Property set up as a company?

[Courham]

Hi everyone, would like some advice/suggestions.

We are looking at downsizing my parents into an ownership unit. Currently my wife and I own half their property, my parents the other half. They are getting on a but and its time to downsize to an ownership unit as the current house is getting to much for them to look after.

Anyway, we've found a property they like, however it isn't an ownership unit, it is set up as a company and each person buys a 1/4 share and the right to occupy the corresponding flat (so a few legal issues need to be looked into about the structure of it). I was tempted to buy one of the other units a couple of years ago as a rental as it had a great return but decided it was too much hassle to look into the structure at the time and bought something else instead.

The flat we are looking at has been totally modernised, new kitchen and bathroom etc and the current owner/share holder has put in a lot of money and effort and so are asking a reasonable price for it. However, the price they are asking is about twice what a 1/4 share of the entire block (given its current rateable valuation- our guide) is worth. I've a valuer going through to give me a market appraisal tomorrow but I think the owner has treated it as a normal owner occupier situation and is expecting the corresponding increase in value to her 1/4 and is not basing it on a 1/4 share of the entire block (the others haven't been done up). Am interested to see what the valuer gives as a market appraisal but think the occupier and real estate agent are dreaming if they expect to get what they have as an asking price as we wouldn't be buying the unit but a 1/4 share in the company's overall value.

Has anyone had any experience in this type of thing? If it was on a single title then no issue and would snap it up but do have concerns but also see it as a potential bargain

[Gladdynook]

They do get slightly less than unit title properties, but for all intents and purposes they are the same. Getting a mortgage can be harder, and banks generally require a RV. Check the rules around renting out etc as some were only for owner occupier and family members. Ultimately the directors need to approve the person that resides there. Yours may be different, and many don't stick to the rules any longer. Get your lawyer to check it out

[Courham]

Thanks Gladdynook, they aren't so common down this way and never tried buying one before.

Have the copy of the constitution- will wait to se what the valuation comes back with so know more where we are at with what to offer.

Will see how we get on but will be getting our lawyer to go over it with a fine tooth comb if we go ahead.

Regards

Craig

[Damap]

The biggest headache commonly is you are buying into any hidden company issues. Satisfying yourself that there aren't any can be problematic but if the company has an untarnished history and there aren't any leaky issues etc. it might be fine. My accountant would never let me buy one....

[Courham]

Property was built in 1970s so pre-leaky but if we do look at it further will be getting it fully checked out as saw some potential earthquake related damage in one exterior wall.


Craig

[Rosco]

General advice is never buy a company. Buy the assets instead.

Otherwise is there
- tax liability? Might not be now, but could come up in an audit
- you need to be very careful with the value, as could be shareholder loans plus bank loans etc

I would suggest this is probably quite messy, and therefore difficult to sell!

Ross

[PTILoveYou]

Talk to a bank and see if they are willing to lend 80% on it.

If not, run, don't look back.

[Courham]

Good advice Gary- cheers

Craig

[klauster]

Shared ownership in New Zealand is based on three title types with rules and legislations to use the common property and share the costs for repair/maintenance of the building.

Company share / flat owning company

A company share title gives you as individual owner an equity share in the company and a ‘license to occupy’ an unit. The land and buildings are owned by a company and the share title comes under the Companies Act.

Cross-lease

Cross-lease titles, mostly used in the 70ies, provide to owners an undivided share of the land and each title holder leases exclusively a part of the building from the other owners and rights for shared property like drive way, etc.

Unit title / Stratum Estate / or Strata Title

Unit titles are the most common form of apartment ownership and covered by the Unit Titles Act (UTA 2010).
You, as apartment owner, own a share of the building (common areas such as exterior, corridors, lifts, central hot water system etc) and the apartment. All unit title holders form the body corporate represented by the Body Corporate Chairman and the Body Corporate Committee. The BC’s operation is based on BC rules and regulated by the Unit Titles Act.

As Rosco said,
Buying/selling a company property (shares) depends really on the contract and tax liabilities can be the result.

[Courham]

Thanks guys- didn't spot Rosco's reply earlier.

Definitely some potential fishhooks but if we did go ahead would not be looking to sell long term but need to look very closely into how the company structure is set up and the other shareholders and liabilities- it is a company share/flat owning type arrangement

Regards

Craig

[Rosco]

Hi Craig,

You might not be planning on selling short term, but things do change.

Also if this is any kind of investment, you want the maximum chance of gains, and this kind of ownership structure could severely limit it.

For example;
A strategy you could look at (or another owner could look at), is being a complete pain, making everything as difficult as possible, offending all the other owners, not spending on maintenance etc, and stopping anything happening in the company, and slowly as the other owners sell, buy more and more of the company. Then get to a stage where they can gain full control, long term owning it all, and buy at large discount as others are sick of it.

Ross

[Courham]

Longer term I'd be keen to buy the whole company. I agree that gains are likely to be limited but if I owned all 4 of them then the rental returns are potentially quite attractive.

Current owner has had it about 18 years and think they are seriously overvaluing what their share is worth. A bit more of a punt that we usually take so am not yet sure we will go ahead but am looking into it closely.

It is about 500m from my work too (and I've another rental about 4 doors down) and longer term once my parents move on (health deteriorating badly so don't think it will be suitable for too many years) it would be a good place for my wife when she is working in town once we move down to live in our bach.

So if I can get it at the right price am interested in pursuing it but everything has to line up properly

Thanks for the advice everybody will let you know how this one pans out.

Regards

Craig

[Re@der]

In Wellington these company shares are very common in the Central area and was how residential buildings were owned before cross leases and unit titles etc.
They are run exactly the same as a body corporate without all the legislation around it. usually a Company secretary(Usually an accountant with property experience like Ross) is paid rather than a Body corporate.
There is usually a constitution annual meeting special general meetings etc.
You would want to see any documentation/minutes of this plus the company books for the last 5 years. This will tell you everything that you need to know.
There is a special part of the companies act governing these and they are not expected to make a profit or loss.
The only tax usually paid by the company is that on interest from money in the Bank for contingency funds.
A word of warning on buying the whole company. Not usually any fish hooks but some owners may stay in for a long time.
It is usually not possible to buy the assets outside of the company unless you can get everyone to agree to sell to you then they wind up the company. This happens overseas with many buildings (Singapore that I am aware of) but I have not heard of it happening here.

Regards Doug

[Courham]

Cheers Doug, more good info for me.

Much appreciated

Craig

[Courham]

Got valuation report back and it isn't stacking up so back to square one. The property would be suitable but the structure is too dodgy. If it was my own money only I might have put in a low offer and see what happened but not wiling to risk my parent's share.

Craig