long do take-private transactions typically take in the context of a public real-estate business? What are the major milestones in this process? What factors could expedite or extend the process?
These issues are of a general character in public M&A, not specific to real-estate-related public companies.
Are non-binding preliminary agreements before the execution of a definitive agreement typical in real-estate- business combinations, and does this depend on the ownership structure of the target? Can such non-binding agreements be judicially enforced?
See our comments on LoIs and other non-binding agreements under questions 1 and 3. Such preliminary agreements of principally a non-binding character are very common in real-estate transactions, irrespective of the ownership structure of the target.
An LoI would normally include basic information on the parties and the acquisition target, steps to be taken to process and negotiate the transaction, main indicative commercial terms including the property value, a time schedule until signing or closing, exclusivity and due diligence provisions etc.
Since an LoI is intended to be non-binding only sections regulating confidentiality and formal issues regarding the transaction process (such as exclusivity and the buyer’s possibility to conduct a due diligence) will be binding and can be enforced. However, this will depend not on the heading of the document, but mainly on its substance. The parties are advised to use clear, unequivocal, language to that effect.
Describe some of the provisions contained in a purchase agreement that are specific to real-estate business combinations? Describe any standard provisions that are contained in such agreements.
Standard provisions in a SPA concerning a real-estate-related business combination would include a specific market standard pricing regulation based on the agreed property value less the book value of the property plus the equity of the company at the closing date. Any price deductions, such as for technical debt and deferred taxes would be made from the amount, calculated in that manner.
Standard representations and warranties (R&Ws) specific to real estate would relate to the property as such, including R&Ws on:
- title and mortgages;
- easements and similar rights or encumbrances;
- compliance with planning decision and building permits;
- leases being valid and complete;
- rent roll being correct;
- other agreements, such as service agreements;
- mandatory inspections and other public authority requirements;
- no authority orders or disputes regarding the property; and
- information in due diligence to be complete and correct.
Indemnities are not uncommon, but are regularly very specific. Typically, they would relate to such due diligence findings (known circumstances) with inherent risks that are not covered by any price deduction. Typical areas of concern and regulation may be tax (including VAT) issues and faulting mandatory inspections (ie, inspections of technical installations that should be completed within a certain time period). Normally, the seller will try to manage such issues (if feasible) within a certain time post-closing, with an obligation to indemnify the buyer should the seller not succeed, sometimes with a capped liability.
Are there any limitations on a buyer’s ability to gradually acquire an interest in a public company in the context of a real-estate business combination? Are these limitations typically built into organisational documents or inherent in applicable state or regulatory related regimes?
These issues are of a general character in public M&A, not specific to real-estate-related public companies.
Certainty of closing
Describe some of the key issues that typically arise between a seller and a buyer when negotiating the purchase agreement for a real-estate business combination, with an emphasis on building in certainty of closing? How are these issues typically resolved?
Such issues will depend heavily on the current market conditions at the time of the transaction. In a seller’s market, the buyer is well advised to avoid any and all conditions precedent to closing.
Naturally, time bars (such that a condition has to be met in a certain time period) are commonly used to handle deal certainty in relation to conditions precedent to closing. Such regulations would normally be combined with termination rights on the other party and, depending on the issues involved, a right to compensation. However, conditions relating to authority decisions are normally mutual and without penalty (shared risk), should the condition not be fulfilled.
As regards direct property transfer under the Swedish Land Code, conditions regarding the completion of the transaction are, as a general rule, only valid for a maximum of two years from signing. Should the parties agree on a longer time period, the SPA will be null and void, unless the condition relates to certain clearly defined exceptions such as the need for cadastral procedure or conditions based on statutory provisions.
Who typically bears responsibility for environmental remediation following the closing of a real-estate business combination? What contractual provisions regarding environmental liability do parties usually agree?
This is unique to each transaction, depending on the property and the parties. However, as a general indication, this will normally be handled by the buyer’s environmental due diligence - in combination with supporting R&Ws to the effect that, to the seller’s knowledge there is no contamination or need for clean-up measures.
