19 February 2024

How To Raise $20 Million Without A Public Offering - A Polish Investor Shows That It Is Possible With Legal Solutions Known To The Romans

A 400-square-meter apartment on the 50th floor of a skyscraper for less than $1,500? Sounds unrealistic.
Poland Real Estate and Construction
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A 400-square-meter apartment on the 50th floor of a skyscraper for less than $1,500? Sounds unrealistic. But that's the price at which a Polish investor is selling the rights to the apartment, and could make nearly $20 million.

Epic flip, or how to sell an apartment for 500% of its value

The whole issue received wide media coverage, while the comments revolve around the seller. He is a Polish investor and also the owner of a residential unit at Zlota 44 in Warsaw. The premises are located in the highest residential building in the European Union, built to a design by Daniel Libeskind. The price of this premises was expected to be close to $6 million a few years ago. Now the owner is offering the rights to this premises for less than $1,500, with the sale offer available to everyone on a dedicated website.

Where is the catch? The offer is for the sale of the ownership of the property, but not 100% of it, but a fractional part of 1/20,000. This means that if all the shares included in the offer are sold, the property will have 20,000 owners, and the sale price from this transaction will be the equivalent of $25 million. This is why the seller is advertising it as an epic flip - he can earn almost five times the price of the premises.

The whole affair is provoking fierce opposition from owners of other units in the same building, as well as much media outrage. However, this article will not be about them. Social assessments of the epic flip may vary, but what is much more interesting is that its legal assessment is much more unequivocal and favorable to the seller. The sales model used, on the other hand, can be an interesting option for financing real estate investments.

Does a share in real estate have a value?

Polish law allows property rights to be shared among multiple people. This is nothing unusual. Such solutions were already known in the ancient Rome. The very act of establishing shares in real estate is widely used, as any owner of a property with the right to a share in the land under the building can see.

Acquisition of property interests enjoys little popularity. This is because it is associated with trouble rather than an actual right. This is due to the fact that all co-owners have the right to use the common property and the consent of the majority of co-owners is needed for ordinary acts. For this reason, joint ownership is most often opted for by people in unions who purchase a property together. The share in the property itself can usually only be purchased through bailiff auctions. On the other hand, the sum of the value of separately sold real estate shares is usually much lower than the value of the entire property sold in one transaction.

If these factors are taken into account, an epic flip should not succeed from the start. Rational buyers should not want to buy shares in a property if they are collectively priced five times more than the property itself. Even less should they be interested in shares when they know they will be sharing ownership with several thousand other people. After all, 20,000 co-owners corresponds to the population of a small city, not a four hundred-meter dwelling. Even if one were to divide the premises for the exclusive use of each co-owner throughout the year, they would only have it for less than half an hour. Despite this, the offer to sell shares in the epic flip is very popular, and the number of sign-ups has already exceeded the number offered several times.

The popularity of this offer may certainly be contributed to the media publicity and the prestigious location of the property. Therefore, some would like to treat it similarly to proposals for the sale of plots of land on the moon, where the buyer obtains a right as worthless as a piece of paper with a certificate to prove it. Meanwhile, the rights to a share in the premises are real and in practice give greater rights than, for example, shares representing a similar stake in the company's share capital. At the same time, the ability to divide them indefinitely allows the price to be set at a level accessible to everyone. This way, an average John Smith can not only be a shareholder in Microsoft, but also a co-owner of premises in the Burj Khalifa.

Property participation like a hotel package, mortgage loan and dividend all in one

Co-ownership itself can be a source of endless disputes over how to manage the property, use it or bear the costs. So if the seller leaves it up to the future co-owners to set the framework for cooperation, it's a straight road to disaster. However, this can be remedied.

Along with a share in the ownership of the property, the buyer can theoretically obtain analogous benefits, such as by booking hotel accommodations, ordering a venue for a party, or investing in bonds or shares of public companies. Therefore, a share purchase offer can be an interesting investment option, as long as it is well structured and clearly defines the potential benefits.

At the stage of establishing shares, mechanisms can be created to determine how the property is to be managed, to set a framework for the use of the property by the co-owners, and to sanction their failure to participate. This way, the right to a share in co-ownership can be regulated in a way that can allow it to be used as a form of raising capital from investors or to support the restructuring of an enterprise.

One can imagine, for example, an investor who sells the rights to shares in office premises in order to finance their construction. The shares sold could be for less than half of the total ownership, and a condition of the purchase would be the signing of an agreement to a specific building administrator and the undertaking of certain property management activities by the administrator himself. In exchange for a share in the property, the purchaser would obtain the right to a corresponding share in the benefits of rent or fees. This way, the investor would acquire capital and the buyers would acquire the right to future benefits while securing them on the property right. Such a way of investing would be much safer for buyers than placing funds in bonds or stocks. On the other hand, the investor could secure the right to take over the investment once it is realized through option contracts giving the right to repurchase the shares for a certain price.

Selling shares in co-ownership could also work well for companies facing bankruptcy. Even if their financial condition did not allow them to obtain a bank loan or financing from bonds or stock issues, they would still have, for example, a property with a factory. Selling shares in such a property while paying off mortgages and establishing a lease right for the existing seller could be a way to save the company and pay off the existing creditors.

Can real estate holdings replace shares in companies?

The examples described show that shares in co-ownership could perform all the functions that bonds or shares in capital companies perform today. The advantage of shares in co-ownership is that they are an independent right and provide, in theory, a much stronger security for the buyer's influence over the investment and obtaining benefits from it. In addition, shares in joint ownership can be offered to the public without any restrictions and at no additional cost. As a result, the seller does not incur the costs of a public issue or preparing a prospectus. The buyer, on the other hand, obtains a fully transferable right that can be transferred without any intermediaries at any price.

Raising capital through co-ownership shares can therefore be much cheaper and faster than through the capital market. It is also more attractive to investors than blockchain-based real estate tokens, which are not followed by effective collaterals. However, despite real estate shares' advantages, it is not without risk. This is because such investments do not protect buyers from modification of the offering or an unannounced termination.

There are many more dangers in raising capital through shares in co-ownership. The lack of established practice means that even the best-drafted contracts may not be sufficient protection for the seller against demands by co-owners for the court to appoint a new administrator of the property or to abolish co-ownership by selling the property. It is also difficult to predict how courts, which have so far dealt with real estate disputes, would behave in resolving disputes of a commercial nature.

So perhaps it is legitimate for the author of the epic flip to call his offer a social experiment. If this deal comes to fruition it will open up a new way of looking at legal solutions that have been known for generations. In consumer trade, it is likely that such solutions may be limited in the short term by new regulations. In professional (B2B) trading, on the other hand, they could potentially open new ways to raise capital and sell properties for more than 100 percent of their value.

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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