Beware the return of the asterisk

Regular readers of advertisements for finance companies will remember the asterisk. It was often nestled next to the phrase "Secured Debenture".

The small print would say the security was subject to any prior ranking and would sometimes say it was a security over property.

We all now know the phrase "Secured Debenture" meant little. It could be a debenture which was down the rankings behind (as is always the case) the IRD and employee salaries, but also behind first mortgage holders, Fortress Credit Corp and a bank loan of some sort. The property may have been a hole in the ground near Queenstown or a bunch of used cars in South Auckland.

Investors in Bridgecorp were promised a secured debenture. It turned out Rod Petricevic was paid his salary before investors got their money back. Fortress got their money out of MFS Pacific before debenture holders. Bank of Scotland will get their money back before debenture holders in Geneva Finance.

Investors should be rightly aware of the asterisk and the small print.

Now the asterisk is back and we should all be a little afraid.

Alex Tarrant pointed out on the NZHerald.co.nz here last Monday that syndicated property deals promising 10 per cent cash returns were on the rise. Brian Gaynor was pointed in his criticism here on Saturday of syndicated property deals.

"Most syndicates have no termination date, annual returns may fall after the first year and it is the promoters, rather than the investors, who get rich from these schemes. Each of these offerings should carry the clear warning that "property syndicates are a major danger to your financial wellbeing." Gaynor said.

Too right.

You can add to that these syndicated deals are very lightly regulated and are being used as a way to flick unsaleable assets from failing finance companies onto unsuspecting savers.

They are heavily dependent on interest rates remaining low to make money and are very exposed to a long recession with plenty of commercial property vacancies.

For anyone considering investing in one of these things, they should ask the following 10 questions:

1. Who owns the building? Is it a finance company in moratorium? Are there any connections between the selling agent, the fund manager involved and any finance companies?

2. Why can't they sell it to a proper fund manager or another commercial property investor? Is it in a bad area?

3. What interest rate is assumed for the debt attached to the building in the forecast of "10 per cent cash return"? What happens to the returns when interest rates rise?

4. How much debt will be loaded on the building and which bank is it with? Is it a New Zealand bank or one of those hot-footed foreign banks like Bank of Scotland, Royal Bank of Scotland or Citigroup?

5. Who are the tenants and how long have they agreed to stay? How long is the current rent in place for and what arrangements are there to increase (or decrease) the rent later?

6. How easy is it to sell the units in the syndicated property onto a secondary market? What examples can the agent point to?

7. Who pays the management fees for the property? The tenant or the syndicated unit holder? How much are the fees?

8. How easy would it be to remove the managers if necessary?

9. What is the history of the building's rent and its value? What did it sell for previously?

10. How much maintenance or development is required in later years?

 

Bernard Hickey