Setting up a private syndicate to invest in UK property – the key terms you need to agree with co-investors
This article is for people who want to set up a private syndicate to invest in UK property.
28 March 2014
In order to set up a syndicate, you will need to agree certain key terms with your co-investors. To begin with, you will probably want to set them out in an informal 1 or 2 page document, so that potential co-investors can review them easily. Those terms can then be used to prepare the legal documents.
You will want to keep things as simple as possible. Here is a list of the basic terms you will need to agree on. It refers to a single property, but the same considerations will apply to multiple properties.
1. The property – either the specific property you plan to invest in, or the generic characteristics (residential / commercial, location, price, condition, projected rental yield and so on).
2. Investment strategy – your plans for the property e.g. develop and sell, long term hold, change of use etc.
3. Individual roles of investors – you should avoid appointing a management committee or a managing partner or anything like that (click here to read why), but one or more of the participants may take on a secretarial or co-ordinator type role. That may be rotated periodically.
4. Capital required – the total funds required, the minimum contribution from each investor, and the expected number of investors (usually not more than 10 or 12).
5. Leverage – specify whether or not you plan to obtain bank debt, and if so, on what terms.
6. Approval of acquisition – the voting requirements to approve the acquisition and associated arrangements. Often this would be on a unanimous basis, but occasionally some other voting threshold may be agreed e.g. 75% by value.
7. Investment period – in other words, the length of time during which the property is to be held.
8. Approval of disposal – the voting requirements to approval a sale or other disposal of the property. Often, a proposed sale before the end of the investment period (or before completion of the development) would require unanimous or 75% approval by investors. Following the expiry of the investment period, the threshold is usually much lower, and typically any investor may require the property to be marketed for sale as soon as possible.
9. Approval of other decisions – the voting requirements to approve other decisions is often set at something like 51% or 75%.
10. Service providers and conflicts – specify what service providers and advisers are to be appointed (e.g. surveyors, lettings agents, lawyers, accountants and tax advisers), and disclose any connection with you or any of the other proposed co-investors.
11. Profit sharing ratios – usually this would simply be pro rata to the amount originally invested. Occasionally, a ‘founder investor may be given an additional profit participation as a reward for initiating an investment opportunity. That may be, for example, a percentage of profits achieved after investors’ capital has been returned, together with notional interest at a specified rate.
12. Exit / liquidity – the arrangements may cater for an investor who wants to exit the arrangements before the expiry of the term – for example on a change of family circumstances or on death. It is unusual for an exiting investor to have the right to require other investors to buy out his or her interest. However, there may be a pre-emption procedure so that an exiting investor must offer his / her interest to the other investors pro rata, before offering the interest to an outside buyer.
13. Dealing with defaulters – a default on the part of one of the investors can compromise the whole of the arrangements – for example, if an investor fails to actually participate in decision-making. In that situation, the other investors may have the right to buy out the defaulting investor, sometimes at a discount to the current market value of the venture.
14. Confidentiality – specify that all investment opportunities offered to the syndicate are to be treated as confidential.
Need some help?
If you would like to know more about how to set up a self-managed property syndicate, this is a great place to start: