Key Features Document
• This Key Features Document gives you the main points about the Closed Ended Property Portfolio (CEPP) that you are considering. • It should be read with your illustration and fully discussed with your
Financial Adviser.
• Please read it carefully and keep it with your other plan documents. • All the information contained in this document is intended as a guide
only. It should not be construed as specific advice. • This plan is designed as a long term investment.
Closed Ended Property Portfolio (CEPP)
What Is A CEPP?
A CEPP is a ‘Closed Ended Property Portfolio’ and is a genuinely diverse investment vehicle into commercial property.
The aim of the CEPP is to return investor’s funds back at the time the project build is completed through pre-arranged bank finance.
The investor who is a shareholder then receives an ongoing dividend income stream which will differ project to project. Capital returned to the investor will be classed as a loan repayment, dividends will be paid from investors’ share of Gross Operating Profit.
The underlying structure of a CEPP is a newly formed UK limited company with a Corporate Body which sits as the Officers but is controlled by a Shareholder Vote. The Corporate Officers run the CEPP as per the
Memorandum and Articles of Association; for example, the development and management of a hotel.
Each CEPP will have similar characteristics; a comprehensive independent, professional site feasibility study and a substantial highly rated tenant entering a long term lease agreement prior to fund raising from equity investors. Why Use CEPPs As An Investment?
Formed initially for Self Invested Pensions, it has become a popular way of giving clients access to major investment projects with relatively small amounts of initial investment. Combined with an early return of capital plus an ongoing managed dividend stream, it serves as a relatively innovative business model.
The CEPP investments follow the criteria below: • Commercial properties
• Independent feasibility study conducted by a relevant professional organisation
• Due diligence checks • Highly rated tenants
• Each site is ‘pre-let’ prior to fund raising • Long term lease
• Pre-arranged bank financing at the end of the build phase
How Does It Work
Land is sourced and bought/optioned up-front by ARCK LLP. A feasibility study is always commissioned on the land before it is completed on. This is funded by the principle. Once the feasibility study is completed the land is also completed on. The land is then sold into the framework of the CEPP’s at current market value.
Essentially investors are buying unlisted, ordinary shares in one of a number of UK Ltd companies. These companies are all identical, (each one being a CEPP) and all own an equal share of a Hotel. There is no external ownership of the investor companies going forward (all decisions are made on a majority vote basis).
As required in the UK, all companies are subject to an annual audit.
Independent auditors ‘UHY Hacker Young’ are contracted to do this for the first 3 years – investors will then vote to continue with ‘UHY Hacker Young’ or substitute them if unhappy with performance.
Investors buy shares and receive an amount of ‘non interest bearing loan notes’ – typically, for every £1000 invested, 1x£1 share and £999 of loan account is allocated. All client money is held in a client account. Lawyers, (Geldards LLP) hold the account. Money is the only released in tranches on certification of each stage of the build by Christies (payments are always made in arrears).
As the hotel is built there is an equity growth, this is apportioned to each of the portfolios. This is typical of any off plan property purchase. There are three main contributing factors to the growth here,
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The growth of the land value through the build phase (typically 2½-3 years).•
The fact a hotel of considerable size and standard is being built on the piece of land.•
Massively important, the worth of a ‘lease back contract’ (typically 25-30 years) with a well known Hotel Chain or Tour Operator.All projections are taken from the feasibility report. This compounded growth through the build phase (typically about 3 years), allows gearing (borrowing) to be taken by way of ‘equity release’ upon a revaluation of the build when it is completed and notarised. This debt is ‘non-recourse’, so of no liability to the investor themselves, the asset holds all liability.
So each UK Ltd company, or CEPP, draws debt down. This pays all outstanding build costs, AND, based upon projections, should fully re-pay investors their balance of loan account.
So, after an initial investment and a holding period of ‘the build phase’, then settlement of loan account, clients have not actually made any money up to this point. They do however; still have the same equity share of the hotel which now owes them a nominal amount.
This shareholding does have a value (this will be shown on their annual Profit and Loss statement issued by UHY Hacker Young). The non-recourse debt attached to their shareholding is self redeeming at this stage.
Typically the lease-back contracts we negotiate have an initial guarantee in place, for example, for the first 3 years of operation of the hotel. As
shareholders take income resulting from their share of the Gross Operating Profit of the Hotel after this period, this income is dependant on occupancy levels of the hotel.
The guaranteed income will be equivalent to a minimum occupancy level dependant on the projections from the feasibility study.
