Property Passport Germany “Recommended law firm for real estate” JUVE 2015/16 3 Introduction Since the late 2000s, many property investments have been made against a backdrop of global economic and political instability. At a time of economic recovery in some global markets, investors can still be naturally cautious wanting to find a “safe haven” whether that is by investing in gold, art, or indeed secure well let real estate investments. The German commercial property investment market however remains strong. A recent report by BNP Paribas has found that investment volumes into the German property market hit €56bn in 2015. Both the residential and the commercial market ended the year 2015 with new record transaction volumes. Investments have spread from the “big five” cities of Berlin, Düsseldorf, Frankfurt, Hamburg and Munich to secondary locations with office property the dominant use, followed by retail and logistics. Whilst demand is still focused on core and core plus assets, the German market is experiencing an increase in investors willing to take risks. In particular, foreign investors are prepared (again) to invest in forward commitments and joint ventures with German project developers. This passport is intended to be a concise and practical guide for overseas investors and others who require advice on: u Investing in German property – why is Germany an attractive investment (reasons to invest, tips for a profitable investment, selecting the right asset, structuring the right deal); u Managing property efficiently – understanding the rules which apply in relation to German landlord and tenant law in order to gain value from property investment; and u Structuring property investments for maximum return – considering the various corporate and tax structures that will enable investors to achieve their investment in the most economic and cost effective way. Taylor Wessing is a leading full service law firm with a network of offices around the world. We offer a fully integrated service for high net worth individuals, families, and other overseas property investors. Our award winning real estate teams comprise real estate lawyers together with real estate experienced specialists from corporate, tax, banking and finance, who can offer an 4 Introduction According to a recent PWC report, Berlin and Hamburg are predicted to be the top two European real estate investment markets in 2016 with Hamburg singled out as the sixth most active market in Europe. According to PWC, at the end of 2015, over half of the total investment into Germany originated from foreign buyers. 5 Introduction integrated service as needed. As such, together with advice on planning, construction, finance, tax and corporate structuring we provide holistic advice which meets with the requirements of our clients in a goal oriented manner. We would be delighted to discuss your needs with you. Please contact us for further information or to arrange a confidential briefing tailored to your particular circumstances. Key Contacts Dr Alexander Peinze Partner, Real Estate, Hamburg +49 (0)40 3 68 03 123 firstname.lastname@example.org Dr Thomas Fehrenbach Partner, Real Estate, Düsseldorf +49 (0)211 83 87 427 email@example.com “Law firm appreciated for real estate” JUVE 2014/15 7 Content Why invest in Germany? 9 Selecting the right asset 13 Managing the asset 19 Financing the asset 25 Refurbishing the asset 33 How to structure an acquisition 39 The purchasing process 45 About Taylor Wessing 51 Why invest in Germany? 9 Why invest in Germany? When it comes to investment strategy, global investors will often differ in their thinking. Whilst some will look for short term returns on their investment, others will take a long-term view, holding and managing the asset for many years, if not decades, in order to secure their investments for future generations. The key to unlocking the potential within Germany’s real estate sector is underpinned by the strong German economy and the sustained low interest rate environment. Across the major 5 cities of Berlin, Düsseldorf, Frankfurt, Hamburg, Munich and beyond, the German market offers attractive investment opportunities across all sectors, from offices to retail and logistics. Germany as a leading global economy provides for safe and transparent market conditions. The German government is open and welcoming to overseas investors and the legal system is reliable. The property market also provides for a professional environment in which long term investments are protected and enhanced. The German property sector has an international mindset with a large number and variety of banks ready and willing to lend money for real estate investment. These banks are well adept at operating across borders and are well immersed in the German property market. 10Why invest in Germany? Germany has retained its leading position for overseas investment, not just from Asia and the Far East but also from many neighbouring European countries including France and the UK. This trend is likely due to the geographical attractiveness of Germany’s location within Europe and the easy access and links to the rest of Europe and the world that this provides. Whether you are looking to purchase, fund or develop, you will be joining a growing group of international investors who consider Germany as a highly attractive place to invest. 