Forum Replies Created
I am not sure where the “$100K” fee to prepare a prospectus originated, when I have been quite clear on estimating the cost at between $20-50,000.
[WP] “my concept is that if I was able to have an ASIC registered prospectus, then I could then attempt to raise funds from there.”
Raising capital via a prospectus is not an easy or inexpensive task. Furthermore, once the prospectus is ready to distribute [which requires more than the preparation of a document outlining your concept], there is no guarantee funds will be secured.
[WP] “I think that there are many people around who wish to invest in property”
A critical point many people overlook when considering prospectus financing is the typical investor is not as interested in the method used to generate a return on investment, as they are the rate of return and the history [success rate] of the company raising the funds.
Having read the remainder of your post, I would suggest focusing less on “maximizing profit” – when there isn’t the means in place to do this, and implementing a strategy which is more condusive to your experience and current financial position – take one step at a time.
In saying this I am not suggesting you do not utilize OPM [other peoples money], but it would appear raising capital in the public arena is not the best or most risk adverse option at this time [for you or any investor].
You mention selling off the plan will not generate the profits you seek, however, this is a more cost-effective option which if conducted correctly can generate the income you require [and experience] in order to raise capital via a prospectus.
And just because you are selling off the plan does not mean you have to “sell cheap”.
[WP] “If one is working on about a 20% expected return (as I believe the case is)”
I am assuming you have a 20 percent rate of return in mind for investors. If you raise funds via a prospectus you will likely find the typical [experienced] investor will require in excess of a 100 percent rate of return – and the maximum holding period will be 2-3 years.
— Michael
“What were you basing 100k on?”
I did not suggest the cost to produce a prospectus is $100K. But I can assure you anybody quoting $3-5,000 is not qualified to do so.
My feedback was..”In terms of cost, this can vary considerably, but a straight forward prospectus could range between $20,000-$50,000 – if prepared in the correct manner.”
“correct manner” means employing; a reputable law firm which abides by SEC rules and regulations, a qualified financial advisor/accountant experienced in public fund raising, key people to manage planning and regulatory issues, and conducting sufficient research and due diligence on your part.
“I would be best to start with a company.. (as opposed to a trust)”
You need to speak with an accountant and lawyer. We prefer companies over trusts for several reasons, but there are many factors to take into consideration in terms of future investment, liability and exit.
[Pisces] “a promoter would probably be looking at a 5% (?) fee which, if the funds raised come to $ 2 M, would mean a brokerage fee of $ 100 K.”
As noted earlier, a broker [marketing] fee is likely to be 5-10 percent. The difficulty will be finding a reputable broker willing to raise capital for an individual/startup company – and I do not know of a broker who would consider less than a $2,000,000 raise, under exclusive contract.
wrappack – a word of advice, whenever you consider raising money in the public forum [securities] do not cut any corners, go with the lowest estimates, or employ the least expensive “professionals” – it will end up costing you ten-fold.
Having read your posts I would recommend gaining more experience – in terms of syndicated fund raising and securities, or partnering with someone who offers the knowledge and experience necessary to conduct this process in a professional/qualified and risk adverse manner.
Personally, I specialize in raising investment capital through public channels – we then direct these funds into real estate developments conducted internally and other investment sectors.
My point being, the information myself and others have provided is realistic, given the information provided by you, and should not be discounted due to “an acquantaince of an acquantaince in the finance and RE field” stating otherwise.
— Michael
“How do I ever know if I am dealing with a potential scammer???”
The decision to invest time and/or money into any “investment company” should involve the same due diligence as any other investment decision i.e. stock, bonds, property.
Request customer testimonials, a corporate history and information which details the “company’s” success rate – and make sure it can be validated.
Most businesses in this segment will provide this information due to their ability to remain in business being reliant upon “credibility” and “reputation”.
If they decline, or the information cannot be validated, move on to the next company.
“it has taken 6 weeks so far for the ‘investment company’ to come back to me with off plan specs let alone contracts to get a valuation done before signing”
If a “red flag” exists, such as the delay you have referred too, and the “company” cannot provide an explanation that you are 110% comfortable with, end the business relationship – they are putting your opportunity at risk.
9 times out of 10 these decisions are based on “gut instinct”.
— Michael
The capitalization rate [or “cap rate”] is a ratio used to estimate the value of income producing properties.
Put simply, it is the net operating income divided by the sales price or value of a property expressed as a percentage.
Capitalization rates typically range from 8 to 12 for commercial and residential income properties. A high capitalization rate suggests that the cost of acquiring a property is low relative to the income generated by the property.
Example 1:
A property has a NOI [Net Operating Income] of $155,000 and the asking price is $1,200,000
Cap Rate = $155,000 divided by $1,200,000 X 100 = 12.9 rounded
Example 2:
A property has a NOI of $120,000 and Cap Rates in the area for this type of property are 12%.
Estimated Market Value = $120,000 divided by .12 = $1,000,000
Net operating income in the above calculation is equal to gross income minus the vacancy amount and operating expenses.
Operating expenses include such items as advertising, insurance, maintenance, property taxes, property management, repairs, supplies and utilities and do not include depreciation, interest and amortization.
