Lease to Own - An innovative new property ownership structure
Why Lease when you can own?
Lease 2 Own is an innovative new property ownership structure that brings the reality of owning property right to your doorstep. The Lease 2 Own structure has no hidden costs or agendas, and is transparent upfront. The structure is based on trusted and accepted economic and investment principles.
The first of these principles is DO NOT INVEST CAPITAL INTO NON-CORE ACTIVITIES.
This principle asserts that capital should first and foremost be invested in building the core business, rather than pouring large amounts of capital into new areas like property to the detriment of the core business.
The challenge was therefore to develop a means of offering businesses the opportunity to own property, without them having to outlay huge amounts of capital.
In order to overcome this challenge, Lease 2 Own applied the second business principle: HIGH RISK - HIGH RETURN, LOW RISK - LOW RETURN.
In essence this means that, as an investor, the return that you strive to achieve out of an investment is directly relational to the level of risk attached to that investment.
From a global perspective, many of the key risks associated with property investments are tenant related. These can be summarised as follows:
1. Tenant does not look after the property.
2. Tenant does not pay.
3. Vacant stock as a result of no tenancy.
4. Short term leases resulting in short term unknowns.
The simple reality is that good, long term tenants offer higher levels of security, and lower levels of risk.
It follows, therefore, that the role the tenant plays in the property owning process is a vital one. Lease 2 Own allows tenants to own their own property, or at least secure a share in it, rather than paying off somebody else’s bond.
This unique investment platform’s strength is in its simplicity. It is rooted in a few simple yet fundamental business policies:
- Marginalise your risk in the property - Enter into a 5 year lease with a good tenant, with the option to renew.
- Marginalise your investment - Sell the property to a newly-formed company and sell off 25% of the equity.
- Acquire property without investing capital - Tenant acquires the 25% equity in the property for no charge.
- Transparency - State upfront an agreed value of the property for the first 5 years, and give the tenant the right to purchase further equity in the property at any time, at these predetermined values.
A few further points should be noted:
1. FURTHER ACQUISITION OF EQUITY IN THE PROPERTY COMPANY
- At any time during the period of the lease, you may purchase further equity in the property owning company.
- As mentioned, the price will be determined and fixed at the start.
- Equity can be acquired in tranches of 5%, subject to a maximum of 50%, and thereafter the entire share capital must be purchased.
- Equity may be purchased in the following manner:
§ Payment in cash or on agreed terms.
§ Payment may be made in the form of a lease premium, which may be paid as a lump sum or over an agreed period of the lease.
- On completion of the lease and exercise of the renewal period, the following will apply:
§ 2 year renewal - an additional 5% equity shall be issued.
§ 5 year renewal - an additional 10% equity shall be issued.
2. OWNERSHIP OF SHARES ARISING FROM EACH TRANSACTION
- Each transaction shall be deemed to be a separate contract, and shares shall be ceded back to the seller/company until the transaction has been faithfully completed.
- The only exception will be an escape clause which may be exercised after 3 years, whereby the seller guarantees to purchase back the equity held by the tenant in the property owning company. For the purpose of this valuation, the property shall be stated at cost and the valuation shall be calculated utilizing the Net Asset Value.
- Should the payment for the purchase of shares be made over an extended period, the purchaser may only dispose of shares, in terms of the shareholders agreement, once payment for the shares has been completed.
3. VALUATION OF SHARES AFTER THE INITIAL 5 YEARS
After 5 years, the value of the equity will be determined on the Net Asset Value or Earnings Yield as outlined in Clause 7.7.3 of the shareholder’s agreement.
Courtesy: Brett Eigenmann (MD) Eiger Group
For further information, please contact:
++27 72 019 6192