Sometimes we are approached by clients who inquire about purchasing the entity that owns the property instead of buying the property itself. This is not very common but there are a series of reasons why this might make sense that I discuss below. Nevertheless, the purchase of an entity brings about a whole different set of requirements along with significant differences in the contract drafting and the due diligence that needs to take place.
One of the reasons often brought up to do an entity purchase is the transfer tax savings that might be accomplished. Depending on the jurisdiction where the property is located, these amounts could be significant. Another could be the status of the project. For example, if there is significant construction going on at the property, it might be easier to sell the entity than to sell the property. This avoids issues with notices of commencement, assignment of construction contracts and the like.
Once the determination is made to purchase the entity, the lawyers then need to change gears and think like a corporate lawyer as well as a real estate lawyer. In addition to all the usual real estate issues that have to be considered regarding due diligence and warranties and representations related to the real estate, the same issues need to be addressed with regard to the entity being purchased.
Many times the purchase of only the real estate includes a provision that the seller makes no representations and the buyer is purchasing the property as-is, based on their own due diligence. That does not work in the context of purchasing the entity. Since an entity is a breathing, living legal person, there are liabilities associated with its prior existence. These liabilities can range from tax liability and filings, sales tax collection and payment issues, employment issues, existing contract obligations, and a range of other items. Therefore, it is very dangerous for the buyer of an entity to take the deal as-is.
Generally there is a lengthy list of warranties and representations made by the seller as to the entity and its prior existence. Often times, these representations are backed up by an indemnity from the seller (or from a parent, affiliate or even its shareholders if it is a special purpose entity that will have no assets after the sale) protecting the buyer from any liability for anything that occurred prior to the purchase.
Also, the due diligence requirements are generally double those of the regular real estate purchase. In addition to the usual real estate due diligence, the buyer must conduct due diligence on the entity itself and its accounting and potential liabilities. Relying on the seller’s representations and indemnification is not enough. Therefore the amount of work that goes into investigating the purchase of the entity is significantly more.
Our other real estate attorneys and I have a great deal of experience with these types of transactions, and we write about this and other important real estate business and legal issues in this blog on a regular basis. We encourage industry followers to submit their email address in the subscription box at the top right of the blog in order to automatically receive all of our future articles.