B y Raymond J. Werner
In 1976, the Hart-Scott-Rodino Antitrust Improvements Act (15 U.S.C. 18a) was enacted to give the Federal Trade Commission and the Justice Department the opportunity to review major transactions before they were finalized. Because the Act required a pre-closing notice to the regulators and the expiration of a waiting period, major real estate transactions were exposed to increased costs and delays resulting from compliance with the Act's requirements. To address this situation, the Federal Trade Commission recently amended its pre-merger notification rules to exempt several categories of real property acquisitions from the Act's reporting requirements. 16 C.F.R. 802.2 and 802.5.
The Act generally applies when the parties to a transaction are en-gaged in interstate commerce or their business affects interstate commerce, a test easily met in major real estate deals. A second test is also easily met if one of the parties, when considered in the aggregate with other members of its corporate family, has sales or assets of at least $100 million and the other party, when considered on an aggregate basis, has sales or assets of $10 million or more. The third test is met if the purchaser will hold more than $15 million of the voting securities or assets or 15% or more of the voting securities of the acquired entity.
The FTC adopted the regulatory amendment because many real estate transactions required Hart- Scott filings but were routinely cleared without further governmental action. The amendment applies to real estate assets that are abundant and widely dispersed. The new regulations were effective on April 29, 1996.
An existing exemption relates to certain acquisitions of new facilities, undeveloped real property, office buildings and residential property sold in the ordinary course of the seller's business. 16 C.F.R. 802.1. That ordinary course of business exemption continues. Although there may be some overlap between the old and the new exemptions, the new exemptions are not limited to the ordinary course of business requirement, which by its nature applied only to the acquisition of operating units.
The new categories of exemptions apply to:
- New facilities that have not yet produced income and were either built by the seller or held by the seller solely for sale. This exemption primar-ily relates to turnkey facilities that are capable of immediately beginning operations with a minimal infusion of additional capital investment. This exemption may also be available to a lender who has taken the property in foreclosure or in lieu of foreclosure if the property was for sale at all times.
- Used facilities that a lessee acquires from the lessor. The lessee must have had sole and continuous possession and use of the facility since it was built. To qualify, the lessor must have held title to the facility for financing purposes in the ordinary course of its business. This exemption extends to the triple net, build to suit, facilities lease with a financial institution lessor the exemption that would have been available had the tenant purchased the property at the outset, rather than under a requirement or option in the lease.
- Unproductive real property, including raw land, and property containing buildings and other improvements, as long as the property has not generated in excess of $5 million in revenue during the three years preceding the acquisition. This exemption does not include facilities that have not yet begun operation (but such facilities may qualify under the "new facilities" exemption), facilities that were in operation at any time during the year before the acquisition, and property that is adjacent to or used in connection with other productive property that is part of the transaction. This exemption would apply to wilderness and rural land transactions and to the acquisition of urban properties that have ceased operation and fallen into disrepair.
- Office and residential properties, including common areas, such as parking and recreational facilities. In determining whether this exemption applies to mixed-use developments, property falling within other exemptions must be excluded. For example, if part of a mixed-use property includes retail rental space or a hotel, both the subject of other exemptions, that property is excluded from the calculation. If the remainder of the mixed-use development is used primarily for office or residential purposes, the exemption will apply. An example accompanying the regulations seems to indicate that if three-quarters of the property is used for office and residential purposes, the property would be deemed to be used temporarily for office or residential purposes and thus fit within the exemption.
- Hotels and motels, including related improvements such as golf courses, swimming pools, tennis courts, restaurants, health clubs and parking facilities. This exemption does not apply to the acquisition of a ski facility or a hotel or motel that includes a gambling casino.
- Recreational land used primarily as a golf course, swimming club or tennis facility. Recreational land does not include ski facilities, multipurpose arenas, stadiums, racetracks or amusement parks.
- Agricultural property that primarily generates revenue from the production of crops, fruits, vegetables, livestock, poultry, milk and eggs. This exemption does not apply to any real property and assets that are adjacent to, or used in connection with, processing facilities that are included in the acquisition.
- Rental retail space and warehouses, including shopping centers, strip malls and stand-alone buildings. This exemption does not apply if the retail rental space or warehouse is to be acquired in connection with a business conducted on the real property.
- Investment rental properties that will be held solely for rental or investment purposes and rented only to entities that are not related to the purchaser, except to the extent that a related entity rents the property for the sole purpose of maintaining, managing or supervising the operation of the investment. 16 C.F.R. 802.5. This provision is likely to exempt most real estate investments made by institutional investors.
Although all real property transactions are not exempt from a Hart-Scott-Rodino premerger notification and filing requirement, the new exemptions go a long way to sim-plify major real estate transactions and eliminate the waiting period requirement.
Raymond J. Werner is a partner at Arnstein and Lehr in Chicago, Illinois. He is a member of the Real Property Division's Council.
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