With regard to industrial properties and in connection with development opportunities, environmental regulations are normally complex, balancing the liability between the polluter and the property developer creating enhanced exposure.
In relation to direct property transfers, the Environmental Code puts the liability on the buyer, unless the buyer has conducted an environmental investigation which has indicated that the property is clean, should the actual polluter(s) not be found and be able to remedy the contamination. Such liability is shared on a joint and several basis with previous purchasers of the property that meet the criteria for liability.
Other typical liability issues
What other liability issues are typically major points of negotiation in the context of a real-estate business combination?
Typically, tax and VAT issues are of great importance. In relation to fully let properties, lease issues will be a major issue (such as any break clauses, obligations to make tenant improvements or similar), while negotiations regarding a development property would rather concentrate on the absence of any third-party rights and other encumbrances preventing or hindering the planned development.
Sellers’ representations regarding leases
In the context of a real-estate business combination, what are the typical representations and covenants made by a seller regarding existing and new leases?
The typical R&Ws will be concerning the complete and correct applicable lease agreements and applicable rent roll, which will be attached to the SPA (either as appendices or by reference to the data room material).
Normal covenants by the seller (in relation to commercial properties) will include a stand-still provision in relation to entering into new leases, agreeing to changes to existing leases and terminating any existing leases referred to in the SPA, unless the buyer has given its prior written approval to such measures.
Legal due diligence
Describe the legal due diligence required in the context of a real-estate business combination and any due diligence specific to a real-estate business combination. What specialists are typically involved and at what point in the transaction are the various teams typically brought in?
The legal due diligence normally includes all company and real-estate information and any information on disputes or litigation and similar matters, excluding tax and VAT, financial issues and technical or environmental issues (unless it concerns disputes or similar issues). Typically, M&A and real-estate lawyers conduct the legal due diligence. There is a great variety in scope and thresholds, as well as reporting format, depending on the individual client’s needs. Usually, international investors and Nordic institutions request a fully-fledged due diligence, while Swedish real-estate companies and private investors normally complete parts of the due diligence themselves, with their own personnel.
Other specialists involved, except for lawyers, are accountant firms, corporate finance houses and technical or environmental consultants.
Normally, more thorough due diligence activities are initiated at a late stage of negotiations, after agreement on exclusivity or some kind of cost coverage by the seller, since due diligence will drive costs for the buyer.
On certain occasions, the seller initiates a vendor due diligence, in order to introduce and organise the data room in an effective manner and in order to reduce the need for buyer due diligence, but more often so in order to clean up the company or property documentation and information to be presentable to investors.
How are title, lien, bankruptcy, litigation and tax searches typically conducted? On what levels are these searches typically run? What protection from bad title is available to buyers and does this depend on the nature of the underlying asset?
Information on title, bankruptcy, litigation etc is normally found in the data room presented by the seller, as supported by R&Ws relating to the accuracy of the data room information and independent searches by the buyer in public registers or information.
Title issues are rarely a problem regarding commercial properties in Sweden. The Land Registry provides online information on title to real estate, which is supported by the government. In addition to this, full due diligence is normally conducted with regard to title to shares with uncapped R&Ws by the seller to support this position.
R&Ws insurance is available also on the Swedish market, both by international and local brokers (insurance companies normally being international). However, such instruments are normally used mainly due to an assessment of a less strong financial standing of the seller, for example in connection with the closure of a real-estate fund or similar.
Representation and warranty insurance
Do sellers of non-public real-estate businesses typically purchase representation and warranty insurance to cover post-closing liability?
See question 26. Such insurance is available and is used to some extent, but not as a standard general practice.
Review of business contracts
What are some of the primary agreements that the legal teams customarily review in the context of a real-estate business combination, and does the scope vary with the structure of the transaction?
See our answer under question 23. The prime issues would be to verify the rent roll as regards lease periods, rent and other charges, any break-up clauses, obligations to make investments etc. The scope normally varies between property portfolio deals (where only an agreed part of larger leases with a certain rental value are reviewed, excluding minor leases) and single property deals (where the due diligence normally is more thorough and specific).
