Are you considering buying an SPV (special purpose vehicle) – which holds UK property? If so, don’t make these classic – and potentially very expensive – mistakes.
5 December 2014
1. Don’t assemble your team early … or at all
This sounds like an advert for spending a lot of money on professional advisers, but it’s not. You will need tax, accounting, and corporate advice, as well as the usual property related advice. And you need to make sure that your various advisers know who is doing what and when, and are talking to each other. Otherwise it’s a recipe for chaos, and you will not get the full benefit of the advice you are paying for.
2. Don’t get clear on exactly who the seller is
The identity of the seller – and its financial standing – often makes the difference between an SPV transaction going ahead and aborting. Unlike a direct property purchase, on an SPV purchase you must rely primarily on warranties and indemnities given by the seller. If you can’t enforce those warranties and indemnities, they are worthless.
3. Don’t check that you and the seller are agreed on the key points, before you spend time and money on the detailed work
When the deal for a purchase is first struck, the agreed terms will often include little more than the agreed value for the property. However, with an SPV purchase, there are a number of critical terms which can be dealbreakers – such as caps on liability, limitation periods and extent of warranties. You will be well advised to clarify these terms early in a heads of terms document, and reduce the risk of wasting significant time and money on a deal which was never there.
4. Don’t carry out tax due diligence on the SPV, in the context of your plans for the property
This due diligence should include whether there is any inherent capital gains tax liability if the SPV holds the property as an investment with a low base cost, and whether any de-grouping charges may arise on the sale. For residential property, your tax adviser should assess whether the Annual Tax on Enveloped Dwellings will be likely to apply going forward. For offshore SPVs, there may be risks that the SPV has been brought onshore for tax purposes, due to sloppy administration.
5. Don’t pay attention to the SPV’s the balance sheet
This is particularly important where the underlying property is tenanted. The actual purchase price for the SPV’s shares is usually the net asset value of the SPV, calculated using the negotiated value of the property. In order to avoid mistakes, you need to be able to track the price back to the SPV’s balance sheet, with appropriate adjustments. A pro-forma balance sheet is extremely useful as part of this exercise, and can save a lot of confusion and wasted time.