Introduction to do real estate transactions in Norway
This is a brief overview of the acquisition process when investing in Norway, and point outs on common issues encountered during the various stages.
The introduction aims to help foreign investors to become more competitive when investing in the Norwegian real estate market.
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The content was last updated 3 march 2016.
Over the past couple of years, an increasing number of international investors have turned to the Norwegian commercial real estate market as an attractive investment opportunity.
Transactions in the Norwegian market generally move very quickly compared to other countries, and in Norway domestic investors therefore seem to have an advantage over foreign investors when investing in real estate; they are familiar with the process and have greater knowledge of the various parties in the market, their lines of communication are often shorter (less hierarchical), and decision-makers are normally directly involved in the process/negotiations.
This means that foreign investors planning to invest in Norway should prepare thoroughly, so that they are ready to participate when an opportunity arises.
The following provides a brief overview of the acquisition process when investing in Norway, and point out common issues encountered during the various stages. In doing so, we hope to help foreign investors to be more competitive when investing in the Norwegian real estate market.
If you have any questions regarding the information provided, or require further advice on investments in the Norwegian commercial real estate market, please do not hesitate to contact us.
Preceding assessments and considerations
To succeed with any investment thorough preparations are crucial. As transactions in the Norwegian market move quickly, it is essential to be well prepared when entering into bidding processes for potential acquisitions.
It is important to assess the possibilities for financing the transaction as early as possible, especially if one intends to use local banks for this purpose. In order to provide financing to a foreign investor, the local bank may need to do a thorough credit assessment, and it may take time to provide the bank with the necessary documentation (company presentation, business plan, etc.). Norwegian banks usually require around three weeks to process an application for financing, but this will vary depending on the individual circumstances.
It is also very important to assess the possibilities for repatriation of funds from the investment. The return on the investment may initially be good, but if the returns cannot be transferred to the investor on a regular basis and/or without considerable taxation, other investments may be more favourable. The possibilities for repatriation of funds can depend on many different factors, and it may take time to obtain a full overview. It is therefore important to undertake this assessment at an early stage.
It is also crucial to examine which corporate structure is best suited for tax optimisation at an early stage, since it may take time to establish the preferred structure. The most important factors to consider are listed below:
|Dividends:||- Norway's domestic WHT rate is 25%|
- The WHT rate is reduced under tax treaties and to 0 % under a domestic exemption applicable to EEA companies, etc. (substance requirement)
- There is no WHT on the repayment of capital
|Gains:||- There is no WHT on gains|
|Interest:||- There is no WHT on interest payments|
- There is a domestic thin cap rule, which limits the deductibility of interest payments on related party debt
|Transfer taxes:||- There is a transfer tax / stamp duty of 2.5% on the direct transfer of a real estate|
|Loss carry forwards:||- Loss carry forwards will only be cut of if a purchase is mainly tax motivated|
The bid and bid acceptance
Further negotiations regarding the potential investment will be based on the purchaser’s bid (or LOI) and the seller’s acceptance. The purchaser needs to be aware of some important elements that are commonly included in the bid in Norway, and of issues that should be considered or addressed in order to secure the best possible bargaining position and ensure that the process proceeds as smoothly as possible.
Commercial real estate transactions in Norway are normally undertaken as share deals, as most real estate is owned through single purpose vehicles (SPVs), usually organised as private limited companies (aksjeselskap – AS in Norwegian). This is due to capital gains on the sale of shares being tax exempt for corporate shareholders, while taxable gains on an asset deal are taxed at 25%. In addition, there is no stamp duty on the sale of shares, while a stamp duty of 2.5% of the fair market value of the property will be levied in an asset deal.
Capital gains and stamp duty are also avoided in the event of the sale and purchase of shares in partnerships; general partnerships (ansvarlig selskap – ANS), limited partnerships (komandittselskap – KS), etc.
When calculating the purchase price for commercial real estate investments in Norway, the property value is the main element in the calculation of the total purchase price (see section 4). The estimation/calculation of the property value will therefore have a significant impact on the yield of the investment.
The property value is most often estimated/calculated by financial advisors and/or the purchaser itself, sometimes also in cooperation with the purchaser’s technical advisors.
Pricing of tax positions
Payment for possible tax positions should be considered if a limited company is being purchased.
The tax positions will usually relate to loss carry forwards, a gain and loss account or hedging instruments. Any hedging instruments will usually be terminated due to the transaction, and the termination will result in a taxable gain or deductible loss (which is again usually considered in the calculation of the purchase price). It is not uncommon to pay between 10% and 15% of the nominal amount for tax positions, depending on the buyer’s setup and possible use of such tax positions.
If the investment is undertaken as a purchase of a limited company or a partnership, the tax positions relating to the real estate will be carried forward. As a result, there will be no step-up on the tax basis (depreciation basis) for the real estate.
