01 March 2021

Commercial property syndicate checklist

This checklist explains some of the things to consider before you invest in a property syndicate. You should be able to find answers to these questions in the documents you are given that explain the investment.

The syndicate

  • Is it a company or a managed investment scheme - and do you know the difference and what that means?
  • Is the offer of units or shares a ‘regulated offer’ open to retail investors?
  • Do you need to attest that you are a ‘wholesale investor’ to invest in the syndicate?
  • How many properties does the syndicate own or plan to purchase? Are you ok with that concentration of risk for your investment?

The property

  • What part of New Zealand is the property in and is it a growing area?
  • Could the property become hard to lease or sell when one or more of the current leases ends?
  • What is the condition of the building? Would this affect the sale of the property?
  • What is the level of insurance cover for the property?
  • What other risks have been identified that are specific to the property?
  • Check the details of the insurance cover – who pays for future increases, if any, and what are the terms?

The property syndicate manager

  • Who is the property syndicate manager? Are they a name you know?
  • Does the manager have a successful track record of managing syndicates?
  • Who decides what management fees are paid, and to whom? What is the level of the fees and might they rise?
  • Can investors vote to change the property manager? If so, will the syndicate need to pay additional fees to the property manager who is leaving?

The tenant(s)

  • Is there a single tenant or multiple tenants?
  • Who are the tenants? Are they a name you know? Are they financially secure?
  • How long are the leases and are any of them expiring soon?
  • Does the syndicate have to pay a ‘rental incentive payment’ for any tenant to get them to extend the lease?
  • Are there any upcoming opportunities to review the rent?

Related parties

  • Are any of the people or firms doing work for the syndicate related to each other in any way? For example, is the maintenance company related to the company setting up the syndicate? If so, how will their fees be calculated? Think about whether you would expect people to act in your best interests or whether they are more likely to try and maximise their own fees.
  • Is anyone allowed to borrow money from the syndicate?

Bank loans

  • Are there any bank loans being paid on an 'interest-only' basis? This means only the interest on the loan is being paid, and none of the original sum borrowed is being paid back.
  • If so, how long is the interest-only loan for? If the syndicate is not able to refinance the loan on a similar interest-only basis, costs will increase to cover the principal repayments and/or the syndicate may be forced to sell the property in order to repay the loan.
  • What is the loan-to-value ratio (also called the gearing ratio)? This tells you how much the syndicate owes (debt) as a portion of what it owns (assets).
  • What is the interest cover ratio? This tells you how much of the syndicate’s income (rent) is used to pay interest on its loans. The higher the ratio, the more comfortably the syndicate’s income can cover any interest owing.
  • Does the bank loan contain any covenants including loan-to-valuation ratio or interest ratio requirements? How often are they tested? How much headroom does the syndicate have if a drop in property value or loss of tenant income is incurred?
  • How long is the term of the loan for? What is the property syndicate manager’s plan for repaying the loan when it is due – will it attempt to refinance or sell the property? If refinance, think about the risk that refinance is not available or is on less attractive terms.

Getting your money out (liquidity)

  • Check what options you have for selling your units or shares if needed – is there a buy-back option or a secondary market to trade these units or shares? If there is, is the availability to sell units or shares limited by being up to manager discretion or other investor demand?
  • In the absence of selling your units or shares, what is the syndicate’s planned length of life – when do they plan to sell the property and distribute the investments and returns?

The valuation

  • Check how the manager sets a price of the share or unit in the syndicate. Is it based on the valuation of the property? Is it made by an independent expert? How often is it updated?
  • Does the manager have the ability to adjust the price of shares or units between independent valuation dates?

Before you make a final decision to invest, we recommend you speak to a financial adviser to find out if this type of investment is right for you. Some offers are only available to investors who have significant experience in investing in investment markets to qualify as wholesale/ eligible investors. An adviser will be able to explain the implications of being a wholesale investor which include not receiving the usual investor information and less protection if things go wrong.

For information on the types of advisers available and where to find one, visit our Getting financial advice page.