I have tried to find info regarding setting up a property syndicate that can offer to the general public- looking to raise 500k-4Mil, probably in small (ie 20+k lots)
ASIC’s web site listed a few ways, but all in legal mumbo jumbo. Sent them a ‘please explain’ email, they sent one back saying sorry, we dont give investment advice, please seek proffessional help
Before seeking help, I like to investigate ideas and possibilities- so I know whats going on, and have a better idea of WHY we may need one setup over another.
Any info much appreciated
Start collecting product disclosure statements (they used to be called prospectuses) from all the syndicates currently out there. Have a good read through them, and it’ll give you an idea of what’s involved.
Some of the things you’re going to need are:
1. Australian financial services licence
2. responsible entity (ie trustee) that complies with the Corporations Act and ASIC requirements.
3. a “custodian” to hold the syndicate assets (which can be the responsible entity, but you’re unlikely to get the RE to comply with the requirements at the beginning)The cost of setting all of this up properly is probably going to be in the 6 figures.
Cheers
Elysium-MDIY Residential Property Settlements in WA – the book coming soon! When I can get my act together…
Elysium, what do the following mean ?
1. ‘Australian financial services licence’ and why is this needed ?
and
2. ‘the responsible entity’ What is this entity’s task ?
The prospectus sets out the type of ventures it is proposed to go into.
So where does the RE come into making decisions about the type of investment ?
And what do you mean by ‘the requirements at the beginning’ ?
Pisces
Unless you have investment partners ready to finance the proposed venture, experience managing equity funds, and a successful track record, “syndicates” can be a very difficult and time consuming exercise – the majority do not obtain financing.
I do not wish to discount your plans, however you may want to consider partnering with someone experienced in real estate syndicates prior to pursuing the formalities.
— Michael
P.S. the lower the investors contribution [i.e. $20K] the higher the risk [less experienced investor/high maintenance/high propensity to seek early liquidation] – and the fund raising phase will be more time consuming and costly.
Michael, are you at all able to give Wrappack some idea what both the legal setting up cost would be for such an entity (I am talking prospectus here) as well as (in your estimation) the cost of raising the funds (i.e. advertising + manpower) ?
Let us assume Wrappack raises $ 2 M , as a rough figure (I may be way out however) the total cost of achieving that may be say $ 200,000.
I cannot even see it worthwhile the money and the effort to obtain what ultimately is a small sum of money only.
How much can it be done for on the cheap ? I know someone who did all the work involved in preparing the prospectus himself without having a lawyer involved.
One still has the task ahead of publicising the issue.
That particular person happened to have a mailing list
he could use for that purpose.Have you given any thought at all where you would get your subscribers from Wrappack ?
Pisces
“I know someone who did all the work involved in preparing the prospectus himself without having a lawyer involved.”
This is not a good idea unless the person raising the funds has vast experience in these matters, and has worked with a lawyer in the past to prepare a prospectus.
Even in this case a lawyer should still be used to review the document prior to distribution.
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.
Marketing costs are also an unknown variable – given the information. If a broker is contracted the cost could range between 5-10 percent of the funding target.
— Michael
Many thanks for your replies. As for pieces reply- Was asking exactly asking the same questions I was going to (twilight zone music can end now).
Even if it cost 100k to raise 2 million, I think it would be worth it in the long run- in interest saved, and in not having your back up against the wall blindfolded and having your last cigarette in case the bank executioner decided to turn off the funding tap.
I was thinking of this as a scenario- please tell me if you think I may be on to something.
Buy about 5M worth of subdivisible land, and try to raise about 2-3M. Wait 5 or so years, subdivide off half of it, and sell it. This should retire almost all of the debt.
Wait another 5 years. Now the block left should be worth about 5-7M, and we would owe the banks nothing. Go to council with plans for the most amount of allowable units, get approval. Then, we can easily raise cash to buy, and not have to sell cheaply off the plan (cutting our profit massively) in order to originally raise the finance.
Sure, it will take ten years, but I think that the chances of failure would be miniscule, compared to trying to do it straight away.
Any thoughts?
“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
You may be right Michael though I read Wrappack’s first post as him looking for investors in the form of co-investors whilst you appear to think Wrappack was looking to raise funds as in borrowing money.
What is it exactly you have in mind Wrappack ?
The other question is : ‘Do you have a spare $ 100 K to $ 200 K to initially get the ball rolling ?
And, are you prepared to place that kind of money at risk ?
The way some syndicators have gone about their business in the past is by tying up a property first via a longish option, long enough to get a plan approved and then raising money via a syndicate and the property being sold into the syndicate at a higher price than the promotor’s actual total outlay, thus providing an upfront profit to the promotor.
A nice way to have an almost guaranteed end buyer.
Whether such things would still be allowed to go on I don’t know. I guess it is provided the director’s interest as a seller is disclosed.
Pisces
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
For many years there was a mob around flogging off shares in syndicates. They were called something like ‘D.F. Johnston Syndicate No XYZ’ I think.
Haven’t heard anything about them for years. Does anyone know whether they are still around ?
I believe they were well established (and probably didn’t have much competition at the time) and were apparently succesfull operators.
Pisces
What is it exactly you have in mind Wrappack ?
(Almost) exactly as you guessed with your next paragraph. Tie it up with a long term option (or, more likely, a long term unconditional contract), get a plan approved, start a syndicate, then start subdividing and developing in stages, with a view to the long term. The property would be bought by the syndicate, and the price would not be “upped” as you suggested. (Although, I too hear the rumours that this often happens).
I would be looking for co-investors, as opposed to raising funds and paying at say 9-12%. Investors would profit handsomely on the deal if all went to plan, but would only own shares of a trust (or some other entity).
