Investment structures for property developments: private self-managed syndicate
The sixth in a series of blog posts about different ways to structure property developments that involve one or more private investors.
19 August 2021
In this series of blog posts on investment structures for property developments, so far we’ve looked at structures that are usually suited to having one investor, or just a few. And we’ve looked at one that works with dozens of outside investors are involved. Here’s one that sits between those extremes.
In situations with, say, between six and twelve investors, a syndicate or ‘investment club’ may be the right approach. The investors do not lend money to the SPV – instead they hold equity that entitles them to a share of any profits. All investors are involved on the same terms, and it is critical that they all actively participate in decision-making.
It may not be necessary to add bank lending. If it is, the bank will demand first charge rights.
Advantages and disadvantages of a private syndicate
The fact that bank debt may not be needed is a big advantage of this approach. It can also be a good way to maximise investment capital from the developer’s existing contacts. The fact that investors are required to actively participate in decision-making can be attractive to them. You might be able to build a community of like-minded investors.
However, as with the loan notes structure that we discussed in the previous blog post, communications with investors and the administration of the arrangements must be carefully managed to ensure that the investment does not constitute a ‘Collective Investment Scheme’ for regulatory purposes. The private syndicate structure is not suitable if the developer is raising capital from ‘passive investors’.
If you would like to discuss anything with us, feel free to get in touch at firstname.lastname@example.org or +44 20 3432 3269. You can also download a more detailed guide – for free – from our website here.
In the next blog post we’ll look at the last of the five structures: crowdfunding.
Key terms SPV – in order to acquire and hold property in England and Wales you usually want to use a legal vehicle. There are several different types, of which the most common is an ‘SPV’ or Special Purpose Vehicle. This is often a private company limited by shares and registered in England and Wales. In some cases – but not all – it can be a 100% subsidiary of the developer. In other words, the developer owns all the shares in the SPV.
First charge – if a lender or investor has ‘first charge’ on a property, they have the right to be repaid before any other parties that are involved. In effect, they are ‘first in the queue’, which lowers their risk. Banks typically demand first charge when lending to property developments.
Collective Investment Scheme – this is an important concept in the context of UK financial services legislation. It refers to an arrangement like a fund or ‘pooled investment’, where a number of investors contribute money, and the investment is managed by someone else. The establishment and operation of a Collective Investment Scheme is a regulated activity, which can only be carried on by a person approved by the Financial Conduct Authority.
Important Nothing in this blog constitutes legal advice. You should take independent legal advice before acting on any of the topics covered.