This article appears with many thanks to Accounting Web, which first featured a version of it.
If you are the co-owner of an accounting practice, the opportunity could arise to buy the freehold or long lease of a new or existing property to be occupied by your practice, says LCN Legal partner Paul Sutton.
The approach described applies equally to your clients if they are professional practices or owner-managed businesses (such as architects, lawyers, surveyors or dentists) – and you may therefore be able to help them take advantage of an equivalent opportunity.
In this situation, a private syndicate can be a simple and effective way to acquire the property. Such a syndicate is commonly structured as a trust, which would hold the legal title to the property. The partners/investors would each acquire participations in the trust and would jointly control the investment.
This structure has three key benefits as compared to a basic co-ownership arrangement:
- The participants can access money from a much wider range of sources, without making it cumbersome to operate. These sources include money from the business, from spouses, and importantly, from the investors’ SIPPs (Self Invested Personal Pensions)
- Bank debt can be arranged on a non-recourse basis at the level of the syndicate
- A syndicate is flexible, and changes to its composition can be made without having to rewrite the documents, transfer the title or renegotiate the banking arrangements
Although an independent third party trustee is often appointed to administer the syndicate, it is important that all decisions relating to the investment are made by the investors themselves and not anyone else. The reasons for this are outlined below.
Minimise legal and regulatory administration costs
One key objective from a legal perspective is to avoid the syndicate being treated as a “collective investment scheme” (CIS) for the purposes of UK financial services law. This is because the establishment, operation and winding up of a CIS is a regulated activity which must be performed by a person authorised by the Financial Conduct Authority (FCA).
It is also important to avoid falling within the definition of “Alternative Investment Fund” (AIF) for the purposes of the European Alternative Investment Fund Managers Directive. Although there is a lighter-touch regime which applies to managers of smaller AIFs, it still requires those managers to be registered with the FCA. That would usually entail additional costs.
One of the main ways to stay outside the scope of both the CIS and the AIF legislation is to ensure that all the members in the syndicate participate in decision-making concerning the property. As a general rule, this means that all the partners/investors should actually vote on all key decisions during the life of the syndicate. This in turn sets a natural limit on the number of participants – if you have more than 10 or 12, the logistics of decision-making can become awkward.
In practice, the requirement for all the investors to participate in decision-making should not be onerous for this kind of investment, where the strategy is simply to acquire and hold the property as a long-term investment.
Although it is possible to avoid the need for an FCA-authorised operator in this way, many syndicates choose to appoint a professional trustee in order to ensure that appropriate records are kept.
This case study illustrates how a syndicate can work:
- A private accountancy practice wanted to acquire a new office for their own occupation, at a purchase price of £8.25 million.
- The senior partner wanted to retire in the next five years, so needed a structure that would allow flexibility in the future.
- Five other partners also wanted to participate in varying degrees, all investing through their SIPPs.
- A private investment syndicate was established using a trust structure with an independent trustee
- The senior partner and the five other partners invested £6.4 million through their SIPPs
- The syndicate obtained a bank loan of £445,000 by way of non-recourse secured lending at the level of the syndicate.
- The loan was repayable over five years.
- The property was leased back to the business for 10 years at a rent of £615,000 per annum.
- The new offices were acquired through the partners’ SIPPs.
- The partners, through their SIPPs, retained control over the premises.
- No rent was paid to third party landlords.
- Over time, the senior partner can reduce his share of ownership and sell his interest in the property to the remaining partners.
- The structure allows for changes in the ultimate ownership of the property without the need to adjust the terms of the bank loan. This enables the composition of the syndicate to be adjusted as the ownership of the accountancy practice changes over time.
Many thanks to the Custodian Capital team for their input on this article.
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: