Property fund fee and fund structures

Transcription

1 Property fund fee and fund structures PFA McMahon Clarke Roadshow 2013 Presented By: Brendan Ivers Partner Corporate Funds Management Real Estate Agribusiness Litigation & Risk Management

2 Introduction Fees in unlisted property funds. Structures for unlisted property funds. Issues with the custodial changes for wholesale unlisted property fund managers. MCMAHON CLARKE Corporate Funds Management Real Estate Agribusiness Litigation & Risk Management

3 Fees in unlisted property funds - research We have undertaken research on wholesale and retail unlisted property funds. Data has come out of disclosure documents from 2010 onwards. Wholesale unlisted property fund data comes from our database of information memorandums. Retail unlisted property fund data comes from product disclosure statements. MCMAHON CLARKE Corporate Funds Management Real Estate Agribusiness Litigation & Risk Management

4 Fees in unlisted property funds - trends In general, ongoing management fees continue to be relatively low. Most retail funds are still charging acquisition fees and disposal fees. Most wholesale funds also still charging acquisition fees but very few are charging disposal fees. Overwhelmingly, performance fees (both wholesale and retail) have a benchmark; usually IRR of between 10% and 15%. Some wholesale funds have wide variety of additional fees. MCMAHON CLARKE Corporate Funds Management Real Estate Agribusiness Litigation & Risk Management

5 Management fee amounts retail funds Highest ongoing fee (p.a) Lowest ongoing fee (p.a) Average ongoing fee (p.a) Median ongoing fee (p.a) Retail unlisted direct property 1.5% 0.6% 0.7% 0.6% MCMAHON CLARKE Corporate Funds Management Real Estate Agribusiness Litigation & Risk Management

6 Retail funds other common fees trends Entry fees Still being charged, generally up to 3% or 4% and must be clipped from the application amount and paid directly to advisers. Need to be structured correctly under FOFA. Exit fees Nil MCMAHON CLARKE Corporate Funds Management Real Estate Agribusiness Litigation & Risk Management

7 Retail funds other common fees trends Acquisition fees Still being charged by most fund managers. Still most common to be a percentage of purchase price of asset. Sale fees Still commonly charged. Still most common to be a percentage of gross sale price of asset. MCMAHON CLARKE Corporate Funds Management Real Estate Agribusiness Litigation & Risk Management

8 Retail funds other common fees amounts Highest Lowest Average Median Acquisition fees 5.125% 0% 2.5% 2% Sale fees 2.5% 0% 1.3% 1.1% MCMAHON CLARKE Corporate Funds Management Real Estate Agribusiness Litigation & Risk Management

9 Wholesale funds fees trends In general, ongoing management fees similar to retail fund levels. Very few funds are charging disposal fees, focus is on the performance fee. Wider variety of additional fees charged in wholesale funds and more often (e.g., debt arrangement fees quite common and various AFSL or trustee fees relatively common). MCMAHON CLARKE Corporate Funds Management Real Estate Agribusiness Litigation & Risk Management

10 Wholesale funds management fees amounts Highest ongoing fee (p.a) Lowest ongoing fee (p.a) Average ongoing fee (p.a) Median ongoing fee (p.a) Wholesale unlisted direct property 1% 0.5% 0.71% 0.75% MCMAHON CLARKE Corporate Funds Management Real Estate Agribusiness Litigation & Risk Management

11 Wholesale funds other common fees amounts Highest Lowest Average Median Acquisition fees 3% 0% 1.76% 1.5% Sale fees 2% 0% 1.6% 1% MCMAHON CLARKE Corporate Funds Management Real Estate Agribusiness Litigation & Risk Management

12 Performance fees trends All funds reviewed (both wholesale and retail) contained a performance fee. Most common benchmark is an IRR of between 10% and 15%. Amount of benchmark will generally depend on the risk of the fund. Common for performance fees to be between 15% and 20% of outperformance. MCMAHON CLARKE Corporate Funds Management Real Estate Agribusiness Litigation & Risk Management

13 What do the researchers look for? Most take a holistic approach and look at total fees charged. Performance fees must have a benchmark. Don t like more than 2% being taken upfront. Manager s and investors interests should be aligned through the fee structure. Generally don t like additional fees like debt arrangement fees. MCMAHON CLARKE Corporate Funds Management Real Estate Agribusiness Litigation & Risk Management

14 Fund structures Single asset-fixed-term funds still structure of choice. Seeing some diversified funds in the retail space. Successful equity raising by hybrid fund structures in the retail space recently. Are we about to see the return of a modified form of the open-ended diversified fund? MCMAHON CLARKE Corporate Funds Management Real Estate Agribusiness Litigation & Risk Management

15 Custody financial requirements NTA requirements for incidental custody providers NTA amount greater of $150,000 or 10% of average revenue in a financial year. Average revenue is all revenue. So, if the licensee generates $5 million in revenue, it must have $500k in NTA. NTA liquidity at least 50% in cash or cash equivalents and 100% in liquid assets. 12-month cash flow projections. Increased audit requirements. BUT wholesale fund managers can avoid NTA requirements by appointing an external custodian. MCMAHON CLARKE Corporate Funds Management Real Estate Agribusiness Litigation & Risk Management