11 Why invest in Germany? “…practice that has outstanding strength in project developments…“ JUVE 2013/14 Selecting the right asset 13 Selecting the right asset Overseas investors will vary in their investment strategy and will range from those wanting to hold the asset for the long term, to those working towards an early exit. In light of this, selecting the right asset will be of paramount importance. Investors will typically require advice on asset classes in which to invest, asset location, covenant strength of tenants and overall timing. In Germany, international investors have typically focused on the top 5 cities of Berlin, Hamburg, Düsseldorf, Munich and Frankfurt and this is set to continue. In part, this is due to an influx of the creative industries and the technology sector which has led to the strongest office uptake the cities have ever seen. A young, international and diverse employee base and a lower cost of living have also driven the cities’ attractiveness for international investors. At Taylor Wessing we work closely with international firms of surveyors and other bespoke houses looking to work with international investors. They will all contribute to selecting the right asset. We are always focussed on delivering the deal efficiently and with a strong commercial approach. Our real estate team has decades of experience acting on property acquisitions and sales both large and small for both commercial and residential properties. From trophy assets to dry investment purchases of multi-tenanted Grade A well let investment stock to the acquisition of shopping centers, from the forward purchase of complex development sites to the purchase of high end flats: we have a wealth of experience in 14Selecting the right asset all areas. From our long years of experience we appreciate the issues that particularly concern overseas investors. In the current market there is increased competition for trophy assets which is allowing sellers to drive timescales. As such, a swift process is key to a successful purchase. If a buyer takes too long, they may miss out on the opportunity with 15 Selecting the right asset the property being sold to a third party with the ability to move more quickly. We are used to working hard for our clients – pushing for a quick due diligence and parallel contract negotiation in order to deliver against tight timescales. We guide investor clients and their advisors through the whole purchase process. Part of that comprises reporting on many different areas including: u Title to the property (are there restrictive covenants or other third party rights which restrict the use of the property?); u The search package provided or a package that we agree to effect with you (ie. searches of public registers for information relevant to any purchase); u Replies to precontract enquiries; u Reviewing and reporting on environmental and zoning/ planning matters, and the permissions, licenses and consents that are required for development; u Verifying tenancy schedules; u Reviewing and reporting on the occupational leases (including service charge recoverability); u Outstanding rent reviews; u Outstanding tenant disputes or disputes with other parties such as neighbours; u The build package; 16Selecting the right asset u Real Estate Transfer Tax, VAT, capital allowances and other tax issues; u Liaising with your surveyors on management contracts; u Negotiating and agreeing on the form of purchase contract and ancillary documents; u Advising on vacant possession strategies if the property is a target for development; and u Dilapidation claims if a lease is nearing the end of the term. 17 “The real estate practice ‘stands out due to its flexibility and commitment’ as well as its ‘very good overall expertise and experience’.” Legal 500 Germany 2015 Selecting the right asset Managing the asset 19 Managing the asset Real estate assets have a natural life cycle and the assets need to be nurtured throughout that cycle to maximise the return for investors. There are a number of aspects which are important to managing any building. Attracting the right tenants For most landlords, the key will be to ensure the covenant strength of the proposed tenants. If the covenant strength is not sufficient, questions will arise regarding how it can be boosted potentially by rent deposits, parent company or bank guarantees (usually 3 monthly rents). In return, the market will dictate what package the landlord will need to give to tenants, i.e. by way of rent free period or other incentives. By way of background: If the owner of a property falls short of cash and the rental income is not sufficient to serve the loan, e.g. because tenants fall away or reduce the rent, the financing bank could initiate enforcement measures based on the land charges registered in their favour. Subsequently, the property might be sold by way of auction or the bank could ask the court to install an official receiver. However, in practice this rarely happens in Germany as the banks are hesitant to assume the risk of managing the property and make such a worst case scenario public. Hence, the banks will frequently look to write off their engagement to a certain extent, keep the borrower and ask the borrower to try the turnaround provided that this is considered viable. 