Dictonary

Single and dual rate in leasehold investment valuation – UK – Lets say a company wants to buy a property investment and wants a return of 5% on it. If it produces an income of £100 per year, one would pay  £2000 for such an investment. (In this case we will not take into consideration buyers costs  and other complications for the purpose this explanation)

If it is a freehold, then I will still have ownership in the property 10 years later so I will still have £2000. This will be in the value of the property or if I sell it for cash. However in the case of single and dual rates the return is called the remunerative rate. So explained in another way if I invest £2000 and I get a 5% rmunerative rate on my investment, I will still have that money or its equivalent in property value.

Now in the case of a leasehold interest, lets say an investor buys a lease, but the lease lasts for 10 years.Then the analysis is different. Lets say I still want a remunerative rate of 5.00%, but I must take that, in 10 years time, whatever has been paid for the investment will be gone, or in other words not only will the lease will have gone but I will have no interests the property. In this case the real estate/property valuers developed the idea of a sinking fund. Instead of reselling (or keeping) my investment at the end of 10 years, as I can with a freehold, the investor decides to put aside an annual sum out of the income from the lease, to reconstitute the investment. The only source of income to the sinking is the income the investor receives from the property during the lease. If as in the previous example the income is  £100, then each year out that  £100 the investor has to put aside a certain amount so that they can get back their original investment at the end of the term. So therefore in the case of a 10 year lease, this would be one tenth of the price I would pay to buy this leasehold investment.

In the case of the 10 year lease the price I would have to pay and still receive a 5.00% remunerative rate is is roughly £666. So therefore in the investors case they will have to set aside £67 out of the £100 a year income as a sinking fund to reconsitute the fund to the original price that the investor paid. The balance of £33 a year is the 5% on the investment outlay  of £666, so the investor has achieved the remunerative rate he wants.

There is another consideration to be taken into account. Most investors have to pay tax on income. We can use the rate of 40% to illustrate the effects. At the present time HMRC do not regard sinking fund contributions as a cost. Therefore the sinking fund contributions will have pass through a tax funnel. Therefore the investor will have to reserve a larger part of the £100 a year income for those contributions. So in the investors case I will only be able pay £461 if the investor wants to achive the 5% return. The reason is because now the investor will have to make contributions of £77.00. Of that amount £31.00 goes to the HMRC and £46 goes to the sinking fund. That leaves £23 for the investor which is a 5% return on the outlay of £461.00. 

In the case of dual rates, the example above would have slightly understated the value I should pay, because in dual rates the money put into the sinking fund attracts a certain amount of interest which is the second rate to make the rate dual. The rate is usually smaller and this rate will be different from the remunerative rate and is known as the accumulative rate because it is progressively added to the accumulating sinking fund. It is considered the risk free rate. This is why the calculation is called a dual rate years purchase or YP calculation, because the there are two different rates at work which are doing different things. The remunerative rate is providing the return on the invested money  and the accumulative rate which is enhancing the return on the sinking fund.

US securities law start from the basic premise that every individual who wants to sell a secuirty must establish an exemption from applicable federal and state securities law registration requirements or must comply with such registration requirements. So when an investor wishes to resell registered securities, he or she will rely on the exemption in Section a(a)(1) of the 1933 Act, which exempts from further registration any transaction by a person other than an issuer, dealer or underwriter. 

However these exemptions are not allways available such as when there are sales of unregistered securities othwerise known as “restricted stock” which are acquired by affiliates of the isuer and non affiliattes from the issuer, and it is not available for sales of issuer securities by affiliates despite the way they were acquired. This is known as “control stock”. The applicable exemption from registration of such securites is provided by Rule 144 which is poromulgated under the 1933 Act. Rule 144 provides a save harbor (providing certain conditions are met), which allows directors and officer to sell securities without complying with the SEC’s registration requirements. 

Restricted stock is stock acquired from the issuer or an affiliate of the issuer in a transaction not involving a public offering. Thus shares of common stock which have been issued upon exercise of compensation stock options that have not been registered under the 1933 Act on For S-8 are restricted stock. Unless restricted stock is registered with the SEC or is specifically designated as exempt by the SEC (such as the case of 144 stock) no shares of restricted stock may be sold. Private sales may be eligibile for other exemptions. Generally speaking, Rule 144 provides essentially the only way to sell restricted stock in the public market. 