As the debt is redeemed by, at first the guarantee, then a share of GOP, clients have a number of options. They will be invited to an Annual General Meeting, and an Emergency General Meeting where required (chaired by UHY Hacker Young). At this meeting (voting may be done by proxy), investors may request to re-gear their debt to the maximum level possible keeping all borrowing non-recourse. This will release a dividend payment. This process may be repeated as many times as possible within the timescale of the lease back contract. Upon re-negotiation of the contract the process starts all over again. This means a number of shares, which cost investors a nominal amount, are releasing dividends for the life of their holding.
If shares are held in a pension scheme, at present, all investors will pay is advanced corporation tax on their dividends.
Aim of a CEPP
Gain a shareholding in a Hotel taken on a lease-back contract with a well known Hotel brand – The shareholding will pay income by way of dividend to your clients over a rolling period – the life of the shareholding.
Spread the risk – by buying shares in one of a number of companies, all with the same share of a Hotel, it does not matter if the rooms in your clients portfolio are hardly ever used or not as income is pooled and shared on a pro-rata basis.
Costs and charges are low – apart from the initial set up charges,
administration fee and independent audit fee’s, clients get 100% spread of their investment.
Risk is lowered considerably on settlement of loan account – At completion of the phase, when the project is re-valued and client’s loan account is potentially settled in one go, the risk to the investor is minimal. Also as all gearing is ‘non-recourse’ debt, using the asset only, as security. This means no liability to the investor as an individual.
Self-redeeming debt – The debt initially drawn to re-pay investors their balance of loan account is serviced by an initial rental guarantee written into the lease back contract. When the guarantee falls away, the debt is
continued to be serviced by the share of the Gross Operating Profit (GOP) of the Hotel. Also any further debt drawn down to release equity out at a further date is also self-redeeming through the share of GOP.
An income for the life of the shareholding – once loan account has been settled, an income may be drawn by way of equity release. As long as investors do not breach the thin equity rules around non re-course debt (specific to each country), they may draw the debt down as often as they like to release more equity. This process may be repeated as many times as equity permits through the life of the shareholding.
Freedom to on-sell the shares at anytime – as the shares are unlisted a replacement investor needs to be found, but the share may be sold on at any time if clients wish to do so.
One emerging secondary market is Trading Closed Ended Property Portfolio’s, (TCEPPS). The trading of Endowment Policies has been very successful. The market here has diminished over time and companies who have a history of trading endowments are also receptive to the same principle in trading CEPP’s. Quite simply, clients will have an annual valuation of their shares (initially by UHY Hacker Young); this will deliver a current market value. Such companies will offer a slightly discounted price to individuals, allowing them to on-sell their shares with considerable ease
Example of How A CEPP Works
Paperwork required
Paperwork required if investing with cash, or through a company
• The Euro-Balkan Properties application in the client’s full name, or, company name.
• A separate admin cheque made payable to ARCK MARKETING LTD for £175.00 (non refundable)
• A cheque for the amount the client wishes to invest made payable to Euro-Balkan Properties
Paperwork required if investing through an existing SIPP If a client has an existing SIPP which will allow the investment,
• The Euro-Balkan Properties application form should be completed by the client and then by the Pensioneer Trustee of the existing scheme. The existing SIPP provider will then send the application form, along with conformation of transfer of funds/cheque etc.
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Hootteell €€660000,,000000
£415,000 raised as Equity and loan account
Investment returned by way of Loan Account repayment
Ongoing Investor Benefits
•Share of Equity Value
•Self-redeeming Debt
•Potential for Equity Release
•Long term escalating income
•Freedom to on-sell shareholding at any point € €660000,,000000 ppaaiidd bbaacckk ttoo UUKK CCoo € €330000,,000000 BBaannkk LLooaann €900,000 Portfolio Purchase €1,500,000 Re-valuation (Assume 20% over 36 months compound) Equity Release
If a client is investing into a CEPP through the HD SIPP using one or more deferred money purchase schemes etc,
• Administration cheque for £175.00 (non-refundable) made payable to ARCK Marketing Ltd
• Euro-Balkan Properties application (Specific to each project) • Completed HD SIPP application
• Signed discharge form(s) from each ‘old’ policy (if the provider(s) do not issue discharge forms please confirm this in writing with the application)
NB; Please ONLY send in complete paperwork, ARCK Marketing will return any incomplete applications.
Why Borrow To Release Equity
Borrowing is used to release the increase in equity of the project and is used to repay almost all of the initial investment. This helps to reduce the risk to the investor by returning almost all of their initial investment after the build phase. Because the investor’s loan account is ‘non interest bearing’, it comes back to them with no tax implications what so ever.
Further borrowing is then undertaken to release further equity from the project to provide capital lump sums.