20Managing the asset Allocating liability In Germany it is quite common in commercial leases that the maintenance and repair obligations of the roof and structure part (“Dach und Fach”) of any property is the responsibility of the landlord, whilst the rest of the property’s maintenance would be the responsibility of the tenant. This split of obligations is called a “double net lease”. It may be regulated in the lease that the landlord may carry out the works beyond roof and structure but then charge this back to the tenant. Moreover, the landlord might not be able to shift all service charges to the tenants. In general, any tenant will have to pay a service charge to the landlord on top of the principal rent to cover items such as heating costs, maintenance and part of the repair works or the provision of facilities. The tenant will have to pay a monthly service charge prepayment which will be reconciled after the end of the year. During the course of due diligence, the investor will have to carefully assess the amount of service charges, which cannot be shifted to the tenants. 21 Managing the asset Flexibility In the current economic environment, flexibility has become increasingly important to tenants but also to landlords. Leases have become shorter and may include break options for the tenant as tenants tend to require more flexibility on exit. Investors should always check how marketable premises are and how they can be used going forward, if a specific tenant relocates. Lease terms between five and ten years are common in Germany. Shorter or longer terms are less common. Therefore, if a business takes on a lease with a longer term, it may be able to negotiate incentives such as rent free periods or fitout/ refurbishment allowances. In Germany, tenants are often granted unilateral options to extend the lease upon expiry. Whether or not such options are granted by landlords will be subject to the commercial negotiations. However, there is always a mandatory termination immediately following a 30 year lease term. Collecting rents If a commercial tenant continuously fails to pay rent the landlord has the following options: u The tenant is usually asked to provide a bank guarantee in the amount of three months gross rent as a rental security. If a tenant does not then pay the rent the landlord may draw on the bank guarantee and ask the tenant to “top up” the bank guarantee. 22Managing the asset u However, if the outstanding amount exceeds the secured amount the landlord will be forced to pursue the tenant direct. The landlord may only initiate enforcement measures, if he achieves a binding judgment, which can sometimes take years. Alternatively, if the landlord succeeds in showing that the tenant is about to relocate, he might get an interlocutory injunction freezing the tenants accounts. However, this is only granted in rare cases. u If the rent in arrears exceeds the equivalent of two monthly rental instalments, the landlord may terminate the lease with immediate effect and sue for possession. Moreover, he can ask for damages in the amount of rent that would have been payable until the end of the regular lease period. The landlord is, however, obliged to let out the premises anew without undue delay. If the landlord does not find a tenant who pays the same rent as the then tenant, he may ask for the difference in rent for the remaining lease period. u The landlord may also seize fixtures and fittings which were brought into the premises by the tenant. Care must be taken though as such assets do not necessarily belong to the tenant and also might not be valuable, for example in the case of lettings for the purpose of office use. Managing rent reviews Typically, commercial leases in Germany include an indexation clause which increases or decreases the rent according to the development of the German consumer price index (CPI). The indexation can amount to the full CPI-change or to parts of it, it may comprise a threshold change amount after which indexation takes place and it may include an indexation free period. 23 “Taylor Wessing’s real estate department offers ‘high-quality performance on a markedly large scale’.” Legal 500 Germany 2014 Managing the asset In the retail sector a turnover rent is frequently found. Such clauses usually include a provision of evidence of the turnover (e.g. auditors statement), which gives the landlord an insight into the business of the tenant. Managing the asset We work closely with surveyors in managing property assets throughout the cycle of the letting. We advise on asset, property and facility management agreements and make sure that the respective agreements comply with the financing bank’s requirements (duty of care). Financing the asset 25 Financing the asset An investor may wish to finance the acquisition and/or development of a property by raising debt, either at the time of acquisition or by way of a refinancing, following the acquisition of a property. We advise banks as well as investors on national and cross-border real estate financings. By working closely with our tax law colleagues we are also able to realise major portfolio transactions quickly and efficiently. We have been advising national and international banks, investors and sponsors for many years and have a deep understanding of the differing needs of both lenders and borrowers. Besides the classic legislation on loans and the securing of loans, we also assist with structured financing (such as mezzanine financing and mortgage backed securities) and with the structuring of leasing arrangements. Typical Lender Requirements We advise both banks and investors on the financing of commercial and non-commercial real estate portfolios. Our documentation covers the current needs of the market (syndication, securitization, refinancing by bonds), and it is possible for us to finance large portfolios at short notice. We are familiar with both the German and the London market standard loan documentation. If a loan pertaining to a German asset is governed by English law, we will work hand in hand with our English colleagues. 