New property fund helps entrepreneurs
Do you have a little extra cash lying around and want to investment? Rather than go with more conventional was of investing such as putting it into a bank, property is a viable alternative. Or perhaps you are an entrepreneur who needs to buy a property for your business? Though, buying property for your business, or even to invest in, can be expensive.
Specialist financier Business Partners Limited has launched a new property fund which will assist small and medium enterprises (SMEs) and entrepreneurs with financing for property purchases.
At the launch on Tuesday, Gerrie van Biljon, executive director at Business Partners Limited, announced that the fund is made up of two pillars, these are the Property Fund and the Property Joint Venture Fund.
The Property Fund is aimed at SMEs wanting to purchase their own buildings, while the Property Joint Venture Fund is aimed at people wanting to purchase a property as an investment with the intention of renting it out (buy-to-let).
Moneybags journalist Jessica Wood examines these funds and the benefits they provide to SMEs and entrepreneurs.
Van Biljon noted that while the funds were only launched this week, Business Partners Limited has been financing properties for entrepreneurs for many years.
“The financing products have recently been upgraded to offer more options and greater flexibility to entrepreneurs. The focus is to make entrepreneurs aware of the fact that they can buy a property of their own without a deposit.”
These funds provide entrepreneurs who don’t have the necessary capital to buy their own premises and thus assist them in becoming independent.
“The open market requires either additional security or a deposit that varies from about 30% to 40% and they do not as a general rule, offer financing for specialised buildings such as hotels and schools. Obtaining finance for business premises is a challenge that SMEs face every day,” added van Biljon.
The property Joint Venture Fund
The Property Joint Venture Fund is for multi-tenanted properties. It allows you to partner with Business Partners Limited to purchase a building with the intention of renting it out.
Business Partners Limited noted: “Typical projects are suburban or neighbourhood shopping centres, factory unit developments or office units.”
You are required to contribute a portion of the equity or financing for the purchase of the property.
The Business Partners Limited website states: “Investor’s contribution (Business Partners and entrepreneur) of equity in the investment dictates the shareholding percentage.”
The partnership between the entrepreneur and Business Partners Limited will last for the duration of the financing period, which is usually up to ten years. During this time you repay Business Partners Limited.
At the end of the financing period, or when the financing has been paid-off, the partnership ends and you are the sole owner of the building.
The interest charged is dependent on the loan amount. However, van Biljon reveals that it is around the prime interest rate, which is currently 9.25%
Co-investing in properties
Business Partners Limited explained that they co-invest in multi-tenanted properties in two instances.
“Firstly, when a potential investor is unable, or unwilling, to invest the full deposit (equity) required by a commercial lending institution.
“Secondly, where a viable property investment has been over-geared and needs restructuring of the existing debt, partially converting debt finance to equity finance.”
Van Biljon went on to explain how the multi-tenanted, Property Joint Venture Fund operates.
“In such a case, 50% of the total financing will be offered via a term facility from Business Partners or the bank and the balance will be split on an equity base, meaning if you contribute 40% of the equity you are entitled to 40% of the ownership in the property investment company. This product is ideal where the investor (entrepreneur) does not have sufficient equity and requires a partner.”
The criteria that are examined when considering whether or not to finance a property include, “that the property itself needs to be the right property that offers sound long term rewards, can generate cash to service the debt, has growth potential, is well located, a good design and a sound tenant mix.”
The Property Joint Venture Fund offers financing between R500 000 and R30 million. Van Biljon noted that normally the financing is offered over a ten year period.
However, he added that after four or five years, the company or building is cash positive, in which case the loan payments can be accelerated.
One of the benefits of this fund is that you do not need to be an entrepreneur or have any experience in a specific field. You simply need to have a portion of the financing and a building that you want to purchase.
Properties that will be financed
Properties that will be considered for financing from the Property Joint Venture Fund in retail, industrial, and commercial multi tenanted properties with a value of between R2 million and R120 million.
The website states that industrial leasebacks will also be considered. A leaseback is where you sell a building with the agreement that you will lease it back after the sale.
However, residential and agricultural properties, as well as mines are excluded from the fund. However, van Biljon highlighted: “The exception would be where accommodation is offered on a short term – for example bed and breakfast, student accommodation and hotels to mention a few. Where units are used for long periods, such as flats or retirement villages, will be excluded.”
To apply you need to provide Business Partners Limited with the details of the property, as well as all supporting documentation, and details of all your latest personal assets and liabilities.
To contact a property joint venture advisor, click here.
The Property Fund
This fund focuses on the entrepreneur as the occupier of a building. Van Biljon explained that this fund is aimed at entrepreneurs who are wanting to become independent, and therefore don’t want to have a landlord to report to.
By owning their own building, the entrepreneur will also have room to expand.
Another motivation to purchase your own building as an entrepreneur is for long term investment. Van Biljon explained that many entrepreneurs do not save enough for retirement as all their capital goes into the business.
When it comes time to retire, you can sell your business. However, not all businesses are easy to sell, and you might not get the price that you want or need.
Furthermore, you can either sell the building, and live off of the proceeds from the sale, or rent it out for a monthly income when you retire.
The Property Fund offers funding from R500 000 to R30 million over a maximum period of ten years. Van Biljon highlighted that the fund offers 100% financing, without the entrepreneur having to contribute any funds to the property transaction.
Business Partners Limited stated: “The deal is assessed relative to the risk, with the cost of the finance based on the security value in relation to the total funding advanced.
“This means that we offer the finance at a prime linked rate and will also negotiate an incentive for taking the additional risk. This will be linked to the potential appreciated value of the property over a period of time.”
The interest charged on the property is based on a variety of things. As van Biljon explained that it depends on the profile of the business and the entrepreneur, as everyone is different.
“There are many financing models, but the term finance is offered at around Prime with some incentive for the risk that is taken,” he said.
Criteria for property fund
According to the Business Partners Limited website, there are certain criteria that you must meet to qualify for the Property Fund. The business must have been in existence and trading for a minimum of three years, and there must be evidence of a sound profit history.
You must also prove that your business can afford the funding that it is applying for, and occupy at least 50% of the building you are purchasing.
Lastly, the property must be an investment, in other words when it comes time to resell, you will make a profit.
Residential and agriculture properties are excluded from the fund.
For either of these funds, the chosen property for financing needs to be evaluated in order to determine the value of the property and whether or not it is a good investment.
Defaulting on payments
Van Biljon highlighted that there are several procedures in place that will come into effect if the entrepreneur is unable to pay back the loan.
“If an entrepreneur that obtained a loan to buy its own property, fails to meet the financial commitments, an intervention will take place where we seek to have a better understanding of the circumstances that led to the default. Business Partners do not desire to place the property on the market under stress conditions and instead rather seeks commercial solutions, such as offering a moratorium on capital repayments or agree to sell the property on the open market.
“Joint Ventures should not default as Business Partners manage the property on behalf of the investors but if this happens, a commercial solution needs to be considered,” said van Biljon.
Van Biljon stresses that it is important to consider the pros and cons of renting versus buying a property before deciding what to do.
“Obtaining an own property versus renting is a decision one needs to consider carefully. It is a long term investment so selecting the right property (the size, price, location, condition etc.) is important. It puts pressure on the business as it is a long term financial arrangement, normally 10 years.
“The advantages should the business acquire a property are numerous. It offers freedom to the entrepreneur and is not dependent on the conditions as set by the landlord. It is also a format of savings and can be used as pension in time to come.”
For more information on Business Partners Limited and the property solutions it offers, click here.