Private REIT acquisitions are rising in popularity; however, they come with unique risks compared to a typical real estate transactions. Buyers of a private REIT have a more prudent vetting process than in a typical real estate transaction. In a private REIT deal, buyers need to go through extra steps to ensure that the seller has made followed the correct procedure.
"The buyer of a private REIT specifically needs to make sure that the seller has not made any mistakes in following the detailed technical elements to start and keep its REIT status with the IRS, such as maintaining at least 100 shareholders and satisfying assets, income, and distribution requirements," Max Brunner, senior counsel at Allen Matkins, tells GlobeSt.com. "Any mistakes before the sale could result in liability to the buyer after closing, so it is very important to make sure that everything was done correctly. Tax due diligence is critical, and we typically see one of the Big Four accounting firms assist in this regard. For additional assurance, it is recommended that the seller's law firm provides a legal opinion that the REIT complied with all required formalities to be classified as a REIT."
The buyer of a private REIT will also need to maintain the tax status of the entity following the acquisition. "In a private REIT acquisition it is important to know that in order to preserve the tax status of REIT, the buyer will often need to maintain the REIT for a period post-closing," Ben Fackler, a partner at Allen Matkins, tells GlobeSt.com. "That means leaving the entire structure in place and maintaining it in accordance with applicable tax requirements, potentially for many months. The parties will need to agree on how long to keep the REIT entity in place after closing and who pays the costs of maintaining the entity, complying with REIT rules and dissolving it."
The buyer will also need to oversee the REITs shareholders following the transaction. "As private REITs are generally structured with one or more common shareholders and a larger number of passive preferred shareholders who hold shares primarily to meet the REIT rules' "100 shareholder" requirement, those preferred shareholders will continue to hold their shares rather than sell them to the buyer during this period," says Fackler. "The buyer needs to ensure that this capital structure was set up correctly and is capable of being unwound without difficulty and that the cost of the unwind, including repurchasing the preferred stockholders, is addressed upfront with the seller—or will effectively be a buyer cost post-closing. This should be factored into the purchase price discussions up front if possible."
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Kelsi Maree Borland