— Michael
“I am taking my time to learn all there is to know about the development side before doing one myself.”
The key to real estate development is selecting a qualified “team” to assist you – in effect you become the co-ordinator/development manager.
“you need to have some spare cash in case of setbacks”
You will require cash reserves to meet the preliminary costs which include research, planning and marketing – contingencies should always be accounted for in preliminary budgets.
An option is finding “silent” partners to finance this phase in return for equity in the project.
“you cannot get a high LVR lend on developments as they are seen as riskier by the lending institutions”
You may want to consider selling x number of units/lots OTP [off the plans] before institutional funds are required – sold subject to financing, etc – deposit held in escrow.
Lenders are then more willing to proceed with financing – especially if you have an experienced team involved in the planning/preliminary phase i.e. architect, engineers, project manager etc.
— Michael
“One good enough reason for a developer to delay commencement of the construction is because he hasn’t made sufficient of the plan sales and is therefore unable to obtain construction finance.”
This was a possibility mentioned in my initial response that should be answered before proceeding.
In many cases the inability to meet the minimum sales target within a reasonable period i.e. 6-12 months, is an indication the project will not enter the construction phase.
“Another may be that he may want to sell most of them on completion and he may judge that the timing isn’t right.”
This is also a possibility, but as noted it is not often a developer will sustain the debt/opportunity cost for a period exceeding 3 years, aside from other factors, there is no guarantee the costs will be recovered.
— Michael
Below is my response to your post in the “Help Needed” forum.
“I was wondering if anyone knows if an Australian can takeover an assumable mortgage in another country?”Depends on the country and its foreign investment policy.
Check whether the country where you plan to invest permits foreigners to own property. Many countries do not permit foreigners to acquire real estate without immigrant status.
Also, there may be restrictions on buying a property type or in a specific location.
A method used to purchase real estate in a foreign country is to set up a trust [if applicable to non-residents] and then lease the property.
First consult with a reputable lawyer – the Australian embassy or consulate in the country where you plan to invest should have a list of qualified lawyers.
Before you make a real estate purchase, understand the customs and laws of the foreign government with regard to real estate. In the event of a dispute, you will have to abide by local laws.
“Also, are there any lenders in Australia that will lend you $$$$ for international property investing?”
Most institutional lenders will provide financing for offshore investment if the loan is secured where it originates i.e. in Australia.
— Michael
“I was wondering if anyone knows if an Australian can takeover an assumable mortgage in another country?”
Depends on the country and its foreign investment policy.
Check whether the country where you plan to invest permits foreigners to own property. Many countries do not permit foreigners to acquire real estate without immigrant status.
Also, there may be restrictions on buying a property type or in a specific location.
A method used to purchase real estate in a foreign country is to set up a trust [if applicable to non-residents] and then lease the property.
First consult with a reputable lawyer – the Australian embassy or consulate in the country where you plan to invest should have a list of qualified lawyers.
Before you make a real estate purchase, understand the customs and laws of the foreign government with regard to real estate. In the event of a dispute, you will have to abide by local laws.
“Also, are there any lenders in Australia that will lend you $$$$ for international property investing?”
Most institutional lenders will provide financing for offshore investment if the loan is secured where it originates i.e. in Australia.
— Michael
“Why is the buyer’s deposit at risk? It isn’t here, as it is lodged in the Real Estate trust account.”
My response was “in some cases”.. the buyers deposit is at risk”.
Not every purchase agreement allows the buyer to recover 100 percent of the deposit.
The feedback I have provided is not specific – I do not know the development, the developer or the location. I have simply outlined general considerations using the original question and my experience as the benchmark.
“Four concurrent developments in Canberra is about 3 more than most other developers have on the go at any one time.”
My point being, the developers debt ratio could also be 3 x [or was it 4] that of any other developer, which “may” be the reason the development in question has a scheduled completion date end of 2004 – which is not a typical timeline.
“I have missed something in your response”
It would certainly appear so.
— Michael
“Tie it up with a long term option (or, more likely, a long term unconditional contract)”
– When the contract becomes “unconditional” the land is in effect sold subject to settlement. In order to secure a long term settlement date it is likely the offer will need to exceed the valuation.
– A “long term option” restricts the vendors ability to sell the land. Therefore the offer may again have to exceed the valuation and offer low risk incentives or a secured guarantee.
“I would be looking for co-investors, as opposed to raising funds and paying at say 9-12%.”
– “Co-investors” and “raising funds” is generally a one in the same definition in this instance.
“Investors would profit handsomely on the deal if all went to plan, but would only own shares of a trust (or some other entity).”
– If you are offering investors equity [shares, units] you must still demonstrate the projected ROI [return on investment] which is generally defined as an annual or periodic rate of return [percentage].
“thus giving larger investors a mortgage over the property (though it might end up being a fifth or a sixth mortgage- is this possible?)”
– “Larger investors” will generally seek a subordinate note only second to the institutional lender
i.e. bank.“I would need an entity (with all the associated legalese and accounting), a deposit bond (fairly cheap), and an ASIC approved prospectus.”
