The agreement presented to me at the meeting was very clear. I had written agreements of this type in the past. A developer pooled a group of investors in an agreement, each of whom received shares/holding units in a legal entity established for the project in the country where the project is to be carried out, in proportion to his share of the total investment. A property was bought by the legal entity, with the developer managing the entire process and the investors expecting a return from rent or from the profit on sale after the property is improved, or both.
Familiar? I assume you have heard of, read about or taken part in such a venture. Investor groups like this are springing up like mushrooms after the rain.
The client sitting across from me had invested in such a group. Everything worked as promised. A residential building was purchased. The apartments were divided, renovated and rented, and the rental income was distributed among the investors every quarter since the improvement works were completed. But the client fell into financial distress and needed money to care for a first-degree relative who required expensive medical treatment, and asked to realize his share. The developer/organizer referred him to the agreement, which contains an exit mechanism. It is a standard mechanism in agreements of this type, allowing the shares/holding units to be sold to a third party if the developer or any of the group members is not interested in buying.
“I have to pay for a life-saving operation. I can't wait now 3-6 months until a buyer is found for my share before I get the money,” he tells me with tears running from his eyes. “And what if no buyer is found?”
“There is a mechanism in the agreement for that case too, only then it will take a bit longer until you can receive the money,” I replied. “I know the timelines in agreements like this. I understand the distress, but we can try to talk to the developer/organizer to speed up the timelines, or have him find you an alternative solution; we can bring bridge financing until the money is received from the venture. Don't see it all as black... let's try to find a solution that will get you the money within a few weeks, and not a few months.”
There are advantages to this type of investment, starting with the equity required, which is usually low relative to an individual investment, which also affects the investor's level of risk. And that is also the risk taken in such a group investment. As an investor you are part of a group that buys a property together, so the investment is not defined by an apartment that can be sold, which makes it hard to exit the group and get your share back at any time. You depend on the group, and this must be taken into account when entering a deal of this kind.
Stories are based on real situations, with identifying details changed. Not legal advice.
Translated from the Hebrew original. עברית