Acquiring a company? Pay attention to its real estate
As the market for mergers and acquisitions continues to heat up in Michigan, businesses evaluating a deal need to look beyond the bottom line and scrutinize the entire transaction — especially the real estate.
Too often, we see acquiring companies focus their attention on the dollars and cents of the revenues. They forget they are buying everything that goes along with that bottom line — namely, the buildings, facilities and property owned or leased by the seller.
Yet potential landmines can lurk in unread leases, easements or shelved environmental studies that may negatively impact a deal’s bottom line. On the flip side, being unaware of economic incentives available to new owners could mean leaving money on the table.
It is critical to the success of any transaction to examine the soon-to-be-acquired real estate holdings with the proverbial fine-tooth comb. From leases to underground storage tanks to easements, you need to have a true picture of what you are acquiring before you sign the final contract.
Four areas worthy of special attention include:
Existing leases: The most common problem area for companies, existing leases can be a nightmare to get your arms around. Purchase options, hidden amendments, tenant renovations, allowances, leases within leases, extensions — if you don’t do the proper due diligence and ask for all the lease documents, you could find yourself dealing with a hopeless tangle of issues. Have a real estate attorney carefully review the leases and their addenda to ensure the rents and terms you think you’re getting are actually what you are getting.
As part of the closing, the new owner, if the tenant, will want to secure subordination, non-disturbance and attornment agreements from the landlord and landlord’s lender so that its leasehold interest is honored. The new owner, if the landlord, will want to secure estoppel certificates from current tenants to confirm the terms of any leases.
Reciprocal easements: If you are buying property in a planned unit development or any real estate used in common with other property, pay special attention to the reciprocal easements and other common area maintenance agreements.
There can be a lot of hidden costs for the upkeep of shared driveways and parking lots, underground water and sewer lines, retention ponds, other shared utilities, etc. You will be bound by what property owners before you have created, so pay close attention to operating and maintenance requirements. And while you can decouple the utilities if you share electric lines or other utilities, the process can be time-consuming and, depending on the other owners, expensive.
Environmental issues: Depending on the property being purchased, you might uncover any number of hidden environmental issues, from underground storage tanks to improper waste disposal to the use of agricultural chemicals. It’s a good idea to get environmental consultants involved in the transaction upfront to fully assess potential environmental issues.
If you are required to pay for remediation, you may qualify for state or federal incentives to cover the cost or be able to negotiate a discount on the price.
Economic incentives: Speaking of which, be sure to explore all the incentive programs that are open to you. You don’t want to leave money on the table, but you might if you’re not aware of what’s available. For example, if you are an auto supplier acquiring a building and entering into a new lease, if you transfer employees from one city to another, or one state to another, you may qualify for tax incentives or abatements or reductions in real estate or personal property taxes. Each municipality and state are different, though, so be sure to explore options in advance.
David C.C. Eberhard is a partner at the law firm Warner Norcross & Judd LLP who concentrates his practice in real estate, construction and business law. He can be reached at firstname.lastname@example.org.