“Affiliates” in general are people that are in a relationship of control with the issuer, examples might be people such as the director, executive officer, or large shareholder. 

Disclaimer: While Heavyhitter attemps to provide accurate information. Please dont rely on this information to make financial decisions before consulting with a qualified financial person. This information has been provided for informational and educational purposes only. 

What is ‘SEC Form S-1’

SEC Form S-1 is the initial registration form for new securities issued. It is required by the SEC for public companies. Any security that meets the criteria must have an S-1 filing before any shares can be listed on a national exchange. Form S-1 requires companies to provide information on things such as details of the current and planned strategy,  as planned use of capital proceeds, a brief prospectus is also required  of the planned security itself, offering price methodology and must also disclose any dilution that is planned over a particular time period. 

What does the S1 comprise ‘SEC Form S-1’

SEC Form S-1 is otherwise known as the registration statement that comes under Securities Exchange Act of 1933. The SEC often requires the disclosure of any material business dealings between the company and its directors and outside counsel. These documents are available to veiw online as a way to research companies on new offerings. 

 Filing SEC Form S-1

Part I – is a legal document and known as the prospectus. This section is required to have certain information,such as the financial condition of the company,  total proceeds and price per share, a description of managment,  including the business operations, the use of proceeds, the total being amount being sold by individual holders, plus information on the underwriters.

Part II – This part includes recent sales of unregistered securities, financial statement schedules and diagrams. This part is not legally required in the prospectus

 The issuer will ultimatly liability if there are material misrepresentations or omissions.

 Changing or Amending the Form

The Securities Exchange Act of 1933, otherwise known as the truth in securities law, requires the registration form are filed disclosing important information on the companies securities. However, the he form is sometimes changed or amended  as material information changes such general market conditions cause a delay in the offering or new information will affect the filing. In this situation, the issuer would file a Form S-1/A.This helps the SEC achieve the objectives of this act: requiring investors to receive significant information regarding securities offered and prevent fraud in the sale of the offered securities.

A less detailed rigid registration form known as S-3, which is for companies that don’t have the same ongoing reporting requirements.

Stock Market Launch

When a property company launches on the stock market a lot of information is disclosed. An investor can take advantage of this and use the prospectus  to learn as much as possible assuming one is looking for a company to invest in. The information is contained in the prospectus and this is what needs to be analyzed. But fist we need to consider the variety of ways that a company can get itself listed on the stock market. Firstly there is an introduction this is when a company already has a large number of shareholders and is not looking to raise new capital. The company just would like their shares listed on the stock market.

A second method is called a placing or intermediaries offer and this is where a large number of shares are sold privately to investors. The investors in this case are often the clients of the investment bank that is doing the placing. Sometimes the shares can also be placed with a variety of investment banks to be sold to their clients. This can help raise the profile of the placing.

The third method is the offer for sale or IPO as known in USA and this gives the public the chance to buy into the stock. In this case a prospectus and application form are available from brokers and banks. In this case the shares are offered at a fixed price which is determined by the investment bank hat is organizing the launch. The price is often comparable to other similar companies that are already trading on the market. However sometimes the shares are quoted a little under market value so that it provides an incentive for investors to come in.

Companies can launch the two markets is on the London Stock Exchange or the Alternative Investment Market. The main difference between two markets is that the LSE requires a three year track record between the two markets and the AIM requires less than this. at

There are a number of points that need attention when analyzing a prospectus. Firstly attention must be paid to whether the shares that are being offered are new shares or whether these are existing shares that are being unloaded by present shareholders. If the sale is to present shareholders the proceeds of the sale go to the shareholders and not the company itself.

Sometimes when a private company has been been built and existing shareholders want to bring it to market the reason can be simply the the existing shareholders want to cash out s when because they feel that the company is not going to grow anymore which might be for various reasons such as the real estate cycle is peaking out or they may feel that the property company is peaking out. This should be taken as a potential warning sign for new investors.

Investors must consider a number of factors when analyzing a company that is coming to market such as what kind of property company is it. For example a company might be an investment company where its primary source of cash flow is rents or it might be a development company where its primary source of income is the sale of new development it conducts. In this case the company would be classed as a trader. Or it might be a company that develops property and retains them for investment, or it might be a dealer which is a company which makes its money by the buying and selling of property owns. Any investor can often find this information in the prospectus of the company.

