Foreword by Andrew Chilvers
For ambitious companies eager to expand into overseas markets, often the conventional route of organic business development is simply not fast enough. The other option to invest in or buy a business outright is far quicker but often fraught with unforeseen dangers. And even the biggest, most experienced players can get it badly wrong if they go into an M&A with their eyes wide shut.
If you search for good and bad M&As online the Daimler-Benz merger/acquisition with Chrysler back in 1998 is generally at the top of most search engines on how NOT to undertake a big international merger. Despite carrying out all the necessary financial and legal measures to ensure a relatively smooth deal, the merger quickly unravelled because of cultural and organisational differences. Something that neither side had foreseen when both parties had first sat down at the negotiating table.
These days the failed merger of the two car manufacturers is held up as a classic example of the failure of two distinctly different corporate cultures. Daimler-Benz was typically German; reliably conservative, efficient, and safe, while Chrysler was typically American; known to be daring, diverse and creative. Daimler-Benz was hierarchical and authoritarian with a distinct chain of command, while Chrysler was egalitarian and advocated a dynamic team approach. One company put its value in tradition and quality, while the other with innovative designs and competitive pricing.
Jayson Schwarz discussed The Art of Deal Making: Using External Expertise Effectively as part of the Real Estate chapter.
How important is local market intelligence to effective cross-border real estate transactions, in your view, particularly in the current Covid-19 market? Any examples of how you have helped clients using expert insight into your jurisdiction’s real estate market?
Covid-19 has thrown a wrench in the real estate market, not only in our own backyard but on an unprecedented global scale. The uncertainty that comes with a global pandemic has presented both novel challenges but also new opportunities in real estate. Local market intelligence, or having boots on the ground, especially in cross-border real estate transactions, is the only way to navigate these muddy waters.
Local intelligence is critical to understanding the nuances of the marketplace. In Toronto today, the impact of Covid-19 has been felt across the market. Only industrial sales and leasing were spared. Sales of commercial and residential condominium units, the pricing and leasing of retail, office and residential condominiums and freehold apartment properties have dramatically slowed. This leads to tragedy and thereby opportunity. Local market intelligence is critical to locate the opportunities.
Claude’s Quick Tip: Speak to a Real Estate Broker who is born and raised in Toronto. No matter how sophisticated the buyer, we provide vital knowledge. Our clients have included the CEO of a large Canadian bank, and a businessman who sold his tech company to Microsoft for nine figures. There is a tremendous advantage in working with someone who can marry local product and market knowledge with business and negotiating acumen.
What are some of the key elements involved in achieving an accurate valuation for a real estate portfolio prior to the deal making process?
The right law firm will open the right doors, enabling a client to connect with the appropriate team on all matters of due diligence to achieve an accurate valuation.
Claude’s Quick Tip: Talk with the guys who have “boots on the ground”. We pride ourselves on the right broker will be downtoearth, approachable, professional constantly in-tune with the changing market trends and realities. I regularly tell my clients that “we have our finger on the pulse of the market”.
Once you get a real feel for the market and the particular type of real estate you need and the market realities we would recommend retaining an AIC, AACI or CRA appraiser, all recognised by the Appraisal Institute of Canada to appraise the purchase once under contract. This will confirm your price and assist in obtaining financing. Contemporaneously, we would be introducing you to the appropriate VP real estate at the financial institution of your choice to move the ball along. Finally, we would recommend an accounting firm with cross border tax experience to assist in holistic planning.
What Tax-Efficient Vehicles Can Be Used To Hold Real Estate In Your Jurisdiction? Any examples of deals you have structured in this way?
Foreign residents have available – in Ontario – the ability to hold real estate either directly or through a corporation. It depends on whether you are an individual or a corporation, the value being invested and whether the investor resides in a jurisdiction with a tax treaty with Canada, to avoid double taxation. There may be an ability to use a Nova Scotia ULC, which allows for flow through, taking advantage of your jurisdiction to lower tax payable.
As an example, a C Corp in the US would create an S Corp subsidiary which would then use the ULC to hold the property avoiding double tax particularly if you are a US resident. In many cases, again depending on complexity of the investor structure and jurisdiction of residence, the most tax efficient method, considering all scenarios mentioned above, will be to set up a Canadian or Ontario company to hold the property.
In every case Schwarz Law LLP will assist any investor in identifying these issues and bringing in the top tax professionals to assist in structuring to minimise tax and maximise protection.
Top Tips – To Optimize a Real Estate Portfolio
- Choose the right properties: Focus on the type of real estate you want to invest in and follow through with laser-like focus. This will allow you to gain product knowledge in a specific asset type and class, and to apply any lessons you learn to future purchases.
- Size Matters: It may be better to have fewer properties where you can add value and generate higher returns. Be strategic, patient and wise
Reassess: It’s important to re-evaluate your portfolio regularly to ensure you aren’t holding onto lemons, divesting of losing properties is just as important as focusing on higher performance properties to maintain a healthy portfolio. - The right Professionals: Don’t work with the first “professional” you come across. Interview each one, carefully. Ask about his/her applicable experience, and which strengths and connections are being brought to the table. Has that professionals extensively bought, sold, and invested in the type of property you’re interested in?