16 Custody financial requirements Appointing an external custodian: issues to consider Stamp duty issues, considered in more detail below. Novation of finance facilities, speak to your bank now. Appoint the external custodian to hold all new properties. Be diligent about appointing an external custodian, they are, from a practical perspective, very difficult to replace. Can the increased costs be recovered under your fund s constitution? MCMAHON CLARKE Corporate Funds Management Real Estate Agribusiness Litigation & Risk Management

17 2013 PFA Roadshow Tax update Commercial in Confidence S e r i o u s a b o u t S u c c e s s

18 Disclaimer Our comments and information contained in this presentation are generic in nature and are not purported to represent advice that can be relied upon. You should seek your own advice for your own circumstances. The author or any other persons involved in the preparation or distribution of this presentation expressly disclaim all and any contractual, tortious or other form of liability to any person in respect of this presentation and any consequences arising from its use by any person in reliance in whole or any part of the contents of this presentation. The comments contains in the presentation shall not in any way constitute a recommendation as to whether you should invest in any product discussed in the presentation.

19 Agenda Snapshot of current MIT regime Proposed new MIT tax system Changes to under/over attribution of net income announced on 5 August 2013 Other issues surrounding MIT Taxable income exceeds cash distribution Foreign pension funds August Case Capital v Revenue distinction

20 Snapshot of current MIT regime What is the MIT regime? Concessional withholding tax regime used primarily by Australian REITs and managed funds. MIT withholding rate Applies to MIT distributions to foreign resident investors that are fund payment amounts The rate (from 1 July 2012) depends on residence of the foreign resident investors: 15% for investors resident in EOI countries 10% for investors resident in EOI countries for fund payments made by a Clean Building MIT 30% in other cases Capital Account election

21 MIT Structure proposed changes Will be subject to new simplified MIT regime from 1 July 2014 Reasonable allocation of tax (clearly defined rights) Under / overs (including integrity rules) Other Integrity rules: Arms length rule Cost base adjustments

22 Under/over changes Old proposal New proposal Under distribution exceeds the de minimus threshold amend and reissue distribution statements; or Trustee pays tax at 46.5% on shortfall Unintentional under in excess of the de minimis issue revised distribution or attribution statements; or carry forward under amount into the income year following identification under will be uplifted at GIC rate and included in the earliest year in which MIT has net income. Trustee may face administrative penalty: Under carelessness up to 25% of under Under recklessness up to 50% of under Over distribution exceeds the de minimus threshold must amend and reissue statements Unintentional over in excess of the de minimis issue revised distribution or attribution statements; or carry forward over amount into the income year following identification. Trustee may face administrative penalty: Under carelessness up to greater of 20 penalty units or 10% of over Under recklessness up to greater of 40 penalty units or 20% of over

23 Examples Unintentional under in excess of the de minimis In 2013, an MIT has an under amount of $100,000 Assume that the $100,000 is in excess of 5% of net income for the 2013 and the the trustee did not cause the under intentionally Option 1: issue revised distribution statements Option 2: carry forward the under amount into 2014 income year, however this under will be uplifted at the GIC rate (for example, GIC = 10%) i.e. the under amount of $110,000 ($100,000 x 110%) will be included in the earliest year in which MIT has net income. Trustee may face administrative penalty: Under carelessness up to 25% of under (i.e. 25% x 100,000 = $25,000) Under recklessness up to 50% of under (i.e. 50% x 100,000 = $50,000)

24 Examples unintentional over in excess of the de minimis However, if in 2013, an MIT has an over amount of $100,000 Assume that the $100,000 is in excess of 5% of net income for the 2013 and the the trustee did not cause the over intentionally Option 1: issue revised distribution statements Option 2: carry forward the over amount into 2014 income year, unlike the treatment to the under amount, this over amount will not be uplifted i.e. the over amount of $100,000 will be subtracted in the 2014 income year Trustee may face administrative penalty: Under carelessness up to greater of 20 penalty units (a penalty unit is currently $170 per unit) or 10% of over Under recklessness up to greater of 40 penalty units or 20% of over

25 Other issues surrounding MIT S e r i o u s a b o u t S u c c e s s

26 Taxable income exceeds distribution ATO view where taxable income exceeds distribution Fund payment amount can not exceed distribution amount Excess taxable income maybe assessable to trustee at 45% Blackhole argument Fund payment amount can not exceed distribution amount Excess taxable income is not assessable to trustee at 45% PCA where taxable income exceeds distribution All taxable income to be advised to investors as fund payment Assistant Treasurer advised that consultation would continue after the election

27 Foreign pension funds It is proposed to allow foreign pension funds access to the MIT withholding tax regime. Apply retrospectively from 1 July Development arises from ATO s interpretative decision ATO ID 2012/71: deals with whether certain Foreign Superannuation Funds are eligible for the MIT concessional withholding tax rate under s the ATO ID indicates that the concession does not apply to a foreign superannuation fund that holds an indirect interest in a MIT because it is a beneficiary in the capacity of a trustee of another trust and paragraph (4)(c) of the ITAA 1997 is therefore not satisfied.