I would be happy to give say a mortgage on a higher figure such as 200k or so, thus giving larger investors a mortgage over the property (though it might end up being a fifth or a sixth mortgage- is this possible?)
Thus, I would be after long term co-investors with a similar investing philosophy as I had presented.
As for a spare 1-200k, I could probably raise 100k, and would consider risking the lot. I dont think that startup costs could enter the six figures though. After all, I would need an entity (with all the associated legalese and accounting), a deposit bond (fairly cheap), and an ASIC approved prospectus. Surely this would be 95% boilerplate anyway? I would have expected some change from 40K.
As for where to get funding, dad promised me 20k, so theres a (albeit small) start! Seriously though, I would probably try to find as many investor groups/meetings/share days, etc, and go on as a speaker. This is why it is so important that I set things up properly, (not how my interpretation of ASICs web site is)
Also, I would approach all architects, builders, interior designers, bathroom installers, etc, to see if they would like to invest.
ps my comment regarding my chances of being miniscule came out the wrong way. I was saying that I believe that if I perform multiple subdivisions over a period of time, that my chances of success would be significantly higher than if I tried to develop 1acre of land into units at once, with minimal funds available.
After all, most of us (except the flippers and perhaps the wrappers), view property as a long term investment. Strange then, that most developers treat it as a short term investment.
“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
Michael, when I applied for a deposit bond, we had to have five times the bond’s value in equity. I don’t believe that that has dropped at all.
Cheers
MelMichael, I talked last week to an acquantaince of an acquantaince in the finance and RE field. He said that I would be best to start with a company (easy to set up and easy to get extra funds down the track (as opposed to a trust)), and an ASIC approved prospectus. Cost of prospectus 3-5 grand, and about 6+ months, and all up I should get change from 10K (forgetting about marketing expenses). What were you basing 100k on ?
I know the question wasn’t addressed to me but, nevertheless, here is my input.
Let us assume you’ve got a prospectus which may well cost you $ 50 K (cheap) if it is prepared by one of the larger firms of solicitors (just guessing at the cost).
Remember, no self respecting lawyer would put a prospectus together for a mere $ 3K to $ 5 K (how else would they be able to pay for their tenniscourt ?)
What I do know is that in order to attract investors one needs to either advertise (and make a good job of that as a small classified won’t do the job) OR pay a share broker to mail it to their clients.I don’t think that a broker would be too enthusiastic about such a small issue but in any event, as their reputation is involved, they would need to be convinced about your ability.
I remember that about twelve months ago I approached a client who works as a stockbroker about the possibility of their firm being involved in raising money for another client who would have wanted to raise some $ 15 M to $ 20 M for an energy related project.
The broker replied that he didn’t think they would be interested as ‘the climate wasn’t right.
So here is another complicating factor none of us has brought up as yet.Secondly, 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.
I doubt that a fee of say 2% would do as the money put in by their clients would mean that these clients would have less money at their disposal to spend on shares (which possibly will be turned over several times and therefore produce brokerage, over a period, of a lot more than 2%.
Pisces
“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
Many thanks for all of your replies. I sincerely appreciate all of your replies, both + and -ve.
Michael, I was not discounting your views, but wanted to ask whether your approx fee of 100k would still apply to a relatively small scale venture.
Obviously, this scale of thing is in a difficult situation. It is too large to do by myself, and is too small to be welcomed with open arms by the big end of town.
In between, my concept is that if I was able to have an ASIC registered prospectus, then I could then attempt to raise funds from there. I think that there are many people around who wish to invest in property by developing the units/townhouses, as opposed to buying the units/townhouses. ie be the developer as opposed to buy a development
By initially raising funds, this would allow significantly less borrowings and LVRs from banks, and give much more room for manouver (ie delays, contingencies,etc). Then, selling after completion to owner occupiers , a higher price would be achieved (emotional purchases, particularly if I finance them 10 or 15%VF) than by initially selling cheap off the plan to investors (who wish to pay cheap prices) in order to raise the finance to build the units.
This point alone would have to significantly enhance profits. Lets assume a flat market, and say a 400k unit/TH (fair price). Off the plan investors (with a two year horizon) may only want to pay say 380, but on completion, owner occupiers would be more likely to be willing to pay a higher (say 410-420k) price if they are emotionally (rather than just fiscally) attached to their PPOR. THus, simply by selling on completion, an extra 40k might be gained. ie 10%. If one is working on about a 20% expected return (as I believe the case is), then an extra 10% will be closer to 30%, with less chance of drowing in debt along the way. If needed, we could always sell one or two off the plan.
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
hi guys.
Publicly offered property syndicates are typically set up in a unit trust-type structure (even though it’s not called a unit trust), because it allows the tax benefits (ie depreciation, amortisation, etc) to “flow-through” to investors.
Sure you can try to do your own prospectus yourself, but any misleading or deceptive statements, or material omissions from, the prospectus is a strict liability criminal offence. That means that you’ve committed the offence even if you didn’t mean to do so. The penalty (last I checked) is up to $22,000 ($110,000 for companies), 5 years imprisonment, or both. Is it worth the risk? I say no.
A proper due diligence process will reduce the risk of committing an offence, and may also provide a defence to the offence. A good lawyer will be able to implement a proper due diligence process.
In any event, because you (or the company you’re using) will be dealing in a financial product (ie issuing interests in a managed investment scheme for the purpose of raising money to invest in something), you are required to have an Australian financial services licence which allows you to deal in these particular financial products. Getting the licence in itself is going to be an expensive and difficult process.
Cheers
ElysiumDIY Residential Property Settlements in WA – the book coming soon! When I can get my act together…
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