In the business world, there are various ways to conduct transactions and purchase real estate. Acquiring real estate is a significant investment, whether for private individuals, investors, or companies.
When purchasing real estate, there are various transaction structures available, each offering different advantages and disadvantages depending on the objectives and needs of the parties involved. In this blog post, we will take a closer look at the three most common types of transactions in real estate acquisitions—asset deals, share deals, and unit deals—and highlight their specific features and implications for the parties involved.
Asset deal
Asset deal is the classic method of purchasing real estate. In this case, the property is sold and the benefits and encumbrances are transferred in full from the seller to the buyer. After the sale, all ownership rights lie with the buyer.
Advantages of an asset deal when purchasing real estate:
- The buyer can specifically select the properties that best suit their investment objectives and needs.
- The selective acquisition of individual properties allows potential risks and liabilities on the part of the seller to be avoided.
Disadvantages of an asset deal when purchasing real estate:
- Since separate contracts are required for each property, the asset deal can be time-consuming and complex to complete.
- Depending on the country and tax law, an asset deal may have tax implications for both parties.
Share deal
In a share deal, it is not the property that is acquired, but the property company, with the property being the object of the company. Put simply, it is a company purchase in which the property is only acquired indirectly. The property is transferred to this company, but only shares in the company are purchased. Here, the buyer acquires 95% of the company. The remaining 5% must remain with the seller for at least 5 years. This process is more complicated than an asset deal, as the company or the property company must be thoroughly examined. The advantage of a share deal is that the buyer does not have to pay real estate transfer tax (currently 6.5% of the purchase price in North Rhine-Westphalia).
In 2021, there was a change in the law whereby the company shares to be purchased were reduced from 95% to 90% and the holding period was extended from 5 years to 10 years. This means that the seller is now tied to the property/company for longer with their capital. Only after 10 years does the property belong 100% to the buyer. This change in the law was decided to make share deals even less attractive for investors.
Advantages of a share deal:
- Contracts remain unaffected
- Simple recording of the object of purchase
- The existing company remains in place
Disadvantages of a share deal:
- Risk of assuming unknown liabilities and liability risks
Unit deal
As a result, lawyers have been looking for a new option and have discovered a loophole in the law. The unit deal is now available as an alternative. This involves a reallocation or share transaction . The property to be sold is placed in a fund managed by a trustee. With this sales structure, there is a change of shareholder in the fund. However, under civil law, ownership of the properties held in the (open-ended) fund does not change, as it is not the shareholders who are considered the owners, but the capital management company (KVG) that manages the shares. The prerequisite is that the properties are held in a special contractual asset pool.
Advantages of a unit deal:
- Direct entry into established funds
- No blind pool risk
- Reduced transaction costs
Conclusion
When purchasing real estate, there are three different transaction structures available: asset deals, share deals, and unit deals, each with its own advantages and disadvantages. The choice of the right type of transaction depends on the individual objectives, legal and tax aspects, and the risk appetite of the parties involved. Before purchasing real estate, it is advisable to carefully familiarize yourself with the advantages and disadvantages of each transaction structure in order to make the best possible decision. With a solid understanding of these deal structures, real estate buyers can carry out successful transactions and optimize their investments.
