Investing in tax lien certificate

Byline: Carlos Treistman

Imagine your company is given an incredible opportunity to enter into a significant joint venture involving prime commercial real estate in the heart of Buenos Aires, Argentina. This transaction would put your company on the map, help to diversify your global portfolio and make you the envy of your competition.

The problem is you have only two weeks to close the transaction, you do not know anything about the customs, regulations or laws of Argentina. Worse yet, you don't even speak Spanish. Due diligence is impossible to complete in the few weeks remaining before closing, and the local joint venture partner insists that there is not much diligence to review.

Although you are reluctant to move forward, the upside of this transaction for your company is tremendous. The transaction closes as scheduled, and after a fantastic closing dinner, your company's general counsel whispers the following words: "We have several serious problems - the joint venture does not have clear title to the properties, and I just learned that one of the properties is encroaching on government-owned land."

The general counsel adds, "and now that the tax authorities realize that a large foreign company is the new owner, we're facing huge tax liabilities associated with the properties."

How could you have minimized these risks? Here are five ways:

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Retain experienced real estate and legal consultants - Investing in Latin American real estate can be a complicated and challenging undertaking. Assembling a reliable, experienced support team of professionals is key to success. Once you've selected the property you want to buy, you should hire a reputable real estate attorney to guide you through and protect you in the transaction. Your attorney should help you select a Latin American notario publico, who must be involved in real estate transactions and the legal conveyance of any type of property in Latin America.

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Team up with a local partner - Global investors acquiring or developing properties in Latin America often find that alliances with financially sound and reputable local partners increases the chance of success. A good local partner can help guide the foreign investor through local politics, government regulations and business customs, and provide valuable market intelligence. Investors should conduct extensive due diligence investigations of local partners before forming alliances.

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Confirm the seller has legal title - The buyer must determine whether the seller has legal title to the property, and if he is able to transfer title to the buyer. In many Latin American countries, a property can be sold with a lien, and if the property is mortgaged, the lien will follow the property. Therefore, a new owner may risk forfeiting the property, if the seller defaults on his mortgage. It is critical to conduct a title search of the property to determine whether there are any liens or encumbrances. Additionally, buyers should hire an independent surveyor to verify that the property being sold is accurately depicted in the deed. If the property is part of a business condominium regime, buyers should obtain a copy of the condominium declaration, condominium regulations, copy of the approved construction plans, and a certificate from the condominium showing that the seller is current with his condo dues.

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Confirm that there are no delinquent taxes - Buyers should also check with the tax authorities to see whether taxes are owed on the real estate, so that the amount can be accounted for and paid at the closing of the purchase.

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Conduct a thorough environmental review - In many countries throughout Latin America, buyers may be liable for environmental violations that occurred before acquiring the property, so it is important to conduct a thorough environmental due diligence assessment.

Finally, investors should be aware that due diligence in Latin America usually takes longer to complete than in many other developed regions of the world. In many cases it is difficult to convince the target company or potential local partner to cooperate in a diligence investigation. Nevertheless, successful investors conduct thorough due diligence before entering into Latin American real estate transactions.

Carlos Treistman is a partner in the Houston office of King & Spalding LLP. His work focuses on complex Latin American business transactions. He can be reached at ctreistman@kslaw.com.