26Financing the asset When looking at financing the acquisition of real estate in Germany, a lender will typically expect the following criteria to be met: u The property to be owned by a ring-fenced special purpose vehicle (SPV) which is able to grant full security, including a mortgage over the Property, in favour of the lender. u The lender’s expectation is that the SPV would not have any other creditors, other than the investors, and that investors’ debt would be subordinated/postponed to the lender’s debt. u In most cases, the lender would expect to take security over the entire issued share capital of the SPV, whether the SPV is incorporated in Germany or offshore. u A loan agreement would be entered into between the SPV and the lender, which would contain, amongst other things, a number of undertakings which the SPV must comply with in relation to how to manage the Property, the rental income received from the Property, and the operation of the SPV itself. u A lender would expect to have some control over the rental income received from the Property to ensure that this rental income is first applied in payment of interest under the loan. This can be done by granting security and signing rights to the Lender in respect of the bank account into which rental income is paid, or, if a managing agent collects the rent, by obtaining an appropriate duty of care undertaking from the managing agent. 27 Financing the asset u Lenders will typically require a number of other conditions to be satisfied prior to making available the loan, including the receipt by the lender of a satisfactory valuation, building survey, insurance, and report on title/certificate of title, as well as board resolutions, directors’ certificates and legal opinions. u Legal documentation needs to cover the current needs of the market. We are familiar with both the German and the London market standard loan documentation. As a team we have vast experience in advising on cross-border financings across Germany and other jurisdictions. 28Financing the asset Security Interest The most common security taken over property is a land charge (“Grundschuld”), which is similar to a mortgage. The underlying deed requires notarisation and only comes into force upon registration in the land register. The implementation is done by the notary. Generally, the purchase price is only due when the cancellation of existing encumbrances on the register is secured by the notary. The notary ensures that the seller does not receive the purchase price before all these debts have been paid. Co-investments Many investors will look to share risk on major investment and/ or development projects and as such, joint ventures and other corporate structures are common in Germany. Advice may be required on co-investments like joint ventures and mezzanine loans as well as on shareholder agreements including non-voting rights structures. 29 Financing the asset In some circumstances, mezzanine lenders may seek to require their debt to be serviced at the same time as senior debt, or, for example, agree that mezzanine payments are postponed and made upon the sale or refinancing of the asset. The latter approach is akin to a joint venture model. A mezzanine lender will typically expect to take second ranking security over the property, and will require that an intercreditor deed or priority deed is agreed with the senior lender in order to document any enforcement rights the mezzanine lender may have. Alternatively, additional equity or finance could be sought with a joint venture partner, and this could be brought into the acquisition structure at a level which sits above the level into which debt is introduced. This would be done with the input of our corporate tax teams to ensure that the proposed structure is tax efficient and the intention of the parties is adequately documented through a joint venture agreement or otherwise. Development finance Under a facility which also provides for funding to be made available to finance the development of a property, the basic requirements of a lender are the same as for an acquisition facility, but a lender would also expect the following: u An independent project monitor appointed by the lender to verify that the development will be completed on time and on budget, and to sign off on invoices to be paid by drawdown of the loan. u Approval by the lender of the professional team appointed to complete the development and collateral warranties to be provided to the lender from that professional team. 30Financing the asset u Review and approval of any planning consents and pre-let agreements put in place and sign off on any rights of light issues that may arise pursuant to the development. u If relevant, provision by the lender of an interest roll up facility to service interest on the loan during the development phase. u The lender would also expect the borrower to sign up to a number of other development specific covenants and undertakings. Financial covenants When determining whether a lender is willing to fund an asset, and how much it is willing to fund, the Lender will consider the asset class, the tenant strength and geography of the asset, as well as the expected compliance by the SPV of a number of Financial Covenants: u LTV: The LTV covenant, or the Loan to Value covenant, is the ratio of the principal amount of the loan expressed as a percentage of the value of the property. u Interest Cover: The Interest Cover covenant is a covenant that tests the ratio of rental income received from the property to the interest due under the loan over a certain period. u Debt Service: The Debt Service Covenant (or DSCR, as it is also known) serves a similar function to the Interest Cover Covenant and is intended to benchmark the ability of the SPV borrower to service its debt through the income received from the property. 