Commercial investment

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From: Mark B


Hi All.

I've been lurking for a while, so here's my first post.

Something caught my eye in todays (Thursdays) Sydney Morning Herald (p27 for those who have it).

It's a large office building in Brisbane looking for investors. Minimum $10,000 to get in, 10% income "projected to rise to 14.7% in the final year", although it does drop slightly below 10% for a little while. Projections are included in the prospectus, as well as tax info which looks fairly good. The prospectus is online at www.cromwell.com.au.

Now, I haven't yet read the prospectus cover to cover, but what I have seen sounds like a reasonable deal. If you could borrow some money and get the gearing up, could get a rather good return.

What do other people think about this? Is there a catch I'm missing with these sorts of deals? Any reason I couldn't/shouldn't borrow on a deal like this?

I'm pretty new to this, so go easy on me :)

Thanks,

Mark
 
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From: Gary Smith


Hi Mark, I've got some money in these sorts of deals. They aren't for
everyone, though. The main downside is that you are pretty well locked into
the syndicate until the building is sold - usually about 6 years later. For
this reason, it is hard to get anyone to loan you money using just the
syndicate as security - if they need to foreclose they may not be able to
find anyone willing to buy the shares to get their money back. So you will
probably have to borrow against your equity in some other asset. If you are
in the asset building stage, then you should be able to find much better
options for using your equity. But for people who already have money, they
are a reasonable investment which offers consistent, tax-effective returns,
with no management worries.

There are a few things to consider. The first one is the lack of liquidity.
If you want to sell your holdings, then it is up to you to find someone to
buy them. In my experience, the syndicate companies will try to help you
out, but they give no guarantees. The syndicates have been talking of
setting up a stock market like system for these shares, but so far that
hasn't happened. There is one broker Austock www.austock.com.au which deals
with MCS syndicates.

The second thing is what happens at the end of the syndicate. What happens
if the end of the syndicate the commercial property market is in trouble -
you may be selling the property at a very low price, but you have no real
say in it.

The third thing is tax. The income you receive is 'tax advantaged'. Some of
this is genuinely tax-free, the rest is tax-deferred which means that the
amount is taken from your purchase price for capital gains tax purposes when
the property is sold. Check the prospectus carefully to see how much of what
type you get. You will also notice that as the income rises in later years,
the tax advantaged percentage goes down.

Speaking of capital gain, its best not to think you will get too much -
probably about 2-3% a year. Though of course there may occasionally be a
spurt in commercial prices, like there was last year, but there may also be
big falls.

To sum up, if you can get someone to loan you the full amount and only use
the syndicate shares as security, and get a fixed-rate loan, they could be
worth while doing. If you find someone willing to do that, let me know. But
if you are looking to build up an asset base, you will do better elsewhere.
I think they are mostly aimed at people with large super payouts, or people
looking to balance out a large share market holding, and don't want the
hassle of directly owning property.

You may want to check out some of the other syndicate companies - MCS,
Landmark, Teys McMahon.

Gary
 
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