28 August Case Facts Toorak Trust acquired 6 properties (the Melba Shops) for $344K from 1997 to 2000 and spent $240K on building and refurbishing shops The properties were all let out Sold these 6 properties for $2.33m in 2003 Gain of $1.766m. Issue Was this on capital account and eligible for 50% CGT discount or on revenue account?

29 August Case Findings No contemporaneous documentation supporting that the properties were acquired as a long term investment Held that the Melba properties were acquired by Toorak Trust as part of a profit-making scheme with the principal intention that they be developed, tenanted and sold for a profit. View mainly due to: Properties selected in consultation with a friend who was an experienced developer As soon as properties were upgraded and tenanted Mr August approached real estate agents to sell the properties

30 August Case Learnings Ensure contemporaneous documentation (IM / PDS / Marketing materials etc.) support that the properties were acquired as a long term investment Focus on the strong income return Less risk on properties that are currently tenanted Reworking property and developing property greater risk. The greater the gap between: acquiring the property and starting any development the better Completing the development and starting to sell the property the better. MIT Capital account election (but not for trading stock)

31 Thin Capitalisation From 3:1 to 1.5:1 Debt to Equity (i.e. from 75% Debt to 60% Debt) From 1 July 2014 Interest denied The de minimis threshold will increase from $250,000 to $2 million of debt deductions (i.e. interest). Options revalue worldwide gearing test or arm's length debt test recapitalise

32 Contact details Presented in Perth by: Richard Watkins Supervisor, Tax and Business Services Moore Stephens Perth Pty Ltd Level 3, 12 St Georges Tce Perth WA 6000 Phone: (08) Presented in Brisbane by: Abi Chellepan Senior Tax Manager Moore Stephens Melbourne Pty Ltd Level 10, 530 Collins Street Melbourne VIC 3000 Phone: (03) Presented in Sydney by: Martin Booth Partner Moore Stephens Sydney Pty Limited Level 15, 135 King Street Sydney NSW 2000 Phone: (02) Presented in Melbourne by: Stephen O Flynn Director Moore Stephens Melbourne Pty Ltd Level 10, 530 Collins Street Melbourne VIC 3000 Phone: (03) soflynn@moorestephens.com.au

33 PFA Roadshow 2013 Investment Managers and Superannuation, ASIC

34 Outline Major policy and guidance developments Enforcement and surveillance Future focus Major law reform program 34

35 Major policy and guidance New financial requirements for custodians RG166 CO 13/760 & CO 13/761 $10 million or 10% of avg revenue new requirements re cash flow and liquidity incidental providers also need NTA although lesser amount 35

36 RG133 Managed investments and custody: Holding scheme property and other assets CP 197 December 2012 Updates to RG: Strengthening minimum standards of all asset holders Strengthening content custody agreements Permitting key assets to remain in RE name where RE has engaged a custodians so RE satisfy financial reqs Changes to use of omnibus accounts 36

37 RG134 Managed investments: constitutions June 2013 Revised RG Class Orders ASIC s views on the content requirements of constitutions for schemes and how ASIC will apply these requirements in deciding whether to register a scheme 37

38 Risk management practices: REs REP 298 on the adequacy of RE risk management systems CP issued March 2013: good practice guidance on risk management systems incl. reviews of risk management systems, resource adequacy, succession planning and stress testing. Proposed RG based on many current practices of REs Reflect international standards 38

39 More policy and guidance Liquid assets Wholesale / Retail definition Financial reqs for REs RG166 39

40 Surveillance and enforcement Proactive reviews Shorter PDS, advertising, compliance plan audits, risk profiled entities, A-REITs and unlisted property schemes Reactive surveillance breach notifications, qualified audit reports, complaints and industry intelligence. 40

41 Surveillance and enforcement Outcomes: - Interim stop orders on PDS and advertising - Cancellation of AFS Licence - Corps Act contraventions (breaches of constitution, no prospectus, misleading materials) resulting in injunctions, declarations and Federal Court action 41

42 Focus Review of sectoral risks and recent legislative and guidance implementation Unlisted property schemes: Business models and compliance with RG46 A-REITs: Business models and emerging risks Disclosure Advertising No tolerance of poor disclosure practices Post action review of entities Asian regions funds passport 42

43 Major law reform programs Stronger Super implementation Focus on disclosure ASIC guidance issued FoFA ASIC guidance issued Early days Facilitative approach to compliance for the first 12 months 43

44 Questions? 44

45 Panel discussion Corporate Funds Management Real Estate Agribusiness Litigation & Risk Management

46 Thank you PFA McMahon Clarke Roadshow 2013 Corporate Funds Management Real Estate Agribusiness Litigation & Risk Management