Private REIT deals are becoming more popular as a way to gain real estate market share, but acquiring a private REIT is a much different deal than a direct real estate transaction—where buyers acquire real estate titles directly.
"In a direct real estate acquisition, the buyer acquires title to real estate directly from a seller," Ben Fackler, a partner at Allen Matkins, tells GlobeSt.com. "In a private REIT acquisition, the buyer instead only indirectly acquires real estate by acquiring the common stock of a business entity, which also has 100+ third party preferred shareholders. That entity typically holds equity interests in another entity that directly or indirectly owns title to the property."
As a result, there are many differences between the two transactions that investors should understand. "There are fundamental transactional differences between these two purchase structures, which impact price and exposures post-closing. Navigating such a deal not only requires real estate knowledge and experience, but also strong tax and corporate law knowledge," says Fackler.
In addition, direct real estate deals have more limited risks than private REIT deals. "In a direct real estate acquisition, the buyer's primary risk is whether it will have title to the real estate, which is substantially covered by reputable third-party title insurance and verifiable through public title records," Max Brunner, senior counsel at Allen Matkins, tells GlobeSt.com. "A private REIT acquisition is completely different from a real estate deal, since the buyer will own common shares in an entity, which hold equity interests in other entities, and take on all legacy liabilities that come with the entities."
Due to structural differences between the two transactions, buyers of private REITs have a more arduous due diligence period. "Regardless of how clean title to the real estate is, a buyer still needs to understand and protect itself from an issues with the actual asset it is purchasing—the common shares of the REIT—for which there is no equivalent title insurance or public chain of ownership information," says Brunner.
In addition, the buyer will inherit certain liabilities, like legacy litigation liabilities, contract liabilities and employment liabilities," according to Brunner. "The risk profile is much higher as a result," says Brunner. "To mitigate these risks, the buyer and seller should agree up front at the term sheet stage on a liability construct that is similar to stock purchase agreement for an operating business."
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Kelsi Maree Borland
