Recently we finalised the sale of a property, the property is on the corner of Kilburn High Road and Palmerston Road. It is being sold for £4.85m; the property was purchased in July 2013 for a purchase price of £2.675m.
We were lucky we were able to grab this deal, as we were not the front bidders, apparently someone had the contract in at over £3m, but they and their lawyers were taking very long to do the deal.
We hounded the agent and they finally relented and sent us another contract, and within three days we had raised the £1.4m required and took a view on all the issues the property had and had exchanged on the deal.
The property came with its fair share of problems, enforcement notices, illegal planning and the roof was about to collapse. In fact due to one of the issues our lawyer advised us not to do this deal as we may not be able to get any funding. We listened, but we didn’t follow his advice.
The property was exchanged on Friday at about 5:30pm. There was a chance if we left this over the weekend the other side, though they had been plodding their feet, would all of a sudden develop laser focus and exchange, and so we did not want this deal to spill over into the weekend.
The property required a large injection to bring it up to standard, however the money used to develop the property came not from our pockets but from a kind housing association who kindly gave us around £400k to develop the property in return for renting half of the property back to them. The property is bringing a healthy income of £250k per annum.
When the offer came in, the majority of the investors were happy to exit but one particular stubborn investor did not want to go with the majority, and insisted the property should be kept. The agreement states if the majority wish to sell above a predefined price then the asset must be sold.
The only way the individual can hold the asset is if he buys it at the same price within the same time frame, then he can stay in the deal with his own funds. This investor has deep pockets and so agreed... so we are exiting this investment leaving one person in. The agreements we have in place are well thought out and cover all possible eventualities, there are restrictions even on what we can do. The money is handled by another FCA authorised firm, our problems should be restricted to property problems and nothing else.
The property was purchased in a Limited Partnership structure, this means everyone is responsible for their own tax.
One of the investors who put in a £120k is due to receive his money back plus £90k profit within the two years, he was rightly concerned regarding the tax this money will attract. The point he wanted to clarify was whether we call this a capital gain or a trade. A capital gain is good and a trade is bad.
A capital gain is good because there’s capital gains allowance of £11,100 for the current tax year per individual. This means in the case of a couple, which this was, you can have £22,200 with no tax at all. If it is called a trading income then the allowance does not apply. A capital gain in this case means you have nearly 25% of your profits tax free.
Of course it’s in his interest to call this a gain, my limited understanding is this can be classed as a capital gain, but if you do many of these then it will be classed as trading. But we are waiting for more firm advice on this, as the label will affect all the investors.
Whatever you call it, it at least is a good problem to have, it means you have made some money. Otherwise where is the question of tax?
We can either sell the vehicle we have used to hold the property or the property itself. Again the lawyers are working to see what is best.
The timing of this deal is perfect as we are just getting the contract in for another development close by. It’s a similar situation, this property too is 9,000 sq. ft. and is an untouched property, everything else around it has been developed. And this one has the potential to be 14,000 sq. ft. adding another 5,000 sq. ft. to it. The block is being purchased as offices but under permitted development can be converted to a residential scheme, the property has been checked by our architect who has confirmed the conversion and extensions can be done - in short has confirmed this is a gem.
From the surface it looks like a building which will generate similar returns from the one we are in the process of exiting.
Though the property required £1.4m of cash, the investors have only £600k buried in this deal. We had the property refinanced in December 2014 and released £800k back to all the investors.
This is an important point, as now we are focusing more on recycling the cash rather than the property. We look to add value but rather than sell the asset to release the gain we refinance to release the original funds. In terms of investors’ money, now there is only 12% of the property value in the deal. In a couple of years it is envisaged this too could be released with the asset being held with no money locked in the deal. A good place to be.
All the financing on this property was done on a non-recourse basis. This means no personal guarantees have been given by any of the investors.
The new deal should be opening for investment, if you haven’t signed up with us and have been sitting on the fence, now would be a good time to do so.
