Real Estate Investment Risk in Asia and Latin America | Business 2 ...

Risks include fraud, invalid documents and unenforceable mortgages.

Investing outside the US has always been seen as an effective way to diversify a company?s portfolio. When it comes to real estate, emerging markets often offer favorable pricing that makes it difficult for corporations that want to expand their business overseas to decline. However, the price doesn?t tell the whole story.

When acquiring real estate investments overseas, the responsibility for due diligence, regulatory filing and compliance often falls on the corporate secretary or general counsel. Executing these tasks flawlessly is part of the corporation?s process of expansion, which sometimes requires investing in the right type of office or factory buildings instead of renting them. These transactions invariably require a large financial commitment, so the company had better get it right.

According to Rodolfo Rivera, regional counsel at FNF Title International, pictured left, companies are looking to invest in BRIC (Brazil, Russia, India and China) nations because their real estate markets were not affected by the financial meltdown. ?Real estate was not sold at inflated prices and banks were not lending 100 percent of the equity, and this is one reason why real estate in the BRIC countries is attractive to the institutional investor,? Rivera contends. By the same token, the struggling US dollar and the stagnant economic climate have led investors to seek investment options in other countries, so when an attractive real estate investment is presented, investors are jumping at the chance.

Yet acquiring property overseas is not a slam-dunk investment. In fact, if proper due diligence is not performed, things can turn decidedly gray and cost a company more money than expected. But before examining the technicalities associated with real estate acquisition, it?s best to start with the most common risks that are overlooked before and after a transaction: title risks and dealing with a complex foreign registry system.

Risky business outside the US

Acquiring real estate in other countries requires a property transfer, and registration depends on various common law and civil law jurisdictions, Rivera says. He adds that corporate legal departments will also face the challenge of dealing with a lack of sophisticated record-keeping procedures and multiple requirements from different regulatory bodies.

?Title risks exist in any transaction,? says Rivera. This is especially true of overseas transactions because governance professionals are not normally aware of all the hidden risks associated with acquiring a property in another country. These risks include fraud and forgery; title transfer issues; invalidity of documents, such as invalid powers of attorney; improperly executed or recorded documents; erroneous or inadequate descriptions of property; survey violations; physical encroachments (a situation that occurs when boundaries are not clearly marked); and unenforceable mortgages.

Rivera offers the example of Costa Rica to illustrate his point. After conducting extensive research, his firm and its legal department discovered that a number of Costa Rican notaries had participated in the falsification of deeds and other documents. When these types of infractions occur, he says, foreign investors are sometimes unable to build because the quantity of the land under ownership is far less than what the buyer believed was purchased.

Often there are problems with real estate that are not reflected in the local property registries, such as prescriptive easements, adverse possession and boundary issues, Rivera explains. An easement is a legal right that allows someone else to utilize land for a particular purpose ? for example, a sewage company may have an easement to run pipes under the property that an investor has just purchased.

While the purchaser?s name is on the deed and the property belongs to him or her, the sewage company possesses the right to use a part of the purchaser?s land for its pipes. Often, easements are in writing and are mentioned in property deeds or title papers prepared by a title insurance company or attorney. In one particular transaction in Mexico, Rivera recalls an easement error that cost the company thousands. The law firm that conducted the title search failed to mention a utility company easement that was listed in the public record. Unknowingly, the company made adjustments to the building that resulted in interference with underground pipes and lines. It was a $60,000 mistake.

Real estate compliance and risks in Asia

David Allen Talley, global counsel for Panasonic Eco Solutions, notes that transactions involving real estate in fast-growing Asian economies can pose a series of governance and compliance challenges. Talley, who specializes in strategic planning, global governance and compliance at the Japan-based electronics manufacturer, says most companies will need help avoiding fraud and other complications. Appointing a knowledgeable employee or hiring a consultant to help you understand local compliance in real estate affairs can save your company a lot of time and unnecessary expense.

In 2007, Japan?s Matsushita Electric Works (MEW), owner of the Panasonic brand, acquired 80 percent of Indian firm Anchor Electricals? shares. This transaction was the largest foreign direct investment from a Japanese company to India ever seen ($450 million). The next step for MEW was scouting for land in India ? here, Talley and Veerasureshkumar Veerappan, legal counsel for Panasonic, played an instrumental role. In 2008, MEW?s top executives visited India?s industrial area and worked closely with the company?s Indian counterparts to help facilitate expansion efforts. Veerappan was involved in post-merger integration, post-closing due diligence and put-call negotiation with the Indian partner for 20 percent of the shares, and Talley was involved in the whole transaction.

Dealing with bribery

Acquiring property in other markets poses a number of compliance risks, including exposure to Foreign Corrupt Practices Act (FCPA) violations. In India, for example, the real estate market is riddled with bribery and corruption. In order to keep a close eye on the perpetrators, the US has escalated its compliance efforts to effectively enforce the FCPA. Despite this, the quality and accuracy of property registrations, business licenses and building/zoning approvals in India often suffer from the existence of previously filed documents which do not accurately reflect the original transaction. Talley believes this serves as evidence that bribes for processing the paperwork were accepted by officials.