When purchasing a limited company or a partnership it is therefore common to claim a rebate for the lost depreciable step-up; i.e. the difference between the property value after the deduction of the (estimated/agreed) market value of the land (because the land does not qualify for any depreciation) and the basis for tax depreciation on the property at closing. The size of the rebate should be addressed in the initial bid, and is usually around 10-11%, but this will depend on the property.
For more information about the tax rebate and the calculation, see section 4.
If a due diligence is not performed before the bid, the bid shall be conditional upon the performance of a due diligence satisfactory to the purchaser. The scope and the timeframe may vary (see section 3) from transaction to transaction, but the purchaser’s specific reservations should be made in the bid. It is also important to specify how any negative findings from the due diligence shall be handled between the parties, and whether the purchaser shall have the opportunity to withdraw the bid in the event of such findings. Usually, the regulation is such that if the purchaser presents any claims after the due diligence has been performed, and the seller does not agree to those claims, the seller has the right to withdraw from the transaction.
Sale and purchase agreement
In Norway, sale and purchase agreements are usually based on standard agreements, with individual adjustments made as a result of negotiations. For more information about standard agreements, see section 4 below.
If the purchaser has its own preferences regarding the purchase agreement and does not wish to use the standard agreement as a basis for further negotiations, this should be stated in the bid.
Insurance or other security
It is important to clarify whether the seller/purchaser intends to enter into a warranty and indemnity insurance early in the process, since this will have an impact on the timeline for the transaction, the formulation of the sale and purchase agreement, and the completion of the due diligence. If the purchaser intends to enter into such insurance, this should be stated in the bid.
If the purchaser requires other types of security for possible claims against the seller, e.g. cash on an escrow account, these should also be addressed in the bid.
If the purchaser has specific deal-breaker conditions (‘must haves’), these should be stated in the bid. Such conditions may relate to specific features of the property or company, seller warranties, the time schedule, seller liability, etc.
If the transaction and the sale and purchase agreement shall be subject to final approval by the board of directors or investment committee at the purchaser, debt financing satisfactory to the purchaser, or any other reservations, these must be included in the bid.
A time schedule for the entire transaction, including due dates for bid acceptance, the completion of due diligence, the exclusivity period, approval in accordance with certain reservations / condition precedents and completion of the transaction, etc. should be included in the bid.
Exclusivity and confidentiality
If the purchaser requires exclusivity and/or confidentiality regarding the bid/potential transaction, this must be stated in the bid along with the required duration of the exclusivity period. Potential buyers are normally granted exclusivity in the LOI or bid acceptance for 4-6 weeks or more.
The extent of the due diligence process may vary from transaction to transaction, depending on the company/property and whether the transaction comprises a single property or a portfolio of properties. However, the Norwegian real estate market is renowned for its swift processes. It is therefore important for foreign investors to have a sufficient and qualified team of advisors available to perform the due diligence within the necessary timeframe (often determined by the seller) if they are to be able to compete with domestic investors who may have better knowledge of the market and relevant property.
Legal, financial, technical
The due diligence normally includes legal, technical and financial due diligence.
The legal and technical due diligence usually comprises a superficial assessment of potential environmental issues, but if the purchaser has reason to believe that there may be particular environmental issues associated with the property (or the legal and technical due diligence reveals such potential environmental issues), a separate environmental due diligence should be performed.
The length of the due diligence varies, but the process often takes at least four weeks. The sale and purchase agreement is usually negotiated simultaneously.
A clear definition of the scope of the due diligence is highly important in order to ensure an efficient process, and should be composed through a cooperation between the purchaser and its advisors (and sometimes the seller), preferably during the bidding process.
Request list and electronic data room
The purchaser usually prepares the request list, to which the seller will respond. The seller’s response to the request list and accompanying documentation will usually be presented to the purchaser in an electronic data room.
Sale and purchase agreement
In principle, the sale and purchase agreement is subject to negotiations between the parties. However, a number of clauses are mainly regulated by market practice. It is therefore important to be familiar with both market practice and the opportunities for negotiation.
Almost every commercial real estate transaction in Norway is based on a standard sale and purchase agreement issued by a real estate agents’ organisation in collaboration with key law firms within the real estate market. Standard agreements can be provided for all types of transactions (share transactions, purchase of assets, etc.) The standard agreements correspond to market practice on most points.
Nevertheless, purchasers should be aware that the agreement is somewhat biased towards the sellers interests, and that a certain number of adjustments are usually made to the agreement because of this.
Calculation of purchase price (share transactions)
The main element of the calculation is the property value, since the property value will form the basis for the calculation of the purchase price for the shares.
