SPI investors kept in the dark
Investors in one of the troubled SPI Capital property syndicates are hoping a Financial Markets Authority investigation will resolve issues regarding a controversial loan on their property.
SPI increased the debt on its Gloucester syndicate, which owned the former Farmers parking building in central Christchurch, and used the money raised to help fund the purchase of two additional buildings.
That has left some investors in the syndicate seething because they never approved the deal, although SPI maintains it did not need their permission and acted within its rights as syndicate manager.
SPI director Murray Alcock said the arrangement came about as part of SPI's plans to create a new diversified property fund.
The plan involved increasing the debt on two of SPI's syndicates, the Gloucester syndicate and the 656 syndicate, which owned an office building at Ellerslie in Auckland.
The extra cash raised was used to part fund the purchase of two additional buildings, a commercial building in Hamilton and the District Court building at Henderson in West Auckland.
All four properties would then have been tipped into a new investment fund and investors in the two syndicates would have swapped their interests in the individual syndicates for shares in the new fund.
But things did not go according to plan.
Once the two new buildings had been purchased, SPI was not able to form the fund and complete the arrangement. The economic downturn meant it was unable to raise the additional capital the new fund required.
That left the 656 and Gloucester syndicates with higher levels of debt, secured by first mortgages over their own properties and unregistered second mortgages, secured by caveats, over the Hamilton and Henderson buildings.
That has left several Gloucester investors fuming because SPI never sought their approval for the deal.
Alcock said the arrangement was approved by a formal vote of the 656 syndicate investors, but that was not done for the Gloucester investors.
"We just took, like a poll, of the Gloucester people, we didn't take a formal vote," Alcock said.
Some of the Gloucester investors were so incensed by SPI's actions they obtained a legal opinion on the company's obligations.
It found that increasing the amount of the syndicate's mortgage to acquire another property was not a permitted purpose under the syndicate's governing deed, and therefore required formal investor approval, which meant SPI was in breach of its obligations under the deed.
However, Alcock rejected that finding and said SPI's legal advice was that as syndicate manager it did not need to seek investors' approval for the deal, but admitted "in hindsight I wish we'd done that".
SPI investors are hoping the FMA's investigation will resolve that issue, but in the meantime, SPI continues to seek a commercial solution.
Interest on the the additional loan money the syndicates advanced to buy the two new buildings has partly been capitalised, although there's a significant difference in the rates of interest charged by the two syndicates.
The 656 syndicate has been charging interest at 11.9 per cent, while Gloucester has only been charging between 6.05 per cent and 6.74 per cent over the past two years.
In February SPI completed the sale of the Hamilton property, which Alcock said had allowed SPI to pay all of the accrued interest on the Gloucester syndicate's loan, which at March 31 was $186,000, and make a principal repayment of about $750,000 on the 656 syndicate's $1.15m loan.
That meant the Gloucester investors were still owed about $915,000 and the 656 syndicate investors about $1.5m.
Repayment of that money is dependent on SPI being able to sell the Henderson court building.
The Justice Department's lease on the property is due to expire around the end of March next year.
Alcock said SPI was currently in the thick of negotiations over renewal of the lease and any incentives that may involve.
Once a new lease is finalised it will be sold and Alcock suggested a potential buyer was already lined up, so a sale could be concluded in the first half of next year.
The property has a rating valuation $10.75m and just under $8m is believed to be owed on the first mortgage to Marac and Perpetual Trust, so the Gloucester and 656 syndicate investors will have their hands out for whatever is left over after that is repaid.
Sunday Star Times