Augusta's latest property syndicate offers relatively attractive returns but investors should think carefully about its upfront costs

Augusta Funds Management has launched another large commercial property syndicate aimed at retail investors, this one forecasting an initial pre-tax cash return of 7% progressively rising to 7.75% over four years.

It is being structured as a Limited Partnership, which means each investor will be taxed on their proportionate share of the scheme's net income (which may vary from the cash distributions they receive), which will be taxed at the investor's individual rate.

Investors will also be able to claim a proportionate share of the depreciation on the building's chattels as a tax deductible expense.

The minimum investment is $50,000. The syndicate is targeting $52.5 million from investors supported by a $41.1 million interest-only mortgage from BNZ to acquire an 8,280 square metre office building on the corner of Graham and Victoria St West on the fringe of Auckland's CBD, (known as Building B in the BDO Centre office complex), and a smaller building in the same complex with 240 square metres of retail space.

Like most property syndicates, this latest offering is likely to appeal to investors such as retired folk attracted to the income stream from its monthly cash distributions.

The forecast pre-tax distributions of 7% a year initially, rising to 7.75% over four years, are better than the gross dividend yields of most of the main NZX-listed property-based vehicles, which are mostly in the 4% to 7% range.

However there's a trade off between the higher return the scheme is forecast to provide and the limitations of its property syndicate structure.

Like most syndicates, the Building B scheme does not have a fixed term and there is no redemption facility.

Investors get back the money they invested into it when the property is sold and the scheme is wound up, assuming the building is sold at a sufficiently high price.

That only happens when 75% of the scheme's investors agree to do so, so in theory, a syndicate could continue indefinitely if not enough of them wanted to sell, although most are wound up within 5-10 years.

If an investor wanted to cash up early they could sell their units in the scheme to someone else via a private sale, but as the Product Disclosure Statement for the Building B syndicate states: "Your investment in these units can be sold but there is no established market for trading these financial products. This means that you may not be able to find a buyer for your investment."

So investors should be prepared to have their money tied up in the scheme for the long term.

They should also be aware of how the scheme's upfront costs will affect the amount of capital that is returned to them when the scheme is wound up.

Property syndicates are expensive to set up relative to the amount of money they raise and their set up costs are paid out from their investors' capital.

The Building B syndicate has set up costs of $5,026,674. The biggest components of these set up costs are:

• The offerer's fee of $1.75 million to be paid to Augusta for setting the syndicate up.
• The offer of units in the syndicate is being fully underwritten by Augusta Capital (the parent company of Augusta Funds Management) , Cook Property Group and Mansons TCLM which is the company that developed Building B and via a subsidiary is selling it to the syndicate. Between them these companies will earn $1.575 million in underwriting fees from the deal.
• Brokerage fees of $1.05 million payable to Bayleys Real Estate which has an exclusive contract to sell down the units in the scheme.
• BNZ is also having a feed, charging $210,000 in bank fees.

Because these costs are paid up front they have the effect of reducing the investors' equity to 92.8 cents for every dollar they invest (at the property's valuation of $89.6 million) or 90.4 cents per dollar invested based on the property's purchase price of $88,373,326.

So if the property was resold tomorrow at the same price it is being purchased for, investors would lose about 10% of their money and even more once selling and wind up expenses were allowed for.

Of course there is no way of knowing how much the property will actually sell for when investors eventually vote to wind the scheme up.

But if market conditions are favourable between now and then and the property increases sufficiently to cover the scheme's set up costs and the costs of selling the building and winding the scheme up, then they should get all of their original investment back.

And if it improves in value by even more than that, investors could potentially make a worthwhile capital gain.

Building B Graham Street Limited Partnership Overview:

A commercial property syndicate structured as a Limited Partnership.

Minimum investment $50,000.

Asset to be acquired: A new 8,280 square metre commercial office building with ground floor retail space, located on the corner of Graham St and Victoria St West on the fringe of Auckland's CBD, plus a smaller building with 240 square metres of retail space.

Forecast cash returns (pre-tax): 7% in year one, progressively rising to 7.75% in year four.

Term of investment: No fixed termination date. The property can be sold and the syndicate wound up and surplus capital returned to investors when 75% of them vote to do so.

Cashing up early: There is no redemption facility for units in the scheme, but private sales of units are allowed.

Purchase price: $88,373,326.

Valuation by Jll: $89,600,000

Purchase to be funded by: 1,050 investor partnership units @ $50,000 each ($52.5 million), and an interest-only mortgage from BNZ ($41.1 million).

Loan to Valuation Ratio: 45.9%.

Scheme establishment costs: $5,026,000, to be paid from investors' equity.

Initial Net Asset Backing: 92.8 cents per $1 invested (at valuation), or 90.4 cents per $1 invested (at purchase price).

Click on the link below to read the scheme's Product Disclosure Statement:

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