Syndications: Legal expert Alistair Law on what you need to know
Total Property - Issue 7 2016
There have been a number of changes to the regulation of property syndications that have taken effect this year. As a large number of first-time investors are taking part in property syndications, it is important that they understand the unique features of these products.
The Financial Markets Conduct Act 2013 (FMCA) represents a major overhaul of the regulatory framework for property syndications.
It has stated purposes of providing accurate and understandable information to investors in financial products and allowing for effective monitoring and reduced governance risks.
Under the FMCA, the manager of the property syndicate is now required to be licensed by the Financial Markets Authority (FMA) to ensure that minimum requirements are met. There is also mandatory requirement for statutory supervisors to be appointed to oversee the investments.
This article sets out the compliance regime for retail or “regulated” offers. Under the FMCA, there are a number of offers that are not regulated offers. These include wholesale offers, which include offers that have a minimum subscription amount of $750,000 and offers made to “eligible” investors. Other unregulated offers relate to the character of the offer or to the relationship between the issuer and the investors.
There are various certifications required in connection with non-regulated offers. If an offer is not regulated, the issuer must still issue a limited disclosure statement, but the scheme does not have to have a registered manager or appoint a registered supervisor.
The key documents provided to investors under the FMCA for retail or "regulated" offers are:
Product Disclosure Statement: it contains the essential information to help investors decide whether to invest in the property syndicate.
Governing Document or Deed of Participation: it sets out the basis for the ongoing ownership and management of the property syndicate.
Offers will also provide a Valuation Report containing an independent registered valuer’s assessment of the current market value of the underlying commercial property.
A useful starting point for investors is the Key Information Summary at the beginning of the Product Disclosure Statement. As the name suggests, the Key Information Summary provides the manager of the property syndicate's assessment of the material aspects of the property syndication that they believe are relevant to an investor's decision to invest. It is a highlights section which provides an overview of the main features of the investment.
In particular, the Key Information Summary is useful because it contains the syndicator's assessment of the key risks associated with the investment.
But the Key Information Summary is only the beginning. It is important that investors do not stop their investigations there. It is strongly recommended that investors read the full Product Disclosure Statement, as well as the Governing Document and Valuation Report.
The success of a particular syndicate is not guaranteed. It is intricately linked to the performance of the underlying property. The same fundamentals that are paramount for a direct investment in commercial property need to be considered by investors when evaluating the merits of a syndicate.
Alistair Law is a Partner in the property team at Anthony Harper and specialises in commercial property. This article is by nature brief and general. Before investing in any property syndication investors should consider seeking specific legal and financial advice.
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