?It?s often hard to tell if a title or license was legally obtained, and accessing and assessing the previous records takes time, even if you are familiar with the environment,? Talley, pictured left, says. ?Sometimes to avoid transfer tax and fees, properties in India will change hands four or five times without ever being recorded.?

This may seem like a legal nightmare for a corporate secretary or general counsel, which is why Talley stresses that corporations should hire someone who is familiar with the local culture and regulatory environment in order to help minimize compliance headaches.

Sifting through legal opinions

Navigating through the legal landscape in a foreign market such as Latin America can be troublesome, as these ?new? markets often cap the amount of foreign investments made during the fiscal year. According to Rivera, almost all real estate investors rely exclusively on a title search in certain jurisdictions, and a legal opinion from a local attorney who verifies the status of the title. ?It would be prudent for the real estate investor to look behind the legal opinion,? he says. ?Legal opinions are just that: opinions.? So how can a company?s legal department make the right choice when working with an attorney overseas?

Rivera explains that a legal opinion is not a guarantee of the right to title, control or possession of the premises. Institutional investors generally retain one of the top firms in the country to conduct the title search and develop opinions based on its results. The depth and scope of these legal opinions depend on customs and practice in the local jurisdiction, and their quality will often vary depending upon the competency of the local partner. Consequently, a legal opinion does not protect an investor against fraud, forgery or matters not listed in the record. In fact, legal opinions don?t even guarantee the property boundaries. Additionally, matters that affect real estate which are not listed in the public registry may or may not even be addressed in the opinion that was provided.

Many opinions contain the infamous ?not my fault clause?, which disclaims many of the risks that the investor is trying to avoid, Rivera notes. A combination of the real estate laws in the foreign jurisdictions and the lack of sophistication of the local registry can dramatically increase risks. Also, in India or China, for instance, land is often inherited, and this makes the acquisition process even tougher.

Stay aware

?The US investor should not blindly rely on foreign legal systems and practices without knowing the full extent of the risk,? Rivera warns. ?Too often the investor is told, That?s the way it is done here. There have been a number of transactions throughout the world where the buyer has purchased land from a party who was not the owner.?

How, then, can governance professionals filter the multitude of opinions? Rivera says a corporate secretary should verify the local attorney?s suggestions with documents from the local registry or other sources. For example, when an attorney states that the prior mortgage has been paid, he or she should attach a satisfied promissory note to support this opinion. More importantly, the corporate counsel should understand the limitations of the legal opinion provided so he or she can fully assess and remediate the risks that can occur.

A lot of property outside the US and Europe cannot be owned directly by individuals, but is made available only on long-term lease from the local government leasing entity. In such cases, Talley suggests that building a strong working relationship with the government leasing entity will ensure good communication and cooperation if issues do come up.

?Hiring an outside consultant can help,? he adds, ?and having a good compliance expert in-house can also save you a tremendous amount of time and money.? In general, governance officers should go beyond one local legal opinion when working on a foreign transaction and conduct their own research prior to informing the board about legal risks.

When it comes to real estate investments in foreign markets, it is advisable for governance officers to start assessing the potential risks that can occur and avoid blindly relying on foreign legal systems. Even though the foreign attorney is charged with the responsibility of determining who has title, ownership and control of the real estate, it is best for you to conduct your own due diligence as well.

Checklist for investing in emerging market real estate

How can corporate secretaries avoid risks when investing in an emerging market? Using India as a solid example, Veerasureshkumar Veerappan, legal counsel for Panasonic Eco Solutions, pictured left, suggests the following:

??? ?Obtain an encumbrance certificate for at least the past 30 years from the registration authorities and ensure that the seller enjoys undisputed title and possession over the property. According to the Indian Limitation Act, a suit can be filed for mortgage claims until 30 years from the due date. According to Section 90 of the Indian Evidence Act, documents that are older than 30 years are presumed to be validly executed and attested.

??? ?Check the authorized land use purpose (such as agricultural or industrial) imposed on the particular zone area. Building regulations have become stricter in India, and you may not use a property for anything other than the intended purpose.

??? ?Verify survey maps kept by the surveying authorities to check the accuracy of boundaries, area and so on. The actual boundaries of the property or land may be different from the area specified in the title deeds; it is therefore important to physically verify that the maps are kept with the surveying authorities.

??? ?Ensure that the seller?s name has been duly registered with the revenue authorities. The revenue authorities can confiscate land for non-payment of property taxes, and if the seller?s name is not registered, the authorities may refuse to make a new entry.

??? ?Perform the above-mentioned tasks with the help of an outside expert who is familiar with the language, culture and procedures in the state or region where the property is located. Remember, India has many regional languages, and each state has its own official language. You may find government and registration documents only in regional languages.

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