The type of property company is important because it helps the investor analyze the quality or risk of investing in the company. For example if the company derives a large amount of its rent from investment property this might be deemed as a more stable form of income than a property trader who might fall on hard times if they are unable to sell their development, or if development funding drys up or if asset values fall. It is also important for potential investors to recognize the quality of the assets that the company holds as these also will be important in determining how profitable the company will be in the long run which will ultimately affect its share price. In many cases if the company is an investment company the shares will often be quoted at a discount to net asset value. For example lets say the net asset backing is £1 per share. In this case the shares might be offered to the public at a discount of say 80p per share. If the property company is a trading company the shares might be valued in in a different way which might be based on another yardstick such as the PE ratio. Which is the price of a stock divided by its earnings. In this case it it possible that the price of the shares will be above net asset value. This difference in the way the property companies are valued is important for the investor because it reflects the risk of the investment. We can illustrate this with an example. Lets say that property trading company Focusnet  has assets of 50p per share and lets say that their projected earnings are 10p per share for the year. On a price earnings ratio of 10 the stock market might value the property at £1per share. This might be inherently risky for the investor because the investor because if the property market goes bad to to funding problems or a fall in values and the trading company is not able to sell its development for the anticipated price than the final backstop for the companies share price will be the asset values that the trading company Focusnet owns. At this stage the assets might be worth only 40 to 50p a big drop for from £1 which would cause the value of the shares to fall and the investor to lose money. This is why it is important for the investor to look at as many factors as possible when analyzing a development company such as the quality, skill and reputation they have as a developer and how long they have been developing for. For example if a property company is launching after only a track record of a couple of years and their track record was achieved during a bull market. Then it might be wise to treat this record with more skepticism and conduct a deeper analysis.

When analyzing a property company it is important to look at a variety of things in the prospectus, such as the history of the property company. How it was formed? Who formed it? How has the company grown over the years? Did it grow by by buying individual properties itself or did it grow by acquiring other property companies. These factors are important because the indicate the particular skillsets that the company has. The longer the a company for instance has has been developing 

Large Syndicated Loans

In practice there are senior lenders that put up part percentage of the cost of a project such as 75% to 85% these would include most of the major British banks and some of their foreign counterparts. They have a lare deposit base and plentiful funds to lend.

Then there are merchant banks and specialist property lenders who might be inclined to take an element of equity risk by putting up mezzanine finance or entering into profit sharing arrangements.

 In practice the two categories might overlap. In other words the same bank that put up the senior debt might also be prepared to be prepared to provide the mezzanine finance, which is more risky. This is sometimes done by merchant banks which are able to put together a syndicate of senior lenders, the merchant bank my not necessarily put up much of the financing themselves.

 To give an example if a bank agrees to organize a syndicated finance of say $100,000,000 for a development project, the a two possible ways the deal could be arranged. The bank could try to put together a syndicate of banks which would agree to put up a specific portion of the money required. Or the bank could provide all the money itself, providing the whole $100,000,000 at an agreed rate, that is say a certain percentage over libor. This would provide an advantage to the developer in getting him the finance faster, but on the flip side this would be more risky for the bank itself.

 If the developer wants to raise more than the the 75% to 85%loan to value ratio, the developer could use mezzanine debt and possibly give up a share of the profits of the development. Another approach that could be used is to take out insurance on the project.

This is very similar to the process used by individuals who are buying a house and want t take more than 75% of the value. The buyer needs to pay a one off indemnity premium to cover the proportion of the loan over 75%. Therefore the lender knows that if he has to sell the house to recover his loan and the proceeds of the sale fall short of the advanced, he is reinbursed by the insurer for losses on the portion of the loan above the the original 75% of value.

Thus in a similar way specialist lenders can provide indemnities against the loss of loans secured on commercial buildings, as protection for the lenders. To give an example if the banks were only able to provide a loan of up to 75% of the loan to value. The insurer might be able to provide a guarantee of up to 95%. For a one off payment from the developer.  As a consequence the bank might be prepared to lend up to 95% of the size of the loan as they know that they are protected not just by