Real Estate Transactions Utilize Transactional Insurance

Real estate transactions, in particular REITS, bring a unique set of risks in an M&A transaction that are properly addressed by using a hybrid R&W and Tax Indemnity policy.

The term REIT refers to a “real estate investment trust,” which is both defined and given preferential treatment in the Internal Revenue Code. A REIT typically pays out its taxable income as dividends to its shareholders thereby avoiding tax at the entity level. In order to qualify as a REIT, an entity must satisfy numerous requirements concerning its organization, capitalization, ownership, assets, income and distributions.

In an M&A context, REITS pose particular problems. Because REITs own real estate assets, the usual litany of reps and warranties regarding the REIT’s operations such as rent rolls, tenant concessions, construction, and compliance with zoning restrictions, are commonly made by the sellers. These matters are not addressed under the title insurance policies. However, because REITs are essentially tax driven structures, tax matters require deeper scrutiny and M&A transactions involving REITS typically require larger escrows for longer periods than other M&A transactions. These dynamics make insurance an attractive option to reduce the indemnity obligations imposed on a seller.