– There will be additional costs associated with planning and other professional fees i.e. engineers, surveyor, registered valuer etc, required in the preparation of a prospectus.
– Although a deposit bond reduces up-front cost, secured assets are required i.e. ~120 percent of the bonds value, and sufficient funds in place when the bond expires.
“Strange then, that most developers treat it [property] as a short term investment.”
– The term of investment varies according to the developers investment strategy and risks involved. More than often developers do not look at property as a short-term investment, but they do aim to recover costs [reduce risk] in the shortest period possible – which does not necessarily mean assigning control of the property to another party.
— Michael
As a general rule, Australian residents must pay tax on all income, whether it arises in Australia or overseas.
This includes foreign wages or income such as rent/profit derived from foreign property and dividends from shares in foreign companies.
However, tax already paid in the source country can be offset against this liability.
You should contact a qualified tax/financial advisor to discuss your situation.
— Michael
“I have purchased 15 OTP apartments in the last few years, and not one of them had been started before I signed my contract.”
I am not questioning the stage the development is at when the apartment is purchased.
My point was.. “It is not often a developer will sustain debt for 3.5 years, let alone wait 3.5 years to realize a profit”
Being a developer who sells OTP, it is not “cost effective” or [most importantly] “risk adverse” to extend a development for 3 + years – assuming small to mid size [< 200 units].
For example, the development timeline we aim for – in terms of an apartment project, is 18-24 months from concept to completion, no matter what size the development. And we offer a very high-end product in locations that are often difficult to secure planning approval.
If you have purchased 15 apartments OTP then you should understand the “red flag” that exists when a development is taking 3 + years to complete – aside from the opportunity cost, in some cases the buyers deposit is at risk.
“Four” concurrent developments does not necessarily signify the development company is in a secure position – especially in today’s market.
— Michael
To clarify, my comments are specific to raising equity capital, whereby the syndicated parties receive equity [i.e. shares, units] in accordance with their investment.
They then proceed on the basis that if the project fails, they lose their investment. If it succeeds, they benefit accordingly.
Not “borrowing” funds as such, where the borrower is liable to repay the investors if the project fails. This would generally be a secured loan arrangement.
In terms of the interest rate being significantly higher than a bank [when using private capital] this was in response to a comment that indicates otherwise.
Or this comment may reference the fact that cash reserves are in place to meet the preliminary costs.
— Michael
To clarify.. if the captial gain/profit is brought back to Australia then CGT can apply.
A qualified tax accountant will provide information specific to the case in point.
— Michael
Interest applied to mortgage loans is tax deductible in the United States.
— Michael
The key difference is a “joint venture” is often the amalgamation of two or more active businesses, whereby a “syndicate” generally applies to the formation of a new entity for the purpose of raising and investing capital.
Definitions:
Joint Venture – the cooperation of two or more individuals or businesses in a specific enterprise, each agreeing to share profit, loss, and control – common when companies partner without having to merge.
Syndicate – a group of investors who act together when investing in a company or other entity.
Both are typically taxed as a partnership.
— Michael
“Even if it cost 100k to raise 2 million, I think it would be worth it in the long run- in interest saved”
The above statement is not clear. The money needed to prepare and distribute the documentation will only be interest free if you have the cash reserves.
Any funds raised through private investors – whether for the startup costs or actual project, will incur a significantly higher interest rate than a bank. Furthermore, they may seek some form of security subject to your experience and success rate.
Raising private funds is far from risk/liability free and is not cost-effective when compared to leveraging a bank.
In reference to the scenarios outlined, it will be difficult finding investors willing to “hold” their investment for 5 or more years. Needless to say there are a lot of other cost/risk factors that need to be taken into account.
“it will take ten years, but I think that the chances of failure would be miniscule”..
From an investors perspective, this statement alone can shatter credibility.
— Michael
CGT is not payable in New Zealand.
CGT is incurred in Australia when capital gains originate offshore.
— Michael
The proposed subdivision in Luggate [mentioned above] is potentially a very good investment.
The developers are highly respected and successful business people in the district and have considerable experience in the planning and environmental process.
However, this subdivision is still only proposed and must be submitted to the Queenstown Lakes District Council for approval – which can be a difficult and time consuming process in itself. There is also the possibility of Environment Court intervention which could delay the project for up to 12 months.
Those who seek further information should be prepared to “hold” and not proceed with the sole intention of “flipping” the site prior to settlement. Although a short-term profit is not out of the question, land in this region is reaching peak valuations for now. The benefit being demand continues to exceed supply.
I am personally not involved in this subdivision or any business relationship with the developers.
— Michael
In New South Wales the laws regulating residential strata titles are the “Strata Schemes Management Act 1996” and “Strata Schemes [Freehold Development] Act 1973”.
A “strata company” is the managing entity created when a strata plan [referred to above] is registered with the Land Titles Office.
The strata company maintains the property on behalf of the unit holders and enforces the property’s by-laws [rules and regulations which the owners and residents must abide by].
I recommend contacting professionals who specialize in strata schemes to ensure the process is managed correctly.
— Michael
