Exploring syndicated property investment with Helmsley Group
This article explains how syndicated commercial property ownership works in general terms. It does not describe any particular investment, and it is not an offer or an invitation to invest. It is not advice.
INTRODUCTION
A property syndicate is a small group of investors who jointly own one commercial building. Each holds a defined share, receives that share of the net rent and votes on the decisions that affect the building.
A syndicate is not a fund, a company or a loan. Investors own a share of one named building, rather than units in a pool of buildings chosen by a manager.
Helmsley syndicated interests are unregulated collective investment schemes. They carry no Financial Services Compensation Scheme cover and no access to the Financial Ombudsman Service, and capital is at risk.
WHY INVESTORS USE IT
The first reason is lot size. A building with an institutional lease, a sound covenant and a position that will still hold up in fifteen years tends to come in lot sizes above what most private investors will commit to a single asset.
The second is concentration. A single building owned outright usually has one tenant, so a void stops all of the income while the costs continue. A share in several buildings means a void pauses only part of it.
The price is control and liquidity. An investor is one voice among several, and an interest in a building may be harder to sell than the building itself.
A fund or REIT sits at the other end of the scale. Units are usually easier to redeem or sell, but the manager chooses the buildings and takes the decisions.
WHAT AN INVESTOR OWNS
In most structures, a bare trustee holds the legal title and the investors hold the beneficial interest between them as tenants in common. A trust deed sets out each investor's percentage.
The trustee arrangement exists because only a limited number of people can be registered as legal owners of land. It also allows one investor's interest to change hands without the building being sold.
Each syndicate is normally a separate holding, so a problem at one building does not affect the others. Our syndicates are bought with investors' cash and carry no bank debt, so there is no gearing in either direction and no refinancing risk.
WHERE THE INCOME COMES FROM
Most commercial leases are payable quarterly in advance, commonly on the English quarter days. The managing agent collects the rent, deducts the costs of running the building and distributes the balance in proportion to each share.
The lease determines most of what follows. A full repairing and insuring lease places repair and insurance on the tenant. The unexpired term shows how long the income is contracted for, and the break dates show when it could end early.
Income stops if a tenant defaults, a lease expires without renewal or a break is exercised. The costs do not stop. Empty rates, insurance, service charge and security fall to the owners, followed by agency fees, legal fees and usually a rent-free period on reletting. Helmsley proactively manage the property portfolio, ensuring tenants keep up with their repair responsibilities, so that if a building does become vacant, the cost of getting it into a position to relet is reduced. When a property is vacant, we work hard to minimise void costs and get it re-occupied as quickly as possible.
WHO TAKES THE DECISIONS
The investors decide, by a stated majority, on the matters that change the economics of the building. These typically include lease assignments, structural alterations, reletting terms, capital expenditure and a sale. The operator co-ordinates and the managing agent runs the building day to day.
Capital expenditure is the item investors most often underestimate. Where a building is held without debt, a refurbishment is paid for by the investors or out of retained income. That reduces distributions for everyone, including those who voted against it.
A minority holder can be outvoted on each of these points, including a sale they did not want.
GETTING OUT
There are two routes. An investor can sell their own interest, or the building itself can be sold. Neither is quick, and this is the area most likely to disappoint an investor who has not read the documents carefully.
An interest can usually be transferred without selling the building, and Helmsley operate an active marketplace for stake sales. The likely buyer is another investor, and the price may differ from a proportionate share of the valuation.
The syndicate trust deeds also contain a trigger allowing an investor to require the building to be marketed. In practice, investors who want to keep the building will often buy out the one who wants to leave.
Demand for interests thins when a lease is near expiry, a break is approaching or the building is empty. Those are also the moments a holder is most likely to want to sell. Anyone who may need their capital on a particular date should treat that as a reason not to invest.
THE RISKS
There is no regulatory safety net. An unregulated collective investment scheme is not covered by the Financial Services Compensation Scheme, and a complaint cannot be taken to the Financial Ombudsman Service. These arrangements are not suitable for retail investors.
Values fall as well as rise, and an investor may lose a large proportion of the capital invested. A building that loses its tenant and cannot be relet can fall in value quickly and substantially.
Each syndicate is concentrated in one building, often with one tenant. It should be treated as a high risk component of a wider portfolio, held for the medium to long term.
Interests are illiquid. A sale can take time, may not be possible when it is wanted, and will be at whatever price a buyer is prepared to pay.
Income is not guaranteed. Distributions can fall, pause or stop, and costs can fall on the investors while they have stopped.
Decisions are collective, so an investor can be committed to expenditure, letting terms or a sale they voted against. Where the case for a purchase depends on a plan, such as a regear or a planning consent, that plan can fail.
The arrangement also depends on the operator performing over many years. Investors should ask who would take over the management, the deeds and the records if the operator ceased to trade.
Tax treatment depends on individual circumstances and on how an interest is held, and the rules change. Investors should take professional tax advice.
WHO CAN INVEST
Investments of this kind may only be promoted in the UK to a restricted group of investors. Before we can discuss a specific building, we must establish that an investor falls within one of three categories.
A certified high net worth investor signs a statement in wording prescribed by the Financial Conduct Authority. It confirms an annual income of at least £100,000 in the last financial year, or net assets of at least £250,000 throughout it, excluding their home, pension and certain insurance policies.
A self-certified sophisticated investor signs a prescribed statement confirming which qualifying criterion they meet, such as membership of a business angel network or two or more investments in an unlisted company in the previous two years. Both statements last twelve months.
A certified sophisticated investor holds a certificate from an authorised firm confirming they are sufficiently knowledgeable, valid for thirty-six months, alongside their own signed statement.
The process also includes a risk warning addressed to the investor by name, a cooling-off period and questions about their circumstances and objectives. Meeting one of these tests does not make an investment suitable. It means the law permits the conversation.
ABOUT HELMSLEY GROUP
We have syndicated commercial property from our offices in York for over 40 years. Our guide, Property syndication explained, covers each of these points in more detail.
To request a copy, or if anything here is unclear, call us on 01904 682 800. We cannot discuss a specific opportunity until an investor's category has been established.
If you have any questions, would like further clarification or would simply like to meet us in person, please contact us by whichever means is most convenient. You will deal directly with company directors, who aim to make themselves available throughout your investment journey with us.
IMPORTANT INFORMATION
Published for information by Helmsley Group. It is not advice, and it is not an offer, an invitation or an inducement to invest in any product or scheme. It does not describe any particular investment. Syndicated commercial property interests are typically interests in unregulated collective investment schemes, which in the United Kingdom may be promoted only to certified high net worth investors, certified sophisticated investors and self-certified sophisticated investors. They carry no Financial Services Compensation Scheme cover and no access to the Financial Ombudsman Service, and capital is at risk. Anyone considering an investment of this kind should take independent advice from an adviser authorised to advise on non-mainstream pooled investments. Helmsley Securities Limited is registered in England No. 1990062, and is authorised and regulated by the Financial Conduct Authority with firm reference number 665743.