Structuring REIT Mergers and Acquisitions: Due Diligence, Preserving REIT Status, Tax Concerns, Closing Conditions

Description

Recent years have witnessed an unprecedented deal volume in REIT M&A transactions, and the trend is expected to continue in 2019. Counsel must be conversant with the unique issues presented in REIT transactions, from upfront due diligence and valuation to structuring and closing the deal.

A critical requirement is that the target, in fact, qualifies as a REIT for tax purposes. If not, the buyer could inherit contingent tax liabilities from pre-closing years, incur corporate level tax on the appreciation of the target's assets, and be subject to a "sting tax" on the subsequent sale of target assets. Due diligence and delivery of unqualified REIT opinions from target's counsel should be required.

Acquisitions involving UPREITs present additional challenges. Tax protection agreements and unitholder voting, notice or consent rights must be taken into account. REITs are generally required to pay out shareholders at 90% of their annual income. In all-cash deals, the ability to pay partial or pro-rated dividends must be agreed to by the parties. In stock-for-stock transactions, dividends for the buyer and seller must be coordinated so that each set of shareholders receives its scheduled dividend.

REIT merger agreements typically include the same kinds of deal protection provisions as those found in M&A agreements generally. Because the underlying asset is real estate, REIT M&A closing conditions may consist of additional closing conditions like third-party consents from JV partners or ground lessors, payment of transfer taxes, and resolution of other property-level matters.

Listen as our authoritative panel examines these and other issues with REIT mergers and acquisitions. The panel will also discuss management transition, shareholder litigation and other concerns.