This debt is ‘non-recourse’, so of no liability to the investor themselves, the asset holds all liability.
Failure to borrow to release equity will result in merely a share of Gross Operating Profits. This means that although the value of the shares will increase, there is no way to realise that gain until the shareholdings are sold. Is Your Income Taxable?
As a UK resident you pay tax at different rates on UK dividends (income from UK company shares, unit trusts and open ended investment companies) than you do on interest from savings, such as bank and building society interest.
Dividend tax rates 2007-2008
There are two different Income Tax rates on UK dividends. The rate you pay depends on whether your overall taxable income (after allowances) falls within or above the basic rate Income Tax limit.
Dividend income in relation to the basic rate tax band
Tax rate applied after deduction of personal allowance and any blind person's allowance Dividend income that falls within
the £34,600 basic rate tax limit
10%
Dividend income that falls above the £34,600 basic rate tax limit
32.5%
It doesn't matter whether you get dividends from a company, unit trusts or open-ended investment companies, as all dividends are taxed the same way. The above is intended as a guide only and you should seek independent tax advice on this plan.
Your Commitment
In return for the opportunity to benefit from withdrawals, and potential growth, you will need to, along with your Financial Adviser (IFA):
• Decide the amount of the investment and the levels of withdrawals required (ie dividend income, lump sum payments or a mixture). • Invest over the longer term, typical minimum is 3 years.
Risk Factors
This section is important. Please ensure that you read this carefully. The plan is designed as a long term investment.
Investment into individual CEPPs should be viewed as medium to high risk, although the actual risk will be dependent on your individual circumstances. The introduction of leveraging, where applicable, increases the overall risk. Additionally, borrowing capital to invest may also increase the risk rating of the product and alternative arrangements for the repayment of the borrowing should be made should the plan not fully achieve its aims.
Illustrated returns are not guaranteed. You may get back less than originally invested.
Returns
• The level of return is influenced by the spread between the lenders interest rate and the growth of the underlying asset. Borrowing to buy CEPPs has a higher risk than CEPPs purchased outright.
• Past performance is no guarantee of future returns. The value of the underlying investment can fall as well as rise and you may not get back the original amount invested.
CEPPS
General Information
• CEPP Investments are not regulated by the Financial Services Authority (FSA).
• Investment into CEPPs should be viewed as medium to high risk. • Removal of your investment from the CEPP is not available until the
CEPP is refinanced. Typically this is estimated at about 3 ½ years. • Should you die during the CEPP investment period it may take up to 24
months to release the capital from the investment, should your beneficiaries require early encashment.
Returns
• The return of CEPP capital by way of loan repayment from each independent CEPP is not guaranteed as this relies on bank re-financing which may not be available (although agreements are currently in place).
• The level of dividends from CEPPs is not guaranteed, dividends may increase or decrease depending on the performance achieved via the property.
• The duration and frequency of dividends may vary
• The level of dividends paid relies on CEPP Tenants making sufficient operating profit to cover CEPP bank loan interest and other operating costs.
Investment Loan
• A portion of the investment loan interest rate can rise as well as fall. • The lender reserves the right to demand repayment of the loan at
anytime.
• The lender could request further funds or liquidation of assets held as security if the investment loan exceeds the limit as detailed on the facility letter.
You should ensure that you fully understand the Terms & Conditions of the lender’s facility before signing.
Tax
You should seek independent tax advice on this plan. Charges
Investment Charges
The investment loan account aims to pay all fees. This means that at the outset of the plan you do not have to invest further capital.
Costs
Client’s charges are as follows:
• Admin Fee £175.00 (Payable to ARCK Marketing – non refundable) The following charges are pro-rata. They have assumed a client has invested in 10% of one CEPP
• Cost of setting up the UK Ltd company (CEPP) £9.95+vat
• Cost of the annual audit charge (UHY Hacker Young) £100.00+vat SIPP charges where applicable – see HD SIPP charges.
About Arck Marketing Ltd
Arck Marketing Ltd specialises in providing unique solutions for utilising deferred pension funds as well as providing products that aim to solve everyday financial challenges.
We provide uniquely designed and constructed products that have been approved by exemption which have been designed to meet the needs of a wide range of investment clients.
We do not give regulated advice. We only give information and support in relation to products that we offer.
We are not authorised or regulated by the Financial Services Authority (FSA). If you would like more information about a Closed Ended Property Portfolio (CEPP), please contact your IFA.
Distributed through Arck Marketing Ltd, a company registered in England as No.06213492. Registered Office: Westgate House, 3 The Triangle, Enterprise Way, NG2 Business Park, Nottingham, NG2 1AE UNITED KINGDOM