31 “More flexible and committed than others” Legal 500 Germany 2013 Financing the asset Islamic Finance Real estate is predominantly a sharia’h compliant asset class and can therefore be a very suitable form of security for structures where investors require finance to be provided on a sharia’h compliant basis. There are a number of mainstream and specialised lenders who will agree to provide finance on a sharia’h compliant basis, and those that do so will typically provide this finance using either a commodity murabaha structure or an Ijara lease structure. This is a specialized area of real estate finance, and whilst such structures are not commonly used in Germany, this is an area in which our London team has market leading expertise should the need arise. Refurbishing the asset 33 Refurbishing the asset Whether you are looking to purchase a high end residential property or invest in a commercial property, the purchase of prime property may often result in extensive development, renovation or refurbishment. We regularly advise international clients on prime property development and refurbishment. As part of this we focus on the preferred contractual framework and also the permissions and approvals which are required (amongst other matters which may need to be considered and on which advice is needed). It is important to have a lawyer with expertise in the construction markets. We have a sizeable and experienced construction team ready to advise on all issues. Choosing the right contractual structure and insurance There are various standard contracts which are frequently used for construction projects in Germany. However, under German law such standard forms are qualified as general terms of business (“Allgemeine Geschäftsbedingungen”) and are subject to various restrictions especially with regard to limitation of liabilities. Therefore, when standard contracts are used it is very important that the parties individually negotiate and agree on variations within the relevant provisions so as to side step the restrictions, e.g. by agreeing on special conditions to vary the standard terms. 34Refurbishing the asset The following issues should be taken into account on a development/refurbishment: Bonds u Generally, in German construction contracts the contractor is required to provide a performance guarantee or performance bond from a German Bank or its parent company as security for the fulfilment of its contractual obligations. In addition, the contractor usually has to provide for a warranty bond in an amount of 5% of the contract price to be issued upon acceptance of the plant or building for the duration of the warranty period. The employer on the other side usually – depending on the payment schedule – has to provide for one or several payment guarantee(s) or alternatively for a letter of credit. The latter is mainly used where the guarantor has its place of business in a jurisdiction outside Europe. Defects u With regard to defects in material and/or workmanship, German statutory law provides for different remedies. As a first step the employer is entitled to rectification of any defect by the contractor by repair or replacement. As a second stage, the employer is entitled to choose either to (a) claim damages, (b) rectify a defect itself or through third parties and claim any cost incurred from the contractor, (c) rescind the contract or (d) reduce the contract price accordingly. The statutory warranty period for buildings and industrial plants is five years. Most construction contracts provide for limitations of these rather wide statutory remedies. 35 Refurbishing the asset Insurance u It is common in German construction projects for either the employer or the contractor to provide for a Construction All Risk Insurance covering any damage to, or loss of the plant or building, or any component or materials thereof. Usually, the employer is coinsured under such policy and a waiver of subrogation rights is issued. u German construction contracts usually require the contractor to further provide (a) a Commercial General Liability Insurance covering public liability, property damage and financial losses of third parties; and (b) (where the contractor is also responsible for the design elements) a professional liability insurance covering defects in design. 36Refurbishing the asset Permissions and approvals that may be required for refurbishment works Generally, each construction project in Germany requires a building permit under the German Federal Building Code or a permit under the Federal Immission Control Act. Clients need advice with regards to all issues arising in the context of regional planning, zoning and building law. We advise on the status of plots under the aspect of planning law and represent our clients in building permission proceedings and within the framework of municipal zoning. Managing disputes Additional provisions in contracts on alternative dispute resolution methods such as mediation have increased extensively over the past few years. We usually recommend appointing an independent expert to advise in the case of purely technical or commercial issues. It is in both parties’ interests for these to be resolved sooner rather than later so that the progress of the works is not affected or delayed, e.g. disputes on the entitlement of the contractor to request change orders or variation requests. 