Like other industries, real estate was not immune to the impacts of COVID-19. At the same time, interest in industrial property has seen continued growth from professional and private investors.
mostly referred to entire property complexes such as grain elevators, plants, factories, office centers as well as distressed assets. Recent privatization reform business deregulation, and opening of the land market unlocked new opportunities.
Due to the rise in the number of transactions, we can also see that businesses often make the same mistakes by chasing interesting objects, which may cost a lot and in certain circumstances lead
to loss of the investment.
During due diligence, the history of the asset’s ownership to some extent can become Pandora’s Box. For instance, if an asset was acquired by a seller within the privatization procedure, the sale
and purchase agreement probably contained additional limitations, such as an intended purpose for the use of the asset or similar conditions. Using the asset for unauthorized purposes, carries a big risk of losing the asset. A buyer may not be aware of this, as it’s is not publicly available information and from first glance, the asset may look crystal clear.
Also, the asset may have several owners, meaning the sale needs their consent. This information is contained in one tiny line of an excerpt from a state registry. Another common surprising issue is absence of legal grounds for use or ownership title to the land under the asset, which may affect legitimacy of the deal and raise tax risks.
Absence of encumbrances stitched to the asset still requires checks for disputes and any criminal proceedings against the seller, its affiliates and the asset itself. Arrests imposed on the asset within the scope of criminal proceeding are much harder to cancel.
During technical due diligence of integral property complex it is highly important to thoroughly determine all the elements of such a complex (equipment, machinery, product lines, work stations etc.), unless the investor wants to purchase only the building. It is essential to determine which parts are integral, which are considered separate movable property and who owns it. Unfortunately, it is not always clearly stated in ownership documents.
In addition, acquiring ownership of the assets in the form of the entire property complex (office center, manufacturing plant, grain elevator, production facility etc.) is deemed concentration, which may require prior consent from the Antimonopoly Committee of Ukraine. For example, the privatization of Dnipro Hotel, as well as the purchase of ethanol production facilities of UKRSPIRIT by Nemiroff required respective prior approval. Ignorance of this requirement may surprisingly cost up to 5% of the annual income of the buyer’s business group.
Another important issue is the proper structuring of the deal, which depends on different factors: parties to the deal, tax implications, financing of the purchase by third parties, condition or type of a target asset etc. In case the purchase is financed by a bank or another creditor, it is essential to confirm the deal structure with the financiers first.
When choosing between direct or indirect purchase, it should be noted that although the purchase of the real estate by means of a corporate M&A may provide benefits and the possibility to conduct the transaction under foreign law, it may create additional risks coming out of international treaties and national tax legislation on tax evasion.
MAX lEBEDEV Partner at GOLAW
OLEKSANDR MELNYK Associate at GOLAW
+380 44 581 1220
[email protected]
19B Instytutska St., Office 29
Ukraine, 01021, Kyiv
www.golaw.ua
