By: © Norma J. Williams, 2024, All Rights Reserved

In sales of businesses and mergers & acquisitions (M&A), the focus is often on the assets and operations of the business being bought or sold. However, for many owners, a significant valuable asset of the business is the real property from which it operates.

Increases in the levels of sales of businesses and M&A are anticipated in 2025, albeit with some aspects that might temper these positive changes. Thus, further M&A growth is expected above the low level of activity that existed in 2023 due to higher interest rates, gaps in bid/ask prices, economic uncertainty, and other factors.

While 2024 did not see a return to the record 2021-2022 levels, the 2024 increases in M&A activity, especially in North America, have been enough to foster optimistic outlooks for 2025, with variations related to deal size, geography, market sector, and other variables. The optimism is due to factors including stable and possibly lowered interest rates, lessening inflation, and a record amount of available capital. The potential increase in deal flow highlights the renewed need to consider all of the assets of businesses if a purchase or sale is anticipated.

In viewing sales going forward, Norma Williams, Esq., a well-known real estate lawyer in the national legal community and the principal of Williams & Associates—a boutique commercial real estate law firm with a sophisticated client base including Fortune 500 companies, banks and other lenders, high-net-worth individuals, and middle-market companies—says, “Many business owners do not realize that the disposition of the real estate is a separate, distinct transaction that is often documented separately from the sale of the business. Each aspect requires different legal strategies and considerations, and the manner in which the real estate should be treated requires careful legal expertise and analysis.”

Norma, who has been named to the 2024 Lawdragon 500 Leading Global Real Estate Lawyers Guide, offers her insights on how to navigate these complex legal waters. She highlights three primary options for a business owner considering what to do with their real estate.

The first is to sell the real estate to the buyer who is purchasing the business. This is often the simplest scenario, allowing the buyer to own the property and seamlessly continue its integration with the business operation.

A sale-leaseback is another strategy often used in which the business owner sells the property to a third-party investor, and the business buyer leases it from the new owner/investor. The investor might be an individual, a private equity firm, or a strategic buyer with other goals. In the sale-leaseback structure, the buyer does not have to tie up its capital to acquire the real estate. Norma notes, “The investor can acquire a beneficial long-term lease which might enhance its ability to obtain financing, and the business seller can often receive a more favorable price for the real estate because its valuation is maximized by the new long-term lease.”

A third scenario is for the business/real estate owner to sell the business to the buyer but retain the real estate and lease it to the buyer. This might be advantageous both to the buyer who does wish to acquire the real estate and to the seller who may not want to sell the real estate at that time, perhaps preferring to wait for a later time due to market or other conditions.

There are unique business and legal considerations in each of these, and multiple strategies may be involved in a transaction if multiple real estate assets are owned. Valuation is paramount among the business considerations, especially in the past few years, but other business considerations abound, including tax, financeability, exit strategy, and estate planning concerns for individuals and trusts. The identity of the buyer may also be significant. For example, Norma notes that in her experience, private equity firms may be less likely to purchase than to lease, given their strategy of acquiring and holding portfolio companies and their assets for only a long time to maximize their value prior to an exit.

In scenarios involving the sale of real estate, there are legal and structuring considerations that differ from those in selling the business. Real estate legal due diligence plays a crucial role. The scope of due diligence begins with negotiating the Term Sheet, during which time all real estate owned by the seller should be identified. Both the Term Sheet and the Real Estate Purchase and Sale Agreement that is subsequently negotiated and executed should provide that the buyer has a certain amount of time, a due diligence period, during which the buyer can investigate all aspects of the property. That process first involves the seller delivering to the buyer all relevant property-related documents, studies, reports, plans, permits, and other material in its possession. The buyer then (or earlier) begins its own investigation of matters including title, survey, governmental restrictions, zoning regulations, physical condition, environmental condition, existing leases, regulatory compliance, and potential liabilities associated with property ownership. Environmental investigation requires particularly careful attention in order to insulate the buyer from clean-up responsibility that may later arise.

Third parties generally issue the reports, and the buyer, its attorneys, and other professionals review the reports and advise on them. Each property is unique. Solutions to problems are myriad and can be time-consuming and complex.

If the buyer is dissatisfied with the investigations, it can cancel the transaction (which may, but not always, also involve the cancellation of the business purchase), ask the seller to correct certain defects or proceed with the transaction to closing. The buyer should obtain a title insurance policy at the conclusion of the real estate sale transaction.

Additionally, coordination with the business sale is essential to avoid delays or complications. Timing is a key factor here—the due diligence investigations and closing on both sides have to be aligned, and there may be additional considerations if a lender is involved. Separation of the entities owning the real estate and the business assets is common. 

Beyond the mechanics of the sale, Norma underscores the importance of considering tax and estate planning implications. “As with the sale of the business, real estate transactions also have significant tax consequences, including but not limited to capital gains, depreciation recaptures, the effect of like-kind exchanges, and real property tax-related matters, such as transfer taxes and property tax reassessments in jurisdictions where those exist,” she notes.

“Business owners need to consult with both legal experts and tax advisors to ensure they are fully aware of the financial impact of the sale,” Norma advises. Estate planning is another critical aspect, especially for those seeking to pass on wealth through real estate holdings. “It is essential that these considerations are integrated into the transaction. This maximizes the value while ensuring compliance with federal and state tax laws and fulfilling the estate planning goals of the seller.”

The complexity of these transactions can often be daunting. With multiple parties involved—buyers, sellers, attorneys, business and possibly real estate brokers, financial advisors, and others—the process can be overwhelming. “It’s a multi-layered process requiring expert navigation and coordination of legal, financial, and operational considerations.” 

Norma Williams and her firm excel at managing this complexity. Williams & Associates has had considerable success in guiding business owners through the legal aspects of these complex real estate transactions, including their structuring, due diligence, and closing. “We are legal advisors who work with the client’s other advisors using a detailed and rigorous approach to ensure that all aspects of the real estate transaction are handled with the highest level of expertise to ensure a smooth transaction that aligns with the client’s broader financial, business, and personal goals,” she explains.

Disclaimer: The content in this article is provided for general knowledge. It does not constitute legal advice, and readers should seek advice from qualified legal professionals regarding particular cases or situations.