Breach of contract
Remedies for breach of contract
What are the typical remedies for breach of a contract in the context of a real-estate business combination, and do they vary with the ownership of target or the structure of the transaction?
The typical remedies for breach of R&Ws are price deduction and a right to compensation for direct damages and losses (excluding indirect and consequential damages or losses). There is normally no right to rescind the SPA post-closing. Such remedies will also normally be limited as regards amounts (thresholds, baskets and caps) and in time.
The remedies are very much market standard, irrespective of ownership of target or the structure of the transaction. However, in case of a transfer from a bank or a bankruptcy estate the buyer may have to accept less coverage as regards R&Ws .
How does a buyer typically finance real-estate business combinations?
The traditional way is by asset-backed lending through Swedish/Nordic or international banks. In larger holding structures, debt is normally procured at top level with internal downstream distribution of funds. However, security will be provided both by individual property SPVs with regard to mortgages and on senior holding level.
During periods of less availability and high pricing of bank lending, bond financing and preference shares have been frequently used to attract capital, as an alternative to traditional bank lending.
What are the typical obligations of the seller in the financing?
The typical obligations of the seller would be to assist the buyer or buyer’s bank in the issue of new mortgages due to formal rules of representation to property title during a transitional period. Otherwise, the typical situation would be for the buyer to refinance the property and to repay the seller’s or property SPVs financing, releasing the seller for any obligations in connection with buyer’s financing.
What repayment guarantees do lenders typically require in the context of a property-level financing of a real-estate business combination? For what purposes are reserves usually required in the context of property-level indebtedness?
Lenders typically require certain repayment guarantees, such as cash management systems and reserves in the context of a real-estate business combination. Such reserves are usually required for the general operations of the property business, such as for payment of taxes, insurance, maintenance and repairs etc.
What covenants do lenders usually insist on in the context of a property-level financing of a real-estate business combination?
The lenders would normally request the same covenants as apparent from LMA standard agreements, such as no other indebtedness, other negative clauses, information and reporting covenants, prepayment in connection with disposals of real estate, loan to value covenants etc. This can be expected to be very much in line with international lending.
Typical equity financing provisions
What equity financing provisions are common in a transaction involving a real-estate business that is being taken private? Does it depend on the structure of the buyer?
Typically, such a transaction would potentially require publicly offered financial instruments to be replaced by equity and asset - backed financing, unless such financing is already in place. Required equity of sorts would normally be cash, assets, shareholder contributions and shareholder loans.
In certain cases, the shares would be split into different classes, differentiating between financial distributions and voting rights.
Collective investment schemes
Are real-estate investment trusts (REITs) that have tax-saving advantages available? Are there particular legal considerations that shape the formation and activities of REITs?
Not really, the concept of REITs has not been established in Sweden. Through indirect investments, such entities may transact on the Swedish market, but there is no specific Swedish legislation on such entities.
Private equity funds
Are there particular legal considerations that shape the formation and activities of real-estate-focused private equity funds? Does this vary depending on the target assets or investors?
Yes, depending on the structure and size of a real-estate-focused private equity fund, the fund may involve activities that are regulated under Swedish law (following EU law) by the Swedish FSA.
Update and trends
Are there any other current developments or emerging trends that should be noted?
The Swedish/Nordic market is still very strong, due to the strong and stable Swedish economy and the transparency of the Swedish legal system. Much information is publicly available as well as being online. There seems to be a renewed and increased interest in Sweden’s real-estate market from international investors, specifically in larger portfolios with value-add possibilities. At the same time, pricing is high and local institutions are very competitive and consider their long-term perspectives.
One threat to the market activity is a general decrease in housing prices in Sweden that is heavily affecting the residential development market, which, until the recent slowdown, showed intense market activity. Furthermore, potential changes in applicable tax legislation may, until settled (and potentially thereafter), affect structuring and interest from international investors in the Swedish market.