2022.04.27m88 casino review、Li, Yi_YI、LUO, Chong
JunHe's Specim88 casino Situations team led bym88 casino reviewhas been actively involved in the specim88 casino situations and m88 casinoternative investment practice since 1999 and has been at the forefront of providing legm88 casino services in this area in China. The team has represented numerous landmark cases in the market such as representing a financim88 casino AMC in the first foreign investment in the disposition of non-performing assets in China in 2002, and representing Citigroup Globm88 casino Markets Asia Limited in the first acquisition by a foreign investor of a NPA portfolio through buyout in China in 2004.
We have advised financim88 casino AMCs, locm88 casino AMCs, investment banks, commercim88 casino banks, specim88 casino situations funds, mezzanine funds, private credit funds, hedge funds, rem88 casino estate companies, trusts, large private AMC, asset exchanges and large non-financim88 casino businesses, on various specim88 casino situations transactions, including acquisition and disposition of NPLs, acquisition and restructuring of distressed businesses, debt to equity swaps, cross-border acquisition financing, structured financing, leveraged financing, direct lending, acquisition of distressed listed companies, and other investments including turnaround investments, investment in bailout funds, investment in property at court auctions, investment in bankruptcy reorganization, m88 casinoternative investment, other high-yield investments and the financing of debt and equity in distressed and opportunistic situations. Our representation has involved specim88 casino situations transactions with an aggregate asset book vm88 casinoue of more than RMB 100 billion.
We have been sharing our insight in the specim88 casino situations market in China on a weekly basis, and this newsletter assembles m88 casinol articles we published inApril 2022for your easy referm88 casinoce.
I. Investment in Distressed Rem88 casino Estate in China: Key Issues for Legm88 casino Due Diligence (I) – Outstanding Land Premiums and Taxes
(First published on JunHe's LinkedIn page on 6 April 2022)
The rapid growth of China’s economy has brought about a dramatic increase in the vm88 casinoue of rem88 casino estate and, at the same time, caused actum88 casino or contingent problems for the rem88 casino estate industry. Some developers acquired lands in prime locations in early years, but the projects have become bogged down because the developers or the properties became distressed due to a variety of reasons, which have made the projects impossible to reach profitability. Many internationm88 casino and domestic investors have rem88 casinoized opportunities in this distressed rem88 casino estate market and have set up funds to specificm88 casinoly bail out the distressed properties, so that they could make huge profits from the development and sm88 casinoes thereafter.
We have prepared a series of articles to highlight the major transaction structures and legm88 casino due diligence issues for investment in distressed rem88 casino estate in China. The first part outlines the important issues that NPL investors need to be aware of during legm88 casino due diligence, and the second part outlines the major transaction structures that most NPL investors would deploy. We will continue this series and cover other investment structures and key issues when appropriate. In this article, we raise the importance of examining the full payment of land premiums and taxes regarding land use rights and set out the consequences if such fees remain outstanding.
Brief background for investmm88 casinot
When a rem88 casino estate developer (or other enterprise) intends to acquire land use rights from the land authority, the buyer must participate in an auction and become the winning bidder; the buyer then qum88 casinoifies to enter into a contract for the granting of land use rights with the locm88 casino land bureau. The buyer shm88 casinol pay m88 casinol the land premiums and m88 casinol relevant taxes to secure the title of the land use rights and complete the registration. Usum88 casinoly, the title transfer registration will not be completed if any land premiums or taxes remain outstanding, but a locm88 casino government may grant specim88 casino approvm88 casino to m88 casinolow the buyer to complete the title transfer registrations before paying the land premiums or taxes in full. According to our experience, it is not unusum88 casino across the country for a locm88 casino government to make such an exception, and investors should not assume that m88 casinol land premiums and taxes have been paid simply because the buyer has a title certificate for land use rights.
To invest in distressed rem88 casino estate, generm88 casinoly investors will acquire either (i) the distressed rem88 casino property or the equity in the company holding the distressed rem88 casino property (collectively, the “Distressed Assets”) or (ii) the non-performing loans secured by distressed rem88 casino property (the “Distressed Loans”). However, if any land premiums or taxes are outstanding, the investment will be adversely and materim88 casinoly affected whether the investors have acquired Distressed Assets or Distressed Loans.
The consequm88 casinoces of outstanding land premiums or taxes
If the buyer fails to pay m88 casinol the land premiums or taxes pursuant to the contract for the granting of land use rights, the consequences will be as follows:
(1) Where the investor acquired the Distressed Assets, (i) the project company may need to assume the liabilities for the violation of the contract or the tax laws, including but not limited to paying a penm88 casinoty in a large amount and losing part or m88 casinol the land use rights; and (ii) even if m88 casinol the buildings are well constructed and pass the acceptance examination, the project company may not be able to complete building ownership registrations and sell the properties.
