Buying the Property or Buying the Company? Due Diligence for Japanese Real Estate M&A
An asset purchase and a share purchase are fundamentally different
A buyer of an income-producing building, hotel or commercial property may be offered the shares of the company that owns the asset rather than the real estate itself. In a share transaction, the registered owner of the property remains the same company; only its shareholders change. This can help preserve leases and commercial relationships, but the buyer also inherits the company’s historical liabilities and contractual obligations.
Do not price the shares solely from the property value
A starting calculation may be market value of the real estate minus bank debt, but a target company can also contain unpaid taxes, tenant-deposit liabilities, litigation, shareholder loans, off-balance-sheet obligations and repair exposure. Book value of the property may also differ substantially from market value. Property valuation should therefore be combined with financial, tax and legal due diligence.
Core diligence items
- Title, mortgages and security interests
- Bank debt and shareholder-change clauses
- Leases, deposits, arrears and disputes
- Corporate and property-tax compliance
- Unpaid and contingent liabilities
- Repair history and building compliance
- Shareholders, directors and related-party transactions
Maintain independent advice
Japan’s SME M&A Guidelines, third edition, highlight issues including intermediary fees, conflicts of interest and contractual disputes. Even where an intermediary introduces the transaction, the buyer should use independent legal, tax, accounting and technical advisers as appropriate.
Check change-of-control provisions
Loan agreements may require bank consent when ownership or control of the borrower changes. The fact that the property remains registered to the same company does not mean lender approval is unnecessary. Required consents should be identified before signing and incorporated into closing conditions.
Conclusion
Real-estate company M&A transfers both the asset and the corporate history surrounding it. Due diligence should therefore integrate property, finance, tax, law and lending, with identified risks reflected in warranties, indemnities and closing conditions.