Enterprise Zone Syndicate

This is an interesting example of an acquisition of two properties by a group of investors, which included Chancery clients, in Chatham’s Naval Dockyards. The properties were acquired in early 2000 for approximately £22m, with the investor contribution (deposit) being just under 41%. The balance was in the form of a non-status, limited recourse mortgage secured against the properties. From the outset the rent for the properties was secured by a cash deposit to cover approximately five and a half years rent.

The allowable expenditure for tax purposes, after negotiation with HM Revenue & Customs was agreed at around 89%. Assuming that the investors were able to claim income tax relief at 40%, the net cost of the property in cash terms, was just over 5% (see table) of the acquisition cost. This is the amount of money which each investor contributed, over and above their tax money.

Cost	£ 22,000,000	% 100.00
Less Tax Relief 22,000,000 x 89% x 40%	(7,832,000)	35.60
Effective net cost of properties	14,168,000	64.40
Investors Cash Deposit	9,020,000	41.00
Less Tax Relief	(7,832,000)	35.60
Effective Net Cash Contribution	1,188,000	5.40

The investors, via their property advisers, secured a tenant for one of the properties on a long lease. The second property remained vacant for the entire holding period but was actively marketed up until the point of sale.

In July 2007 the investors of this scheme accepted an offer to purchase an interest in the properties for over £20.5 million.  
 

Disposal Proceeds	£ 20,500,000	% 93.20
Less Outstanding Mortgage	(11,500,000)	52.27
Capital Distribution	9,000,000	40.90
Less Effective Net Cash Contribution	(1,188,000)	5.40
Net Proceeds from Investment	7,812,000	35.51

In this example it can be seen that even where both properties were not fully let, it was possible to achieve a significant return for the investors. In terms of the effective net cash contribution paid by the investors, the net proceeds of £7,812,000 represented a return of 657% over the seven year period, which is even more dramatic if you consider this was tax free in the hands of the investors.

At Chancery we look at this return as a way of reducing the effective tax rate of our investors – in the above example an effective net tax rate of 4.5% was achieved for the tax year 1990/2000. Compared to investors paying higher rate tax of 40%, the effective tax reduction to 4.5% is exemplary.

In this example the returns would have been significantly higher if tenants had been secured for both properties during the seven year life of the scheme. As it stood the investors were able to achieve 93% of the premium price they paid for the properties on day one, even without this having occurred.

For further information on Enterprise Zone Syndicates, please contact us.