REAL ESTATE DEALS TO BE WARY OF

Many real estate developers are coming up with many innovative real estate concepts for re-sale to and are also coming up with very ambitious ways of raising funds to enable them conduct the real estate developments. Other than the usual debt finance, joint ventures and off-sale purchases a new trend of financing is coming up which buyers should consider the legal risk before getting into them.

 

I saw a newspaper advertisement by a real estate developer inviting members of the public to buy shares within the developer and these shares were valued at the approximate price of each unit. The developer would then use the funds paid by shareholders to develop the homes for them and later on transfer the units to them. It does sound as innovative way of financing by real estate developers as the costs to the promoters of the developer are minimal the only cost to the promoters of the developer company being dilution of their shares as the prospective home owners buy shares into the company. However this kind of financing of subscribing into a developers shareholding for eventual home ownership is very risky as it may fall short of legal requirements.

In some cases, the real estate developer invites people to buy shares into their company and jointly undertake a project for capital gains purposes as opposed to home ownership. This means that the developer c alls the public to buy shares in the real estate company so as to invest in some real estate projects and later on re-sale the asset and distribute the proceeds. Whether the eventual goal of such financing is home ownership or capital gains, a lot more diligence should be observed on the part of the investors for various reasons.

 

Firstly not all companies are allowed by the Companies Act to make offers to the public for the public to subscribe to their shares. Only public companies have such privilege as private companies cannot offer shares to the public. Infact it is illegal for a private company to offer shares to the public.  The way you are invited to participate in buying into the real estate developer makes all the difference between legal and illegal. If the offer is construed to be private, such as between a group of friends then the offer is deemed to be private and therefore legal even if undertaken by a private company. However a public offer is one that is made in the public realm such as in newspaper advertisements, conferences, e-mails (depending on if the same was circulated generally or to a select group), websites and even through social media like facebook.  Then the same can be deemed to be a public offer and therefore can only be undertaken by a public company.

 

The provisions of the Companies Act will also guide the entire bid such that even if your eventual goal is to own your own home buy buying into a real estate developer, the Companies Act is what shall guide the relationship between you, the other home buyers and the promoters because according to law a company and its shareholders are two different people. What this means is that the law will not separate your individual interest in the unit assigned to you but will instead treat it as company property until the designate unit is transferred from the company into your name.

 

Armed with this information what should you look out for when entering such deals? One is to find out if the company is private or public and what kind of offer it is making. A private company cannot make a public offer. It is important to conduct a company search of the real estate developer to find out its promoters and who are its officials. The promoters would be the original owners of the company however you should also know that your co-buyers into this project as well as you will end up being the shareholders of the company. Find out how many shares are on offer and what their value is. It is important to undertake a valuation of the company according to its asset base or projected asset base and pro-rate this with the number of shares you will take so as to avoid over paying.

 

It is important to understand that with this type of concept you will not be treated as a home owner but as a shareholder of a company therefore you will carry all the risks a shareholder does. Therefore before buying into such a concept find out if the company has any liabilities and what other assets it has. Also find out what third party contracts it has and what other business it is doing. Such a concept can be workable if all the legal loopholes are sealed.

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