Seth Klarman’s Boston-based hedge fund is best known for its value-focused equity portfolio, but this is just one section of the $30 billion hedge fund’s portfolio.
https://hedgefundalpha.com/2018/01/klarman-2017-letter/
Klarman and his team are always searching for value wherever it can be found, and often this takes them into the private markets. Real estate is one area where Klarman has been particularly active. Indeed, at the end of last year, it emerged that the Baupost Group partnership as the winning bidder for Marathon Oil Tower in Houston. According to the Real Estate Alert, Baupost “and local firm M-M Properties is hammering out an agreement to purchase the 1.2 million-square-foot office building for roughly $175 million, or $146/sf — well below the $249.5 million that CBRE Global paid in 2013.”
The value partnership has also been linked to real estate deals across Europe, notably Paris and London. And it’s one of these deals that has ignited a fight between Baupost and the French authorities.
According to the Business section of the Independent.IE, in April 2005, a Luxembourg company majority-owned by Baupost bought property with space of 646,000 sq ft near Paris’s La Defense business district for €16.7 million. The plan was to tear down the existing on-site structure to make way for new offices. However, before the project was completed, it was sold unfinished to another firm, Gecina for €384.1 million, 23 times the acquisition price just 19 months later. Baupost’s affiliate on the deal was none other than Lehman Brothers Holdings, which also had a stake in the Luxembourg entity. Between 2006 and 2008 this entity was liquidated returning €90 million to its owners.
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The reason why these two investors used Luxembourg as a base for their operations is due to a loophole in French tax law which allowed developers to escape taxis if French property deals were initiated by units based in Luxembourg. Neither country levied taxes on profits if this was the case. In 2008 France changed this law and set out to recoup any lost funds.
Now, as a consequence of these deals, Thomas Blumenthal, Baupost’s head of international real estate is facing a four-day criminal trial due to his part in the transactions, which the French authorities allege were designed to sidestep tax obligations.
The hedge fund has already lost its civil legal battle against tax officials ahead of the criminal trial according to Bloomberg and has not revealed how much it has had to pay out in fines.
According to Independent.IE, the French taxman, has discovered evidence that work on the real estate deal wasn’t carried out in Luxembourg, despite the fact the deal was pushed through the Luxembourg affiliate. Therefore, the Luxembourg affiliate was ineligible for the tax benefits and income was, in fact, taxable in France.
As well as the deal profiled above, the authorities have also reportedly also discovered another property transaction conducted via another Baupost affiliate in Luxembourg.
