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Property Syndication: To disclose or not to disclose?

29 May 2006 Renet van Wyk

The underlying principle of property syndication is to gain access to investment in commercial property. It is therefore a means not only to diversify an investment portfolio, but more specifically to diversify in property.

Property syndication is usually structured as collective shareholding in a legal entity (company or trust) that owns immovable property. The structure is co-ownership of shares in the legal entity that owns the property, not co-ownership of the property itself. The lease agreements with tenants in commercial property determine the returns on the investment. The key factors to consider are growth, income, security and access to funds invested.

New concept in SA
Property syndication is packaged as an investment opportunity by a promoter that identifies and purchases a commercial property, and then structures, markets and administers it as a syndicated property. It is an internationally recognised investment opportunity to diversify portfolios, and a fairly new concept in South Africa. Over the past 10 years it has developed into an industry of its own.

Formal legal requirements
In the most recent past, the financial media has investigated and published some of its concerns surrounding certain aspects of the industry. Subsequently, on 30 March 2006 formal legal requirements were promulgated in terms of the Consumer Affairs Act, 1988, that requires minimum information to be contained in a property syndication disclosure document.

The underlying principles regarding the disclosure document of a property syndication is now legally prescribed as that an investor shall be informed in writing of the following:
1. That public property syndication is a long-term investment, usually not less than 5 years.
2. That there is a substantial risk, in that the investor may not be able to sell his shares should he wish to do so in future.
3. That it is the investors responsibility to find a buyer should the investor wish to sell his/her shares.

Investor protection
The legislation furthermore prescribes certain minimum information that needs to be disclosed in order to ensure investor protection. These include the following:

1. Full particulars of the trust account into which funds are to be deposited prior to transfer or finalisation.
2. Full particulars of the terms of the purchase of the property, of the property itself, of any bonds to be registered, and of the commencement of the syndication.
3. Full details of the promoter and his due diligence investigation of the syndication scheme prior to commencement.
4. Full details of the syndication vehicle and the fee structure of the management company.
5. Full disclosure of the company description and structure to be used for the syndication scheme.
6. Full details of the tenants, rentals and lease agreements.
7. Full disclosure of income and expenditure of the syndication scheme.
8. Full details of all projections provided, as well as the basis for such calculations.
9. Full details of the valuation of the property, of the valuer, as well as the pro forma valuation process to be followed by the valuer.

The new legislation is to be welcomed as governments concerned effort to ensure investor protection. It is also advisable that financial advisers take note of the new legislation in order to ensure best advice to their clients.

Renet van Wyk, Inpact Properties (Pty) Ltd

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