• Holding Pattern and Distributions
    Kunal Moktan - 22 Jan 2018

HOLDING PATTERN AND DISTRIBUTIONS

 

Property Share presents investors with lucrative, high rent yielding commercial and residential properties pan India. Taking advantage of the LLP structure, Property Share maximizes returns by saving on dividend distribution tax and stamp duty, incurring lower audit and filing related expenses while simultaneously providing investors with a highly liquid investment product.

 

Ownership

 

Depending on the percentage share of the Limited Liability Partnership [LLP] purchased, co-investors directly end up purchasing and owning an equivalent percentage of the property held by the LLP. Co-investors are admitted into the LLP as partners by signing LLP partnership agreements.

Here is an example for how property share works?

Example: Property Share identifies a real estate investment opportunity worth Rs 1000. Buyer 1 invests Rs 400, Buyer 2 invests Rs 300, Buyer 3 invests Rs 200 and Buyer 4 invests Rs 100.

All 4 buyers are admitted as partners into the LLP ‘ABC’ that holds the asset [the LLP holds no other assets].

Buyer 1 receives 40% of shares

Buyer 2 receives 30% of shares

Buyer 3 receives 20% of shares

Buyer 4 receives 10% of shares

 

Property Registration

 

The property is registered in the name of the LLP. The title of the property thus rests with the LLP. The sale deed, sale agreement, etc. are all similar in the name of the LLP. Further, the tenancy agreement is also in the name of the LLP.

 

Property Management

 

The LLP signs an asset management agreement with Property Share which manages all property related issues including tenancy management, lease negotiation, property management, repairs, rent transfers, etc. The LLP pays Property Share a yearly asset management fee [calculated as a % of asset value].

 

Example: LLP ‘ABC’ owns an asset worth Rs 1000. A negotiated annual asset management fee of 1.0% implies a payment of Rs 10 per year [Rs 0.83 payable monthly] to Property Share.

 

Rent Transfers

 

The LLP receives monthly rent from the tenant which is distributed to all partners in proportion to their holding pattern. Property Share deducts tax at 21.6% of rents (read our blog on taxes) and property management fee. Rents are tax free in the hands of the investor. Property Share shares a TDS certificate with all investors at the end of the year.

 

Example: Property ‘ABC’ earns Rs 100 as monthly rent. Assuming a distributable amount of Rs 70 [post tax and property management fee deductions] the rent distribution is as follows:

 

Buyer 1 receives 40% of distributable amount: 40% * 70 = Rs 28

Buyer 2 receives 30% of distributable amount: 30% * 70 = Rs 21

Buyer 3 receives 20% of distributable amount: 20% * 70 = Rs 14

Buyer 4 receives 10% of distributable amount: 10% * 70 = Rs 7

 

Exit/Sale Proceeds

 

Property Share holds the property for 4 – 5 years. Post the holding period, the asset is sold and the profits from the sale are distributed to the partners in proportion to their holding. Capital gains tax is calculated and paid prior to profit distribution (read our blog on taxes).

 

Example: Property ‘ABC’ was purchased for Rs 1000 in Jan 2015 and sold for Rs 2000 in Jan 2018. The sale implies a capital gains of Rs 1000. Assuming a capital gains tax of Rs 150, the distributable profit is Rs 850. The distribution of principal amount and profits are as follows:

 

Buyer 1 receives initial investment + 40% of profits: Rs 400 + 40% * Rs 850 = Rs 740

Buyer 2 receives initial investment + 30% of profits: Rs 300 + 30% * Rs 850 = Rs 555

Buyer 3 receives initial investment + 20% of profits: Rs 200 + 20% * Rs 850 = Rs 370

Buyer 4 receives initial investment + 10% of profits: Rs 100 + 10% * Rs 850 = Rs 185

 

 

Why LLP?

 

A limited liability partnership [LLP] falls under the Limited Liabilities Partnership Act, 2008 under the Ministry of Corporate Affairs. An LLP presents several advantages.

 

1. The most significant advantage is the nonrequirement to pay dividend distribution tax of 16.7%. Assuming a monthly rental revenue of Rs 100 and a total deductible of Rs 30, the distributable value is Rs 70. If this asset were not held by an LLP, the investors would incur a further tax of ~Rs 10. This would lower the distributable value to Rs 60.

 

2. LLPs have less stringent regulatory and compliance requirements. This results in lesser audit and filing costs.

 

3. All LLP information such as investor information, asset information, etc. is available online on the website of the Ministry of Corporate Affairs. This ensures transparency and easy access to information.

 

4. In addition, another key advantage of LLPs is the limited liability factor – the liability of the co-investors is limited only to their stake in that LLP.

 

Why SPV?

 

1. Usage of a special purpose vehicle [SPV] eliminates the need to pay stamp duty on sale of the SPV. A saving of 6.5% on the sale value is achievable which is transferred to the investors. Assuming a sale of the Property Share unit in Capital One, BKC at a value of Rs 30 Crores, an amount of Rs 1.95 Crores is saved.

 

2. A co-investor who decides to sell their share in the LLP before the sale of the entire asset by the LLP need not pay any stamp duty either.


About the Author

Kunal has over 7 years of real estate investing experience with Blackstone Real Estate Partners, the world's largest real estate fund with more than $102 bn of AUM. Kunal was part of a 3 member team that started Blackstone's India investment office investing $1 bn over 5 years becoming the largest office landlord in the country.