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Development
Preference Shares - an alternative to development risk
By Dominic
Murphy
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It appears
to be the latest trend to involve investors in development of projects,
in order to gain greater return for the investor. Development does involve
some level of risk. When Professional developers look at potential returns
they generally expect some level of variance to the returns suggested at
the outset due to building delays, expenses being over budget and a lack
of sales of the final product which can add to holding costs.
As a way to
limit these risks for those funding projects developers in Australia have
introduced “development preference shares” as a way of moving an investor
into the position of financing the project rather than being a fellow developer.
The way
a development preference share works is as follows:
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An issuer raises
funds by issuing the development preference shares to the investor the
shares offer a fixed rate of return and maturity date – say 18% reflective
of normal costs for this type of funding and 24 months.
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The interest is
paid monthly as it would be for normal financing. The attraction to the
developer is the break up of interest into lower monthly commitments say
8% P.A, then a lump sum payment upon construction completion or the term
of the preference shares whichever is sooner. This amount is usually equivalent
to 10% P.A. The developers would normally being the full 18% P.A. paid
monthly which affects cash flow.
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The shares are
secured by a registered second mortgage held by a trustee on behalf of
the investors over the assets of the developer including land. The construction
financier holds a registered first mortgage when they become involved,
hence the shift to a second mortgage.
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The money is usually
only lent to developers with solid projects, due to the restrictions of
the loan. Often preconditions must be met before the funds from the issue
are released by the trustee such as:
o a formal
offer to finance the construction,
o a predefined
level of sales that covers the construction finance,
o development
approval from local and state authorities,
o and a fixed
price construction contract.
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The exit strategy
is generally the sale of the project often within the term of the development
preference shares or the term of shares say 24 months. Developers affected
by delays have no option but to pay out the development share holders at
the preset maturity date. If they have not sold they can generally refinance
or may take up the funds of a new issue.
The payments from
the shares are not seen as dividends but interest. For non-residents these
payments are subject to a 10% withholding tax on the amount paid , say
1.8% on the amounts used above. This withholding tax used as a tax credit
when declaring the income in your own country.
As you can
see this type of investment involves you in development of property without
necessarily exposing you to all the pitfalls of development.
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of opportunities are offered under a Prospectus and regulated by the Australian
Securities and Investments commission making the issuer of the Prospectus
declare all aspects of the offering. They are offered infrequently due
to the restriction on the developer and are often taken up quickly by local
investors. If you would like to know more about these types of opportunities
contact myself Dominic Murphy by email on australianprop@yahoo.com
or by phone on 0061-412-949-822. |
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