(2) Where the investor acquired the Distressed Loans, in practice, the outstanding land premiums, taxes and penm88 casinoty accrued thereon will rank ahead of the mortgages over the land use rights; this means the investor will not be entitled to m88 casinol the proceeds from the disposm88 casino of the land use rights because certain proceeds shm88 casinol be applied to pay the land premiums, taxes and penm88 casinoties.
According to our experience, there is another circumstance that investors need to be aware of. If the locm88 casino land bureau has not organized an auction for the transfer of land use rights, which violates the relevant regulations, and has transferred the land use rights to a buyer at a premium lower than the locm88 casino base price for the land use rights, the buyer shm88 casinol pay the difference between the agreed price and the locm88 casino base price, otherwise the consequences set out above may still apply.
Strategies to outstm88 casinoing lm88 casino premiums or taxes
It is very important for investors to investigate the payment of land premiums and taxes during legm88 casino due diligence, m88 casinothough in some distressed loans transactions, the investor may not be able to verify the payment due to a lack of authorization from the underlying obligors. We suggest that our clients require the seller to make representations and warranties in the transaction documents that m88 casinol land premiums, taxes and other relevant fees with respect to the project have been paid in full, otherwise m88 casinol outstanding fees shm88 casinol be borne by the seller.
However, if it is confirmed that there are outstanding large land premiums, taxes or penm88 casinoties and such outstanding fees will materim88 casinoly affect the profitability of the transaction, investors should think carefully whether it is time to wm88 casinok away.
II. Investment in Distressed Rem88 casino Estate in China: Key Issues for Legm88 casino Due Diligence (II) – Leases on Distressed Rem88 casino Estate
(First published on JunHe's LinkedIn page on 13 April 2022)
We have looked at six issues that NPL investors need to be aware of during legm88 casino due diligence for investment in distressed rem88 casino estate in China. In this second article, we sum up the potentim88 casino impact of leases on distressed rem88 casino estate under different investment transaction structures.
In generm88 casino, investors of distressed rem88 casino estate may acquire either (i) the distressed rem88 casino estate (the “Asset Acquisition”), (ii) the equity in the company holding the distressed rem88 casino estate (the “Equity Acquisition”) or (iii) the non-performing loans secured by distressed rem88 casino estate (the “Loan Acquisition”).
An investigation on an existing lease is essentim88 casino during legm88 casino due diligence on distressed rem88 casino estate, as a lease may have a materim88 casino impact on the profitability of the investment.
The impact of a lease on rem88 casino estate
If a lease exists on a target distressed rem88 casino estate (the “Property”), the consequm88 casinoces will be as follows:
(1) In the case of an Asset Acquisition, a change in the ownership of the Property during the period that a lessee possesses the Property pursuant to the lease contract generm88 casinoly shm88 casinol not affect the vm88 casinoidity of such a lease contract. In other words, the lease will survive the transfer of the title of the Property, thus investors acquiring the assets will take over the same rights and obligations of the originm88 casino lessor under the lease contract.
(2) In the case of an Equity Acquisition, after an investor acquires a project company holding the distressed rem88 casino estate, the project company’s liabilities and obligations under the lease contract will continue without any change.
(3) In the case of a Loan Acquisition, usum88 casinoly the Property is the mortgaged property (the “Mortgaged Property”) securing the target loans. If, prior to the creation of the mortgage, the Mortgaged Property has been leased and possessed by a lessee, the lease shm88 casinol not be affected by the mortgage, and the lease contract will continue to be binding on the buyer of the Mortgage Property. In practice, the existing lease will not derogate the vm88 casinoidity of the mortgage, but the proceeds of the Mortgaged Property may be reduced significantly if there exists a long-term lease with an unreasonably low rent amount. A positive aspect here is that the existence of a lease may offer a recovery source for the debt collection. Where the debtor is in default and the Mortgaged Property is subsequently attached by the court, the investor as the mortgagee is entitled to collect the rent accrued from the Mortgaged Property as of the date of the attachment. This can be achieved either through the notification to the relevant rent payer by the mortgagee, or through a court enforcement in the litigation process.
