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EXCLUSIVE GUEST COMMENT: All About Location - Where To Domicile Commercial Property Investment?

Stephen Le Ray

23 October 2014

Stephen Le Ray, director of the Trust Corporation, looks at the issues of domicile when it comes to property investments. Given the amount of money that has poured into London and other cities from wealthy international investors in recent years, the topic remains very timely. As ever, this publication invites readers to respond with their views.

London is seen as a safe haven for international investors who have sought the tangible benefits of direct ownership of property in a politically secure and well known market. Forecasts for 2014 indicate that the value of commercial property investment will continue to grow as those investors continue to look for a yield above that being offered by the banks. As an offshore fiduciary we have seen a number of different types of structures used to hold such commercial property investments and, correspondingly, we have seen a number of different jurisdictions used within those structures. A number of factors determine which jurisdiction should be used and some of these factors are discussed below.

Complexity
Clearly the physical location of the structure is important. Firstly, if an offshore fiduciary is going to play an active role in the management of the property and the nature of the transaction requires this, then it is going to be beneficial for the fiduciary to be located close to the property and in the same time zone.

If the transaction is likely to be complex and involve many parties then the fiduciary must play a pivotal role in choosing and engaging with those professionals. While this doesn’t have to be face to face, a matter that might otherwise take numerous conference calls may well be dealt with more quickly and efficiently with all parties sitting around a table.

A complex financing and development of a major commercial building will often involve  a corporate lawyer, a property lawyer, a finance specialist, a lead tax advisor, a property agent, representatives of the investors and the fiduciary. Each party clearly has their part to play - and where individuals work in the same organisation this can smooth the process - but ultimately the conduit to the investors will be the fiduciary. It is therefore critical that the fiduciary is actively involved in the transaction, understands the transaction and is able to convey the relevant information to the investors. This is undoubtedly made easier by the physical location of the fiduciary being closer to the property and advisors.

A further advantage of choosing a jurisdiction closer to the property to be acquired is that the fiduciary is more likely to have a deeper understanding and experience of the various legal, tax and financing issues involved. The fiduciary can therefore perform a useful role in managing the investor’s expectations in respect of timings, costs and known risks.

Cost
In contrast I have seen a situation where a small closely-knit group of investors, decided on a particular property and who themselves had legal and property experience and numerous professional contacts. This meant that they chose to manage and control the acquisition and administration themselves.

The “registered office” service, whilst it clearly has its place, is something which is viewed with wariness by certain regulators which has a knock-on effect on the cost of maintaining registered office services in those jurisdictions. These cost implications mean that some jurisdictions are unable to offer registered office services at what is perceived to be a cost effective price.

Legal system
During the life of the investment the choice of offshore jurisdiction will continue to play an important role, as not all eventualities can be planned for, disputes may arise and mistakes may be made. Accordingly, the legal system of the offshore jurisdiction concerned must be considered when choosing a location.

Given that the investment is likely to be made in one jurisdiction, the investing vehicle is likely to be in a second jurisdiction and the investors potentially in a third (or more jurisdictions), it is also important to understand the differences that exist between the various offshore jurisdictions and the interaction of their various laws.

Recognising this complexity offshore jurisdictions have proactively developed their legal systems to better serve their key markets which has in turn strengthened the links between offshore jurisdictions and those markets. Typically, individuals from the Far East have been more comfortable with BVI companies, Continental Europeans have preferred Liechtenstein, Luxembourg or Switzerland and ex patriots and non-domiciled individuals have tended to use the Crown Dependencies.

Exit strategy
Critically and from a commercial point of view the ultimate sales strategy must be considered when choosing a particular jurisdiction. Should the investment be for the long term, and there is little or no intention to dispose of the property, then the jurisdiction where the investment is structured will matter only to the original acquirer and other factors such as cost and quality of service become key.

On the other hand, if the investor has a one to five year investment timeline, or wishes to maintain a flexible exit strategy, it is important for the investor to consider their sales market and consequent tax implications. A correctly structured offshore vehicle in the right jurisdiction can be attractive to a prospective purchaser and enhance returns whereas a poorly structured group may at best cause uncertainty in the hands of the buyer or at worst significantly depress the sales price and returns.

The choice of jurisdiction when considering offshore structures can make a significant difference to the commercial success of a project. A knowledgeable offshore fiduciary in an appropriate location will be beneficial as will be the quality of the other professionals around them.

There are a number of very good reasons for using the European Crown Dependencies as jurisdictions of choice for investors in UK commercial property transactions. The quality, knowledge and experience of professional service providers in the Channel Islands and Isle of Man may not initially appear cheap, however, in the long run other jurisdictions may prove to be far more expensive.