Property syndication – what you need to know about public
Property syndicates and other public property investments are
currently popular as bank interest rates remain very low.
Public property syndication and investment companies allow members
of the public and investors to pool resources to invest in larger
commercial properties. The return on investment is based on the
rental income from tenancies and the recent average return on
investment is generally around 7-9%. The increased appetite for
these types of property investment structures means there are more
and more opportunities to establish new syndicates or property
investment companies. There are many benefits in establishing a new
syndicate or investment company, however the financial markets
legislation means that public investment offerings must meet the
required disclosure requirements. It is important to know what
these requirements are and how the regulations may impact the
establishment of a new syndicate or investment company.
The requirement to disclose offers
The Financial Markets Conduct Act 2013 (the FMCA) changed the rules
around how property syndicates and property investments are offered
to the public. Certain disclosure requirements are now compulsory
when making public share offers (or offers for other similar
interests) in a property investment scheme or entity. The FMCA
created categories of financial product which focus on the economic
substance of the financial risk rather than legal forms of
ownership. The two relevant categories for public offerings for
property investment are:
Equity Securities - this applies to a company or other entity
established to buy and own commercial property. Shares in the
company are offered to investors and the property management is
normally contracted to a commercial manager; and
Managed Investment Schemes - this is blanket term for products
where investment funds are pooled but investors do not have day to
day control over the scheme. This category captures the traditional
property syndication model. It is important to note that the
definition excludes a syndication where investors are involved with
the day-to-day decision making of the syndicate. There is also an
exception for schemes where investors hold separate and direct
interests in the underlying property.
The FMCA requires a product disclosure statement (PDS) to be made
available to investors for both equity securities and managed
investment schemes for every public offering. The PDS replaces the
need for a prospectus, but the content of a PDS is heavily dictated
by the Financial Markets Conduct Regulations 2014 (the
regulations). The regulations are focused on providing the
potential investor with the critical information of the investment
and excluding less relevant information. This means that while a
PDS may be shorter than a traditional prospectus, the information
contained in the PDS must precisely match the requirements of the
regulations (often word or word). The supporting documents to the
PDS must be provided in the online registry which is contained in
the Companies Office website. The core elements of information in a
1. The key features of the company or scheme (including the
2. The key terms of the offer;
3. The financial information of the offerer (including GAAP
prepared financial information); and
4. The risks to returns.
The regulator (the Financial Markets Authority) places
particular emphasis on ensuring the property financial information
and investment risk factors are highlighted to potential investors.
In some situations, the PDS must include financial information for
previous accounting periods. This can create issues if the
syndicate or company is a new entity and is acquiring a new
property and therefore does not have existing accounts. The
regulator will reject a PDS if it does not contain the all of the
required information, or if the PDS contains unessential
information. The FMCA also places restrictions on marketing offers
to public both before and after the PDS is made available.
There are certain exemptions to the requirement to produce a PDS
where all investors are exempt persons, however this will depend on
the circumstances in each case.
Preparing public offers requires a good deal of planning,
consideration and advice. The penalties for breaching the FMCA are
severe so it is important that correct disclosure is made for every
offer. Experienced legal advice in this area is essential. We
have recently prepared a PDS for a commercial property syndicate so
have recent and up to date experience in this area. If you
are interested in establishing a property investment company or
syndicate for public investment then contact the specialist
commercial property team at Cavell Leitch.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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