Augusta's offer of Telecom House

[Leftette]

What are the negative aspects of this sort of investment?

I'd imagine getting your capital out (selling your $50k share) is pretty much next to impossible, but maybe I'm wrong about that. Any ideas?

[Davo36]

Mate this is all about a bunch of rich guys making a bunch more money selling this thing to the little man.

Did you see the valuers report said it was over rented?

[Leftette]

Nope - not seen any prospectus yet, but in my googling I did see your blog article. If it's over-rented, aren't Spark now locked in for a decade?

So anyway, how DO you sell a share in this sort of thing, down the track a bit? It's not like the sharemarket, but it is a share in the ownership. Are you forced to place a TM ad? :-)

[Andreae]

Yes, but what happens to the value after the ten years if rents decrease?
Some syndicators have a secondary market but no idea what fees are like or how easy it is to actually sell, otherwise you wait for majority of shareholders to sell

[speights boy]

I don't do these, primarily due to fees and liquidity.
They do seem to sell OK however.

Augusta's new cash cow

Augusta launches a whopper

[King13]

Liquidity is the main issue. Almost impossible to sell your share.

The syndicator makes money - fee to form the syndicate and ongoing management fees.

Caution advisable...as with any investment!

[Davo36]

I got all the info on it, man the syndicators earn fees for everything.

If something happens with that property, like the wind blows past it, they earn a fee.

[J_J]

Single Tenant Risk.
No or little liquidity if you wanted to sell.
High Fees.
High Gearing - Over 40% which is the rule of thumb for Listed Property Companies.
Relative low return compared to Listed Property Companies like Goodman Property Trust and Argosy Property.
Low Transparency compared to Listed Property Companies.

I don't know why anyone would enter into an investment like this....

[speights boy]

The management company's shares have gone up recently on the NZX.
Also they have just increased their dividend: the first time in a while.

[Ivan McIntosh]

Nope - not seen any prospectus yet, but in my googling I did see your blog article. If it's over-rented, aren't Spark now locked in for a decade?

So anyway, how DO you sell a share in this sort of thing, down the track a bit? It's not like the sharemarket, but it is a share in the ownership. Are you forced to place a TM ad? :-)

I haven't looked at the offer, but a practice I have seen from time to time is this:

1. Rent at a very high face value to a high value blue chip tenant, in exchange for a very generous rent holiday and inducements that don't appear in the deed of lease but which reduce the effective rent so that the tenant is happy.

2. Use the rent, which mentions none of these inducements, to get a sky high valuation.

3. Sell the property to syndicated investors who look at the term, tenant and rent and think they're getting a decent return.

4. Stay on as manager and cream a healthy fee for doing very little.

5. Watch the investors realise, six years down the track when the lease comes up for market review, that they are going to take a big rent bath and that their building will barely be worth what they paid for it six years ago...or even less.

6. In twelve years time the blue chip tenant vacates, and the investors find they can't attract a new one without an extensive makeover and inducements that they cannot fund. The building gets occupied by a number of smaller tenants piecemeal, and the rent roll falls still further in comparison to the original "deal".

If the investors are in luck, the movement of the market over those 12 years saves them and delivers a profit of sorts, but one which will still be mediocre in comparison to what it should have been.

[Davo36]

That's a pretty fair assessment Ivan.

And to add to it, if the above scenario happens the manager has been paid all the way along, and will now be paid to re-tenant the property, undertake any works and so on. And to fire them, you have to pay a termination fee... they have it pretty well sewn up I reckon.

[Walkerweir]

Without being privy to lease information. ADLS commercial leases have ratchet clause that does not allow rent (at review) to be lower than by previous period. There most likely will be rent reviews to CPI also included which would suggest slight increases. This being said, it is mere speculation given that lease that Spark have signed is unknown.

[Ivan McIntosh]

Without being privy to lease information. ADLS commercial leases have ratchet clause that does not allow rent (at review) to be lower than by previous period. There most likely will be rent reviews to CPI also included which would suggest slight increases. This being said, it is mere speculation given that lease that Spark have signed is unknown.

That hasn't quite been the case for a long time....they have what is called a "soft rachet", in that rent cannot be lower than the start of the term...but within a term rent can decrease from the last review, as long as it doesn't go lower than comencement rent.

For example, a lease is eight years with rent of $100k reviewed two yearly. First review rent goes to $105k. Second and third reviews, rent can actually go down, but not below $100k.

Big value leases are usually on non-standard forms, with every clause keenly contested, so no guarantee any of this would apply.

[Walkerweir]

That hasn't quite been the case for a long time....they have what is called a "soft rachet", in that rent cannot be lower than the start of the term...but within a term rent can decrease from the last review, as long as it doesn't go lower than comencement rent.

For example, a lease is eight years with rent of $100k reviewed two yearly. First review rent goes to $105k. Second and third reviews, rent can actually go down, but not below $100k.

Big value leases are usually on non-standard forms, with every clause keenly contested, so no guarantee any of this would apply.

^ Correct and much better explained.

With regard to Spark lease however, a 10 year initial term would therefore allow for a decade of rents guaranteed on or above rent value as indicated on offer statement.

Main point being as stated, most likely on non-standard forms.

[HattrickNZ]

I aggree with all on here re the fees and risks, but what is a better alternative with a $50K sum to invest? Surely putting the $50K on deposit somewhere is not better?