37 Refurbishing the asset “Strength in property finance and construction, together with a highprofile investor and developer client base, all add up to an impressive real estate practice – Taylor Wessing impresses across the board.” Legal 500 How to structure an acquisition 39 How to structure an acquisition There are several ways to invest in real estate in Germany: (i) An individual can purchase a property directly, (ii) the investment can be made indirectly by using a German corporation or partnership or (iii) by using a foreign corporation or partnership. Indirect investments may be made via single corporations or partnerships that acquire the asset (with the investor(s) holding shares or interests in that entity) or by using a holding company that is a shareholder of one or more subsidiaries, each of which may own one or several properties. Managing liability and tax efficiency are core. Investors will need to ensure that they have established appropriate German and/or foreign corporate structures, such as those described above. Such arrangements are bespoke and will require detailed discussions before an appropriate structure can be selected and implemented. How does the German tax regime impact on real estate transactions? The following key issues will typically be relevant to a real estate investment. This assumes that the Investor establishes a new company outside Germany (but within the EU) to serve as property owning company (“PropCo”). The purpose of the PropCo will be the holding, managing and renting of real estate assets. A typical legal form used for such types of transaction is a limited liability company established under Luxembourg laws as a Société à responsabilité limitée (S.à r.l.). Depending on the 40How to structure an acquisition relevant double tax treaty other countries could also provide for similar tax structuring options. u When the PropCo purchases the property by way of an asset deal, German Real Estate Transfer Tax (“RETT”) will be triggered. The RETT rate depends on the current tax rates applicable where the real estate is located and currently ranges between 3.5% and 6.5%. u In a share purchase transaction RETT also falls due where an economic participation of 95% or more in a real estate owning company is acquired. In determining an economic participation indirect shareholdings are to be attributed. Accordingly, to mitigate RETT in a share purchase transaction only up to 94.9% of the shares in a target company should be acquired. u The German income taxation of the PropCo is as follows: If the PropCo is a foreign corporation which owns domestic real estate assets, then it will generally be subject to limited income taxation in Germany on returns from its German real estate investment according to the German Corporate Income Tax Act provided that it is resident outside Germany. 41 How to structure an acquisition Residence is primarily determined on the basis of the location of the registered office and the effective place of management for the PropCo. If the effective place of management and/or the registered office will be located in Germany, the PropCo will be subject to income taxation in Germany on its worldwide income and capital gains. u Pursuant to the German General Tax Code (AO), the effective place of management is defined as being the centre of the commercial executive management. This is the place where the day-to-day activities are managed and where the key decisions are made. To avoid being subject to taxation in Germany on worldwide income and gains it is therefore crucial that the effective place of management is actually in the state where the PropCo is incorporated. The management of the PropCo should assemble in regular intervals to take its decisions, e.g. on financing, sale and purchase of properties and capital distributions, and an adequate (written) documentation of the meeting should be made. In places like the Netherlands, Luxembourg, Jersey or Guernsey a number of professional service firms help to assist in such matters, including offering professional directors for the respective PropCos. The appointment of an independent German asset manager firm would still be possible without necessarily impacting residence status. u The PropCo (if resident outside Germany so as to be a limited tax payer as described above) is subject to German corporate income tax with regard to their income from sources in Germany. This means that the income in connection with the real estate asset is taxable in Germany. The income (less allowable deductions for certain expenses) will be subject to German corporate income tax at the standard rate of 15% 42How to structure an acquisition plus a solidarity surcharge of 5.5% of the corporate income tax, which results in an effective tax rate of 15.825%. An income tax return must be filed once a year. u Subject to any applicable double tax treaty being reviewed in detail, Germany is likely to be entitled to levy tax on the income of the PropCo. To avoid double taxation, the relevant double tax treaty will need to be reviewed to see if it allows for crediting the German corporate income tax against any foreign income tax which is levied on the income of the PropCo received from the real estate assets located in Germany. u According to the German Trade Tax