How To Do Real Estate Business in Norway – a Brief Introduction

1. Introduction and scope

In the following, SANDS Advokatfirma AS will provide a brief review of general transaction types and procedures for real estate acquisitions in Norway. The review is general and is not intended as a full description of all eventualities.

2. Acquisition of real estate as an asset deal or share deal

          2.1 General structure

In Norway, there are no legal requirements that must be fulfilled to own, lease, or invest in real estate.

A building or a plot of land can be acquired as an asset or through an acquisition of shares (a “share deal”) where the main asset in the company is a property.

In Norway, it is most common to sell/buy shares in a real estate company (single purpose vehicle (SPV)). Asset deals are not very common. The reason for this is that a HoldCos can sell shares in other companies/SPVs, with no or limited taxation on the gain (Nw: Fritaksmodellen). Additionally, the buyer does not have to pay stamp duty/transaction tax on the property transfer.

Norwegian real estate companies typically have each property in separate SPVs.

         2.2 Stamp duty

When acquiring real estate as an asset, the buyer must pay stamp duty on the property transfer. The stamp duty is 2.5 % of the real estate value/purchase price. However, the buyer will receive the purchase price as a basis for depreciation. When buying shares, the buyer inherits the SPV’s historical cost price as a basis for depreciation. The purchaser is normally compensated for this disadvantage; see section 5 for further information.

        2.3 VAT

The sale of real estate is without a right to VAT deduction. The same applies to the sale of shares in real estate companies. Additionally, VAT shall not be calculated with respect to the transfer of real estate in connection with a merger, demerger, or asset deals. However, the VAT adjustment rules may apply and might trigger an obligation to adjust for previously deducted VAT in connection with upgrades made on the property during the last 10 years or in connection with altered use by the buyer. This topic is a typical due diligence task.

        2.4 Concession and notarisation

For share deals regarding real estate, no concession is necessary. However, the acquisition of real estate as an asset may be subject to concession depending on the size of the property or plot.

There is no need for notarisation of real estate acquisition contracts or any other contracts.

3. Due Diligence

Prior to closing the real estate transaction, it is common to conduct a due diligence. The due diligence process will vary and might be more extensive in a “share deal” than in an “asset deal”. It is common to review the financial, technical, environmental, and legal aspects of the real estate. This typically includes the legal basis for ownership, tax and VAT issues, lease contracts, management agreements, public permissions, and development plans. Real estate investors operate with standard request lists.

Simultaneously with the due diligence process, the parties will usually negotiate further on the provisions in the purchase agreement regarding conditions and guarantees. The agreement will often be based on a standard contract. Please note that a standard Norwegian due diligence process might be more limited, shorter, and faster compared to similar processes foreign investors are used to.

4. The bid and purchase process/agreements

         4.1 General information
The main rule under Norwegian law is that there are no requirements regarding the form of contracts. An oral agreement is just as binding as a written one. In other words, legally enforceable contracts may be entered into even if less important details in the contract are not agreed upon or the contract has not been signed. It is therefore recommended that professional parties, in negotiations regarding acquisition contracts, make the reservation that a binding contract can only be established when the contract and all the terms have been considered and accepted, and that the contract has been duly signed.

        4.2 The bidding process
A binding agreement between the seller and the buyer is often established when the purchaser places a bid on the property (or the shares) and the seller accepts. The purchaser’s bid is normally with reservations linked to e.g. possible findings in a due diligence process, a final agreed sale and purchase agreement, and necessary board approvals and financial reservations. The seller and purchaser normally agree on a bid acceptance as step one.

This is a short, less detailed, binding agreement (usually one or two pages) that covers the main commercial terms. But already at the bid acceptance stage, the purchaser and seller have agreed on the main terms of the transactions. Compared to other jurisdictions, the bidding process in Norway is normally a short and efficient process. If an attractive property or land is on the market, the purchaser must be prepared to make rapid decisions and evaluate the necessity of the reservations.

Therefore, we recommend foreign investors prepare powers of attorney to make decision lines short and effective. Vague or wide reservations from investment committees or boards, etc., will often be outcompeted by Norwegian bidders, especially if the bidder is an unknown investor in Norway. Good preparations are therefore a key factor to succeed in the Norwegian real estate market.

