Real Estate Corporate Wrappers
Transactions involving Real Estate Corporate Wrappers (Corporate Wrappers) are not new but are on the rise. The structure brings with it a number of tax and other benefits for property developers and investors. In this article, we explore what Corporate Wrappers are, some of their advantages and how transactions involving them differ from pure corporate M&A and pure property transactions. We also look at why Warranty & Indemnity (W&I) insurance (click here for more information on W&I Insurance) is so prevalent in transactions involving Corporate Wrappers.
What is a Real Estate Corporate Wrapper?
A Corporate Wrapper generally comprises a company (a 'special purpose vehicle' or 'SPV') or group of English onshore and offshore companies and/or trusts used to buy, develop, manage and lease an often high-value property in England and abroad.
How do the transactions work?
Due to the tax and confidentiality advantages of a Corporate Wrapper structure (see below), the parties involved will transfer the shares in the SPV which owns the underlying property rather than transferring the property itself.
Despite the corporate nature of the transactions, they often start life as property transactions with the underlying property, more often than not, marketed by estate agents rather than the corporate vehicle being marketed by commercial agents.
What are the advantages of using a Corporate Wrapper structure?
The key advantages of the structure lie in the tax treatment and confidentiality which can be helpful during the creation and life of the structure, but can be of particular importance in the case of a sale to a prospective buyer.
Since there is no transfer in legal title in the property when a Corporate Wrapper is sold (see below), there is no Stamp Duty Land Tax (usually up to 5% of the purchase price) payable where the target property is based in England or Wales. Instead, stamp duty, at a much lower rate in England of 0.5% of the purchase price, is payable if the Corporate Wrapper being transferred is an English company. More often than not, however, the Corporate Wrapper vehicle is incorporated offshore which may mean that no stamp duty is payable at all. This makes the structure incredibly attractive to investors who are looking to acquire high-value properties in England.
How do the transactions differ from a pure property transaction?
In a pure property transaction the property itself changes hands and, in the case of an English property, the transfer is reflected by a change of the Registered Proprietor at the Land Registry. In a Corporate Wrapper transaction property does not change hands and continues to be owned by the Corporate Wrapper SPV; in the case of an English property, there is therefore no change to the Registered Proprietor noted at the Land Registry.
The property due diligence (click here for an introduction to legal due diligence) will broadly be the same as that involved with the acquisition of a freehold property subject to leases.
The complexity of that due diligence exercise, and the transaction generally, will depend upon the nature of the underlying real estate asset. For example, a single-let detached office block will involve less complexities than a multi-tenanted block of flats involving common parts and a service charge.
How do the transactions differ from a corporate M&A transaction involving the transfer of a trading business?
The transactions have the key characteristics of a transaction involving the sale of 100% of the shares in a target company but with a real estate focus.
The corporate due diligence is usually simplified in comparison to that undertaken where the target company is a trading company. This is because the Corporate Wrapper SPV is generally non-trading and makes its profits by holding the underlying property as an investment.
As the Corporate Wrappers are often structured through offshore SPVs, the transactions will also involve a close working relationship between the parties' respective English lawyers and their duly appointed relevant local counsel.
In some (limited) cases, the buyer may want to onshore the property by transferring it from the Corporate Wrapper SPV to an English company or individual with the Corporate Wrapper structure then being wound up.
Why does W&I insurance play a key part in corporate wrapper transactions?
W&I insurance is a corporate concept which indemnifies the insured against losses arising out of a breach of warranty; the insurance does not cover the property asset itself. From a buyers perspective it provides an indemnity against loss arising out of a matter constituting a breach of warranty. From a seller's perspective it indemnifies the seller against a valid claim for a losses incurred from a breach of warranty. W&I insurance is important in corporate wrapper transactions as the buyer is purchasing the company 'warts and all' and therefore will need to rely on fundamental and tax warranties.
Warranties are given on an indemnity basis meaning payment for any losses resulting from the breach of warranty is given on a pound for pound basis. As a result, most corporate wrapper transactions involve a specialist Warranty & Indemnity policy.
Why use English law?
England has a well-established legal system, which has an international reputation for offering certainty and mechanisms for resolving disputes.
Using English law to govern a contract, even when the parties to it are not English residents or incorporated in England, means that broad freedom of contract principles apply and, as such, there are very few terms implied into contractual arrangements. Generally, what is written in the agreement is what is agreed.
English law is therefore regarded as being neutral in its application and user-friendly for contracting parties which brings with it clear elements of legal certainty for the parties.
Michelmores advised the Mayor’s Office For Policing And Crime on its acquisition of The Empress State Building in Earls Court for a purchase price of £250 million. Whilst the building was already occupied under a lease by the Metropolitan Police Service for back office and operational functions, the acquisition formed part of the Mayor of London's £412M investment to create, under one roof, a new counter-terrorism and organised crime hub in London, and secured the long term occupation of the building (click here for more information on the transaction).
There is currently a UK Government proposal under review to introduce a register of overseas companies owning UK properties by 2021. The relevant overseas entities will have to supply beneficial ownership information in relation to UK properties to Companies House. The intention is to bring Land Registry transparency requirements in line with the PSC regime (click here for more information on the PSC regime).
The government has announced proposals to impose a Stamp Duty Land Tax surcharge for foreign buyers of residential property. It is proposed that foreign buyers should pay 1% extra on top of the existing Stamp Duty Land Tax on second homes and buy-to-let purchases in England and Northern Ireland (click here for more information on the proposed SDLT changes). A consultation document was issued by HMRC on 11 February 2019 in which it was made clear that residential property acquired by non-UK residents in whatever form will be within the scope of this proposed surcharge irrespective of them being individuals, companies or trusts. However, as most corporate wrapper structures, after the introduction of Annual Tax on Enveloped Dwellings tax, tend to be used for high value and large capacity or commercial properties e.g. blocks of residential flats or offices, rather than individual homes/flats the impact of the proposed surcharge should not adversely impact too many Corporate Wrapper structures.
From 6 April 2019 new legislation was introduced to widen the capital gains tax charge to include all non-UK residents. This includes:
- all forms of UK real estate (i.e. including commercial as well as residential); and
- shares which derive at least 75% of their value (as against gross asset value) either directly or indirectly from any form of UK real estate.
Where a non-UK resident is a company not within the charge to UK corporation tax, any gain is chargeable to an amount equal to the corporation tax that would be payable.
Where the non-UK resident is an individual or a trust selling shares in a corporate wrapper structure, the gain would be charged at the applicable capital gains tax rates. However, in such circumstances, no adjustment is made to the relevant capital gains tax liability to take into account the fact that certain of the company's assets (up to 25%) may not comprise UK real estate. An exception applies where the majority of the real estate asset is used in the company's own trade.
We fully expect to see increased activity in transactions involving Corporate Wrappers in the near future as a result of these changes (in particular, arising from the changes to the Land Registry transparency requirements and Capital Gains Tax).
Our approach and experience
We have advised a number of public institutions and private investors and funds in relation to these transactions and understand the nuanced approach required by them. Our well-experienced Corporate, Real Estate, Tax and Banking teams work seamlessly and collaboratively to deliver and advise upon Corporate Wrapper transactions in a coherent and joined up manner.
Please do not hesitate to get in touch should you require further information.
This article is for general information only and does not, and is not intended to, amount to legal advice and should not be relied upon as such. If you have any questions relating to your particular circumstances, you should seek independent legal advice.