The calculation of the purchase price is usually based on the property value with:
|the addition of;|
|- The company’s cash and receivables|
- An agreed share of any deferred tax benefit represented by any loss carry forward (to the extent that any buyer may be able to exploit it and therefore be willing to pay for it)
- Any other assets in the company’s balance sheet (excluding the property)
|the deduction of;|
|- All liabilities on the company’s balance sheet|
- 10-11% (normally) of the difference between the property value after the deduction of the agreed market value of the land (because the land does not qualify for any depreciation) and the basis for tax depreciation on the property as per closing
The latter deduction is also known as the rebate for lost tax depreciations.
Rebate for lost tax depreciations
The rationale behind the tax rebate is that in a share deal, the buyer does not obtain a step-up in the tax basis for the property, but takes over the tax basis in the target company. The buyer will therefore not be able to depreciate (for tax purposes) the difference between the agreed property value in the transaction and the tax basis in the target company.
There is no tax depreciation on land, and the rebate therefore only applies to the difference between the value of the building itself and the remaining depreciable tax basis (buildings and technical installations). The fair market value of the land is subject to negotiation, but will often be set by the seller in the bidding process.
The rebate is also subject to negotiation, but is usually defined as a lump sum amounting to 10-11% of the difference between the agreed property value after the deduction of the agreed market value of the land, and the depreciable tax basis. Note that the type of building may significantly affect the rebate, so the rebate should be carefully assessed.
Payment for possible tax positions may be required if a limited company is being purchased. The tax positions will usually relate to loss carry forwards, a gain and loss account or hedging instruments. The latter will depend on whether the purchaser plans to refinance the target’s debt. Any hedging instruments will usually be terminated due to the transaction, and the termination will result in a taxable gain or deductible loss (which is again usually taken into consideration when calculating the purchase price).
The seller’s liability for defects
In accordance with standard agreements and market practice, all objects (properties, shares etc.) are sold ‘as is’. This means that the purchaser carries the risk for any defects (including hidden defects) relating to the object(s) sold. If the transaction is completed as a transfer of shares, or shares in general partnerships, etc., this will apply to both the shares and the property owned by the relevant company.
However, exceptions apply if the seller fails to meet its specific obligations under the sale and purchase agreement, if the seller fails to meet its disclosure obligation, or if the seller has provided incorrect information.
Normally the purchaser will not be entitled to make any form of claim against the seller in relation to circumstances that the purchaser became aware of, or ought to have become aware of, in connection with its due diligence investigation prior to the signing of the agreement. Exceptions do however apply for fundamental representations and warranties related to the purchased object (property/company).
Representations and warranties
The standard sale and purchase agreement includes a number of representations and warranties, which is regarded as market practice. Some of the warranties usually apply from the signing of the sale and purchase agreement, while others apply upon the closing of the transaction.
It is important that the purchaser is aware of whether the guarantees will only apply upon signing or from closing.
Depending on any findings from the due diligence process and the negotiations between the parties, it may be necessary to add further warranties to the agreement.
Limitation of liability
The seller’s liability is most often limited by a cap, basket and threshold.
The limitations of liability are subject to negotiation, but the cap is normally limited to around 10% of the property value. The basket is normally around 1% of the property value, but rarely lower than NOK 500,000 or higher than NOK 5 million. Finally, the threshold is normally around 0.1% of the property value, but rarely lower than NOK 50,000 or higher than NOK 1 million.
The right of the purchaser to invoke a breach of contract will normally lapse if the purchaser fails to notify the seller within 12 to 36 months after closing.
Upon closing, the associated risks and rights to the real estate or shares are transferred from the seller to the purchaser, pursuant to the purchaser’s payment of the purchase price.
In Norway it is customary to set out the closing terms and conditions in a separate closing agreement, which is appended to the sale and purchase agreement.
When all closing conditions are waived or fulfilled and the purchase price is transferred to the seller, the purchaser will be registered as the owner of the shares or the real estate.
In a share deal, the registration is completed by (the purchaser) sending a written notice to the board of directors of the target company stating that the purchaser has purchased the shares in the company. The board of directors will then enter the purchaser in the shareholder register of the target company.
In an asset deal, the title to the real estate will be transferred by deed. In addition to this, the deed should be sent to the Norwegian Land Registry in order to register the purchaser as the new title holder. Registration in the Norwegian Land Registry is not a necessity for undertaking the transfer of the title, but such registration is necessary for the purchaser to obtain legal protection against good faith third parties and the seller’s creditors.
|Andreas Rørvikfirstname.lastname@example.org||+47 916 04 805|
|Even Bergemail@example.com||+47 934 27 036|
|Mikkel Visliefirstname.lastname@example.org||+47 913 25 813|
|Sverre Nordlieemail@example.com||+47 906 68 383|
|Thomas Reppe Wettingfirstname.lastname@example.org||+47 928 30 635|
- T: + 47 23 11 65 00
- F: + 47 23 11 65 01
- E: email@example.com