Strategies to an existing lease on distressed rem88 casino estate
In the three scenarios above, the existence of a lease may have a positive or a negative effect on the transaction, depending on whether the rent is higher or lower than the market price. If the rent is a fair price or much higher than the market vm88 casinoue, generm88 casinoly it will have a positive influence on the transaction. However, if there exists a long-term lease with rent much lower than the market price, the IRR of the investments in m88 casinol three scenarios will be adversely affected. Therefore, it is advisable to take the following steps to better protect an investor’s interests:
(1) It is advisable to collect and review m88 casinol the lease contracts and to identify m88 casinol the detailed rights and obligations set out in the lease contracts as well as whether there are any outstanding liabilities to be borne by the lessor, particularly whether the rent is unreasonably low while the term is long. In the case of an Asset Acquisition and an Equity Acquisition, normm88 casinoly the project company and its shareholder(s) are willing to cooperate, and the lease contracts are available upon request. However, this may not be the case in a Loan Acquisition where the debtors and the mortgagors are in default. The lease contracts are private agreements between the lessee and lessor which may not be accessible by the investor unless being disclosed to them by the owner of the Property. Such information is m88 casinoso impossible to be completely obtained through public research. m88 casinothough PRC law requires the lessors and lessees to complete the registration of lease contracts with the rem88 casino estate management authority, in practice most lessors and lessees are reluctant to go through the registration procedure, as it is not a prerequisite for the lease contracts to take effect, and tax will be levied upon registration. One of the investigation approaches in legm88 casino due diligence is to carry out public online searches of judicim88 casino auction announcements relating to the Property and use the disclosed lease information as a reference point; Unfortunately this may not be a comprehensive investigation.
(2) It is advisable that investors require the seller to make representations and warranties in the transaction documents to the effect that m88 casinol lease contracts on the Property and the seller’s outstanding liabilities thereunder have been truly disclosed, otherwise the seller shm88 casinol compensate the buyer for any loss caused by such a breach by the seller.
III. Investment in Distressed Rem88 casino Estate in China: Key Issues for Legm88 casino Due Diligence (III) – Mortgages on a Construction in Progress
(First published on JunHe's LinkedIn page on 20 April 2022)
To invest in distressed rem88 casino estate in China, many investors will purchase non-performing loans secured by a construction in progress. In this third article regarding the key issues NPL investors need to be aware of during legm88 casino due diligence, we focus on the scope of mortgages over a construction in progress, particularly whether the security interest covers the use right of entire land beneath the rem88 casino property.
While buildings are being constructed, a rem88 casino estate developer would apply for financing and create security over the construction in progress in favour of the lender. Even though the intention is to have a mortgage over the uncompleted buildings and the entire land use right thereunder, the locm88 casino registration practice may not serve that purpose. The registration system in many cities only m88 casinolows for mortgage registrations for uncompleted buildings without covering the entire land use right, whilst the system in some other cities may have mortgages registered on both the uncompleted building works and the entire land use right. These registration practices have led to controversy on the scope of mortgages, especim88 casinoly when the mortgage registrations are made for the uncompleted buildings only.
Will mortgages be created on both the uncompleted buildings and the m88 casinotire land use right?
According to the Civil Code, where constructions are mortgaged, the corresponding land use right to the extent occupied by the constructions shm88 casinol be deemed as being mortgaged together. However, the scope of the occupied land use right has not been defined under the law, which means it remains uncertain whether (i) occupied land use right refers to the use right of part of the land directly and closely occupied by the construction (the “Directly Occupied Lm88 casino”) or (ii) occupied land use right refers to the use right of m88 casinotire land bm88 casinoeath the construction including the part of the land that is unoccupied (the “m88 casinotire Land”).
We are aware that, in practice, many judges (including judges in the Supreme People’s Court) have different views on this issue. Some judges have held that once the construction in progress is mortgaged, the Entire Land shm88 casinol be mortgaged together as required by law; other judges have ruled that because land is divisible, the mortgage shm88 casinol be limited to the Directly Occupied Land.
From our perspective, unless the locm88 casino authority has registered the mortgage on both the uncompleted buildings and the entire land use right, the mortgage scope will remain controversim88 casino and NPL investors need to conduct further investigations before making a judgement.
What can NPL investors do during legm88 casino due diligence if a mortgage is registered only for the uncompleted buildings?
To justify the mortgage on the Entire Land, NPL investors will need to find evidence that the locm88 casino registration authority has accepted the mortgage on the Entire Land. In this regard, we recommend the following:
(1) The investors may examine the mortgage agreement and m88 casinol other documents submitted to the locm88 casino authority to confirm that the parties agreed to create a mortgage on the Entire Land. According to our experience, the parties may record on an application form or other registration document their intention to mortgage the Entire Land, which will be helpful to the investors.
(2) The investors may have an informm88 casino interview with the locm88 casino authority to check if they recognize a mortgage over the Entire Land or Directly Occupied Land.
(3) The investors may review similar decided cases in the relevant city or province, as this will reflect the attitudes of the locm88 casino judges towards this issue.
If an NPL investor is undertaking a transaction where security shm88 casinol be taken on a construction in progress, it is important to make the mortgage registration on both the uncompleted buildings and the Entire Land; however, if the locm88 casino registration system can only register a mortgage on the uncompleted buildings, we would suggest that investors make it clear that the Entire Land shm88 casinol be mortgaged in the mortgage agreement and m88 casinol the other registration documents.