Act, a foreign resident PropCo is subject to German trade tax only if it has a permanent establishment in Germany (e.g. a fixed place of business). According to German tax law, a fixed place is characterised by a certain degree of permanence. The PropCo therefore must not have its own employees, office rooms or any other fixed establishments in Germany; provided this is observed, it should be possible to avoid the application of German trade tax. u The German interest deduction barrier (“Zinsschranke”) limits the deductibility of interest expense over interest income (net interest expense) to 30% of an entity’s earnings before interest, taxes, depreciation and amortisation (EBITDA). Interest in this sense includes all interest payments, receipts and accruals, whether to or from a shareholder, a related party or a third party (such as the financing bank). The rationale of this rule is that the German government wants to avoid misuse of structures that seek to decrease the company’s profit basis through high interest expenses. However, there is an annual threshold of net interest expense 43 “Ranked for Real Estate/Germany (Band 5)” Chambers 2015 How to structure an acquisition of the entity of up to €3 million, i.e. below this threshold the interest deduction barrier rule does not apply. Therefore, assuming the funding of the PropCo consists of senior (bank) debt and (junior) shareholder loans, the interest deduction barrier plays no role for so long as the overall net interest expenses of the PropCo are below the threshold of €3m. Example: Asset Value is €20m, bank lends at 50% LTV for 4% p.a. creating annual interest expense of €400k. The remaining €10m is basically funded by shareholder loans at 9% p.a. creating annual interest expense of €900k. The overall interest expenses are €1.3m < €3m, i.e. interest is still fully deductible despite interest barrier rule. u German withholding tax on cash repatriation: Provided that the PropCo does not have its effective place of management in Germany (i.e. is not resident in Germany), there should not be a German withholding tax obligation at the level of the PropCo. The purchasing process 45 The purchasing process The German transaction differs in some significant details from the model used in large parts of the world. Letter of intent Initially, vendor and purchaser will enter into a letter of intent regarding the purchase of a property (subject to due diligence). The letter of intent usually contains the purchase price, details of the property to be purchased, timetable for the due diligence and execution of purchase agreement, exclusivity and nondisclosure. Apart from the regulations on exclusivity and nondisclosure and a related penalty in case of violation, the letter of intent is not binding. A purchase agreement requires notarization in order to become binding. If the parties do not include all commercial terms in the notarized deed, the deed would be invalid and the transaction would fail. Due diligence Following the signing of the letter of intent the purchaser carries out a legal and a technical due diligence, which potentially includes environmental issues. The purchaser might also arrange for a detailed commercial and financial due diligence. During the legal due diligence the purchaser’s lawyers review a physical or virtual data room. In particular, the legal due diligence covers the real property (land register status, previous real estate purchase agreements, construction agreements), public law (building permits and zoning, public easements, environmental matters), and lease agreements. The vendor is supposed to answer all questions arising from the due diligence. 46The purchasing process Purchase agreement During the due diligence phase either party circulates an initial draft of the purchase agreement. Ideally, this is done by the purchaser’s lawyers as they can already reflect upon their findings of the due diligence. Once initial markups of the draft purchase agreement are exchanged, the parties enter into negotiations and subsequent redrafting. Finally, the parties will notarize the purchase agreement. Some key regulations relating to such a deed are as follows: u Requirements for due date of the purchase price: Certain conditions have to be met before the notary confirms that the purchase price is due and payable. Among others, the city in which the property is located has to waive its preemption right and land charges securing the vendor’s loan have to be deleted. The purchaser usually also asks for a priority notice of conveyance, which also has to be registered prior to the notary’s payment notice. 47 The purchasing process u Priority notice of conveyance: Since the vendor could theoretically sell the property more than once, the purchaser needs to be secured by a priority notice, which is registered in the land register in order to demonstrate to each third party that the property has already been sold. Upon payment of the purchase price the notary will arrange for the transfer of ownership, which will only take place if the purchaser is registered as owner of the property. For the period between signing the purchase deed and registration of the new owner the priority notice secures the purchaser’s legal position as future owner. It will be deleted once the purchaser has become the registered owner. u Encumbrance authorisation: As outlined above the purchaser will have to pay the purchase price before he becomes the owner of the property. He can only pay the purchase price if bank financing is in place. The bank always requires a security by way of a land charge, which is also registered in the land register. Since the purchaser has not yet been registered as owner when he pays the purchase price, he will have to get the vendor’s consent in order to arrange for the land charge. For this purpose the vendor authorizes the purchaser’s bank to register a land charge prior to the payment of the purchase price. u Warranties, guarantees and obligations: Subject to the findings of the due diligence and the parties’ respective market strength the parties agree upon a catalogue of representations and warranties. If an issue is very important it might even become a payment condition. 