Public offers for property investment - what you need to know about the FMCA

Property

Property syndication – what you need to know about public investment

Property investment
Property syndicates and other public property investments are currently popular as bank interest rates remain very low.  Public property syndication and investment companies allow members of the public and investors to pool resources to invest in larger commercial properties. The return on investment is based on the rental income from tenancies and the recent average return on investment is generally around 7-9%. The increased appetite for these types of property investment structures means there are more and more opportunities to establish new syndicates or property investment companies. There are many benefits in establishing a new syndicate or investment company, however the financial markets legislation means that public investment offerings must meet the required disclosure requirements. It is important to know what these requirements are and how the regulations may impact the establishment of a new syndicate or investment company.

The requirement to disclose offers
The Financial Markets Conduct Act 2013 (the FMCA) changed the rules around how property syndicates and property investments are offered to the public. Certain disclosure requirements are now compulsory when making public share offers (or offers for other similar interests) in a property investment scheme or entity. The FMCA created categories of financial product which focus on the economic substance of the financial risk rather than legal forms of ownership. The two relevant categories for public offerings for property investment are:

  • Equity Securities - this applies to a company or other entity established to buy and own commercial property. Shares in the company are offered to investors and the property management is normally contracted to a commercial manager; and

  • Managed Investment Schemes - this is blanket term for products where investment funds are pooled but investors do not have day to day control over the scheme. This category captures the traditional property syndication model. It is important to note that the definition excludes a syndication where investors are involved with the day-to-day decision making of the syndicate. There is also an exception for schemes where investors hold separate and direct interests in the underlying property.

Disclosure requirements
The FMCA requires a product disclosure statement (PDS) to be made available to investors for both equity securities and managed investment schemes for every public offering. The PDS replaces the need for a prospectus, but the content of a PDS is heavily dictated by the Financial Markets Conduct Regulations 2014 (the regulations). The regulations are focused on providing the potential investor with the critical information of the investment and excluding less relevant information. This means that while a PDS may be shorter than a traditional prospectus, the information contained in the PDS must precisely match the requirements of the regulations (often word or word). The supporting documents to the PDS must be provided in the online registry which is contained in the Companies Office website. The core elements of information in a PDS are:

1. The key features of the company or scheme (including the investment property);
2. The key terms of the offer;
3. The financial information of the offerer (including GAAP prepared financial information); and
4. The risks to returns.

The regulator (the Financial Markets Authority) places particular emphasis on ensuring the property financial information and investment risk factors are highlighted to potential investors. In some situations, the PDS must include financial information for previous accounting periods. This can create issues if the syndicate or company is a new entity and is acquiring a new property and therefore does not have existing accounts. The regulator will reject a PDS if it does not contain the all of the required information, or if the PDS contains unessential information. The FMCA also places restrictions on marketing offers to public both before and after the PDS is made available.

There are certain exemptions to the requirement to produce a PDS where all investors are exempt persons, however this will depend on the circumstances in each case.

Get advice
Preparing public offers requires a good deal of planning, consideration and advice. The penalties for breaching the FMCA are severe so it is important that correct disclosure is made for every offer. Experienced legal advice in this area is essential.  We have recently prepared a PDS for a commercial property syndicate so have recent and up to date experience in this area.  If you are interested in establishing a property investment company or syndicate for public investment then contact the specialist commercial property team at Cavell Leitch.

All Articles

Copyright © Cavell Leitch. All rights reserved. Redistribution is only permitted with express written permission. For enquiries please contact us. This article by its nature cannot be comprehensive and cannot be relied on by clients as advice. It is provided to assist clients to identify legal issues on which they should seek legal advice. Please consult the professional staff of Cavell Leitch for advice specific to your situation.