A legal dispute between Blackstone and a media company in Italy has held up a substantial transaction and left the prospect of doing business in the country’s commercial real estate market in question.

RCS Media Group, the publisher of Italy’s famous Corriere della Sera newspaper, is seeking to nullify the sale of its long-standing Milan headquarters to Blackstone on the grounds the private equity real estate juggernaut paid an unreasonably low price for it in 2013, when the publishing and broadcasting conglomerate was financially unstable.

There is skepticism about the merits of RCS’s claims and the strength of its legal argument. However, the idea of a distressed seller being able rescind a deal years later with the backing of the Italian legal system has raised concerns among private real estate investment executives about the rule of law in a country already contending with an unfavorable reputation for doing business. The country sits 51st in Trading Economics Ease of Doing Business table, for instance, behind countries including Kosovo, Serbia and Kazakhstan.

Rob Rackind, head of real estate at the Stockholm-based private equity firm EQT Partners, told PERE he was shocked that a court would entertain such a lawsuit. The London-based executive said the potential ramifications of the case have made EQT reconsider its approach to Italian investment. “We have a deal in exclusivity in Italy that we have paused until that law case is resolved,” he said. “If this case against Blackstone succeeds, then it means the previous owner can come back and say, ‘I want more money.’”

Another European real estate manager said the case could make the nation a riskier bet for investors. “It puts Italy into an emerging market bracket,” the manager told PERE.

RCS’s lawsuit, which was filed in a Milan court in February, contests the sale of Via Solferino 28, a 115-year office building in Italy’s fashion and finance capital. RCS sold the property along with two other assets to Blackstone for €120 million six years ago as part of a broader divestment effort to stay solvent.

The arbitration documents were filed after reports surfaced of Blackstone’s intention to sell the building to Allianz Real Estate for €250 million. That sale has been stymied by the litigation and Blackstone has filed a counter suit in New York. It argues RCS’s claims are a malicious attempt at extortion, holding up the sale of the property in the hopes of getting more money. Neither Blackstone, Allianz nor RCS would comment.

Wrong precedent

There is precedent for closed sales being revoked in both Italy and the US, Dov Kleiner, a real estate bankruptcy lawyer at the New York-based firm Kleinberg, Kaplan, Wolff & Cohen, said. However, most challenges center on fraudulent transfers, in which bankrupt parties sell assets for well below market value and are therefore unable to repay creditors. The RCS case does not qualify for this type of civil litigation as the company never defaulted on its debts.

RCS has instead filed its complaint under Italian criminal law, arguing that Blackstone violated the country’s usury laws, which govern interest rates and predatory lending practices.

If the court sides with RCS, the precedent could have a chilling effect on real estate transactions involving troubled sellers, Kleiner said. This would not only cut off investors from a lucrative asset class but also remove a potential lifeline for distressed companies looking to liquidate assets.

“Anybody that’s kind of near the edge of the cliff is going to get pushed over the cliff and people will say ‘we’ll see you on the other side and deal with you then,” Kleiner said. “’If you’re close to insolvency, if you’re in any kind of distress, we’re just not going to talk to you now.’ That is bad because it will have the effect of pushing them off the cliff instead of helping them back away from it.”

Blackstone was part of a cohort of private equity real estate firms that swept into Italy after the global financial crisis left its economy badly bruised, CBRE Italy chief executive Alessandro Mazzanti said. Foreign investors have accounted for roughly two-thirds of private real estate capital deployed in the country since 2016, roughly €20 billion, according to the real estate advisory group. Those investments have been rewarded with steadily rising returns, which climbed from 1.4 percent annually in June 2013 to 6.2 percent in June 2018.

However, despite its opportunities for solid returns, Italy is not beloved by the investor community. Besides its standing business ease indexes, it ranks 31st in the World Economic Forum’s 2018 Global Competitive Index, despite boasting a top-10 GPD. One real estate fund manager active in the country told PERE that litigation has to be factored into its underwriting for its Italian investments. “It’s a very difficult place to do business,” the manager said. “A lot of what we do, we do without operating partners and are very selective about what we do.” For that firm, operating in the country’s real estate markets solo is the safest way.