Property syndicate - due diligence??

[Francoise]

From: Francoise B


Any ideas about what one should be checking out when venturing into a property syndicate? Biggest question is, how can one retrieve one's money if something goes wrong? Wrong - eg. project does not get completed, thus no product to sell/rent out. Time frame far longer that orginally indicated. Lack of direct control is a concern, but the project proposal I am looking at is too large (at present!) for an individual like myself. Any comments appreciated.

 

[Mike]

Reply: 1
From: Mike .


Hi Francoise,

I think Michael Yardney is the fella who can provide some clues since he puts syndicates together often for his co-developments, however, since the type and scale of each project varies specific questions would be better directed to your team of professionals. In fact, Michael has advised in the past to concentrate your efforts in finding the right legal, accounting, financial and building practioners first. I advise you to put them in a room together and have them structure the deal correctly for you.

The legal structure that Michael favours is a discretionary trust with a corporate trustee (that you control) as the most flexible structure. I can't give you any clues why.

Michael also uses a lengthy and detailed joint venture agreement. Again I can't elaborate because I don't have experience with JV's.

On the construction side, the building contract should include the neccessary provisions that a builder must legally comply with, including carrying the neccessay indemnity insurances (which should be checked).

There are all sorts of avenues to research this further including Dept of Fair Trading, Housing Industry Association and the Master Builders' Association. In addition to the Form of Contract, the contract documents usually include a Schedule of Particulars or an Appendix, Plans and a Specification. While these issues can be researched for a better understanding, due to the complexities I would advise to leave the specifics to the experts.

Regards, Mike

 

[Michael Yardney]

Reply: 1.1
From: Michael Yardney


Francois,
You are correct. There are some potential traps with syndicates and it is critical that you get the structure right to protect everybody’s interests. As of last month, there are new regulations from the ASIC controlling “financial products” including property syndicates, so this creates a legal minefield.
It is important to decide whether you want a short term joint venture, (I don’t use the word syndicates for legal reasons,) to develop the properties and then each individual joint venturer keeps his own property or whether the properties will be held in the long term by a joint venture/syndicate. Obviously the second method gives you much less control.
Thank you Mike for the kind words but you don’t have it exactly correct.
I favour a discretionary trust with a corporate trustee as my vehicle for long term property holdings but not as the entity for a JV for property development or JV ownership. We use a copyrighted and lengthy 30 page Joint Venture Agreement to to protect the Joint Venturers. We are not a party to this Agreement.
The Joint Venture is overseen by a 100 year old law firm and all funds are placed into their Trust Account. We do not handle any client’s money. The Joint Venturers are even further protected by the fact that they can terminate our Project Management Agreement if we do not perform.

So in summary, joint ventures of individual property investors have the benefit of allowing you to be involved in a much bigger deal that you would be able to on your own, but it is critical to get the right structure and documentation, and have it checked out by your solicitors and accountants to ensure it complies with the new laws and protects everyone’s interest. Unfortunately this is an expensive procedure.

Michael Yardney
Metropole Properties