48 “This competent and co-operative team has an excellent reputation amongst clients.” Chambers and Partners The purchasing process Transfer date Upon full payment of the purchase price all risks and benefits arising from the property shall pass on to the purchaser, i.e. the purchaser will collect the rent and pay all costs relating to the property as of the transfer date. From the investor’s point of view this is the crucial date. Transfer of ownership Transfer of ownership takes place with the registration of the purchaser as new owner. This is just a formal act initiated by the notary, which occurs some weeks after the transfer date. Upon transfer of ownership the lease agreements shall automatically pass on to the purchaser pursuant to statute. Since the transfer date occurs prior to this date the parties will treat the leases as if they had already been transferred upon the payment of the purchase price, i.e. transfer date. 49 Post closing Once the purchase price is paid the purchaser enters into the post-closing phase. At this stage (at the latest) the purchaser will have to arrange for new insurance to be placed as well as for a new asset management and property management (and related reporting) to be put in place. In practice this is taken care of prior to completion as the bank’s requirements will have to be met in this respect. Costs As a rule of thumb you may calculate to spend 12 to 15% of the purchase price on costs. This involves the real estate transfer tax of 3.5 to 6.5% (depending on where the property is located in Germany), notary fees (for notarization, the priority notice, creation of land charges, transfer of title, etc.), court fees (for registration of priority notice, land charges, transfer of title, etc.), brokerage commission (roughly 2 to 4%), legal and other fees (e.g. for technicians, environmental experts). The purchasing process About Taylor Wessing 51 About Taylor Wessing Taylor Wessing is a leading international law firm in Europe, Asia and the Middle East. Our clients include leading financial institutions, major corporations, public sector bodies and wealthy individuals and families. What makes us different is our forwardthinking approach to serving clients. We think creatively about business issues and are constantly looking for new and better ways to add value. By doing this, we come up with truly innovative solutions that help to grow our clients’ businesses. Our focus for the future is set firmly on those sectors that we believe are the industries of tomorrow: u Real Estate and Infrastructure; u Technology, Communications and Brands; u Life Sciences and Healthcare; u Energy and Environment; u Private Wealth; and u Financial Institutions and Services. 52About Taylor Wessing Real Estate Group Taylor Wessing’s Real Estate group plays a core role within the firm. We have the capacity, experience and capability to advise in relation to all of our clients’ real estate needs, including owner occupier, development, investment and management issues. We can service deals of any size or complexity. Our Real Estate group works as one on complex transactions and real estate matters. We have extensive experience in the management, acquisition and disposal of large properties of significant value, whether as individual assets or as portfolios. Our approach is to provide input at the start of any transaction in order that we can assist you in getting a good commercial deal that fully meets your needs. From the implementation of a vacant possession strategy, through to the site acquisition process and on to the development and letting of the scheme, we have a comprehensive range of skills and experience required to ensure a successful outcome. “Clearly goal-oriented. These lawyers want to get the deal done.” Chambers 2010/11 53 About Taylor Wessing Contact details We would be delighted to discuss your legal protection needs in confidence with you. Please contact us for further information. Dr Alexander Peinze Partner, Real Estate, Hamburg +49 (0)40 3 68 03 123 firstname.lastname@example.org Dr Thomas Fehrenbach Partner, Real Estate, Düsseldorf +49 (0)211 83 87 427 email@example.com Key Contacts Europe > Middle East > Asia taylorwessing.com © Taylor Wessing 2016 This publication is intended for general public guidance and to highlight issues. It is not intended to apply to specific circumstances or to constitute legal advice. Taylor Wessing’s international offices offer clients integrated international solutions. Though our offices are established as distinct legal entities and registered as separate law practices, we are able to help our clients succeed by providing clear and precise solutions with highlevel legal and commercial insights. For further information about our offices and the regulatory regimes that apply to them, please refer to taylorwessing.com/ regulatory.html and rhtlawtaylorwessing.com.