            4.3   Sale and purchase agreement
When buying shares, you enter into a share purchase agreement (SPA). In Norway, this agreement is based on standardized templates developed by several branch organizations representing both sides of a deal. It is commonly stated that approximately 90% of the standard branch SPA is already agreed upon, and the remaining 10% of the clauses are negotiable; often the commercial terms such as any due diligence findings, thresholds, and duration for how long the purchaser can put forward claims. The prospectus usually refers to the templates, and it’s stated that the SPA is to be negotiated based on the template. Further, it’s also commented that any desired deviations from the template must be addressed already in the bid. Transactions in Norway are in some way built on trust, and it is not common to have long, extensive, and complicated contracts compared to some other jurisdictions.

When signing the SPA, the background law is mainly replaced by contract clauses that reflect market standard regulations. These contracts are regarded as being relatively balanced and, as mentioned, commercially based, regulating the most important and central terms that the parties should incorporate into a contract. There are standard contracts for both direct acquisition of real estate (asset deal) and for share deals.

One of the reasons for the common use of standard contracts is that it simplifies the transaction process, including due diligence investigations, when the structure and content of both types of contracts are already well known. This is a contributing factor to the relatively short time span, and limited investigations during transactions in the Norwegian real estate market. We also have similar standard branch contracts regards to lease agreements.

5. The purchase price
The purchase price of shares is calculated based on the balance sheet for the company. In a SPV, the main asset is the property; therefore, the starting point for the purchase price calculation is the agreed property value. The value is then adjusted for the company’s other assets, liabilities, and tax positions (for example, a carry forward loss is often added to the purchase price).

The seller is often compensated for the SPV’s carry forward loss with 10-18 % of the carry forward value, depending on how fast the SPV and the purchaser can utilize the loss.

As mentioned in clause 2, the purchaser inherits the SPV’s historical cost price as a basis for depreciation in a share deal. It is a well-known practice that the purchaser will get compensated for the disadvantage if requested. It is therefore important that this topic/adjustment is addressed in the bid.

The agreed compensation is normally between 9 % and 11 % of the difference between the cost price/real estate value and the historical tax depreciation value, adjusted for the market value of the plot (the latter is not subject to tax depreciation). The percentage may vary and depends on which of the different depreciation groups apply. Tax compensation in commercial plot deals (without buildings) is normally not given, due to the fact that plots are not depreciable assets. This is, however, more common if the purchaser is a resident developer, since the SPV, when finalizing his residential project, will be subject to asset deals when selling the residents/apartments directly to private parties. This is a discount for deferred tax, and the percentage is higher in this case compared to the discount for tax depreciation.

6.  Ground lease
Generally, the owner of a building owns the ground on which the building stands. However, ground lease is also extensively used in Norway. When leasing the ground, the tenant owns the buildings, while the tenant leases the ground. Such ground leases are generally entered into for a long period of time, usually for periods of 50 – 100 years. The Norwegian Ground Leases Act is complex, and due diligence should have an extra focus on this topic if applicable.

7.  Finance
In Norway, the Companies Act regulates the possibility of using the target’s asset, hereby the property, as a pledge in financing the acquisition if certain conditions and procedures are followed.

In companies that operate across jurisdictions, one should also be aware of the rules concerning transfer pricing and the interest limitation rule. If the purchase of property is financed from a company outside Norway, the interest limitation rule may apply.

The general rule in Norway is that debt interest is deductible. However, the interest limitation rules limit the right to deduct interest in certain cases.

The interest limitation applies to companies in a group and companies outside the group (related party).

The interest limitation rule for groups only applies if the Norwegian part of the group’s total net interest costs during the income year exceeds the threshold amount of MNOK 25. This includes both external interest, interest to group companies abroad, and interest to related parties outside the group. If the group is below the threshold amount, the group rule does not apply, but the related party rule may still apply.

A related party is anyone who directly or indirectly owns or controls a company, etc., by at least 50 %. The interest limitation rule for related parties only applies if the company’s net interest costs exceed the threshold amount of MNOK 5. This includes both external and internal interest.

The rules are extensive and complicated, and if the rule applies, it is often decided in consultation with an accountant.

8.Anti-money laundering (AML) and Know Your Customer (KYC)
Norway, like all other countries, experiences a significantly higher focus on AML and KYC, especially for investors outside the EU. Recently, we have seen a few transactions fail due to purchasers not being able to satisfy Norwegian banks’ demands when it comes to AML/KYC documentation.

A good piece of advice for foreign investors not yet having a bank relation in Norway is to examine the possibility of establishing a bank relationship before entering a deal.