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Estate & Succession planning 21 June 2022

A Trustee’s considerations when investing in residential property

Michael Giraud and Mark Carpenter, ‘Safe as houses?’, STEP Journal (Vol30 Iss3), pp.52-55

“Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full and managed with reasonable care, it’s about the safest investment in the world”

This quote from Franklin D. Roosevelt (aka FDR) still rings true in many ways today and because of this property remains a popular investment with families and their trustees around the world. As with many Jersey based trustees, we have significant exposure to property on a global basis but with specific concentrations in countries which have the rule of law and where property ownership can be clearly evidenced and enforced. These properties range from residential properties, commercial properties and even development properties. Within this article we will focus specifically on residential property owned by trusts as each property class could easily have its own article given the nuances in their acquisition and ownership (especially given the potential costs of getting it wrong).

Since FDR made his quote there have been widespread changes in relation to property ownership ranging from how landlords and ownership vehicles are taxed, to tenants’ rights, landlords’ obligations, health and safety legislation in relation to property, the type/profile of residential properties and, of course, how they can be owned. Despite these changes, which have complicated ownership and increased its cost, property has remained an attractive asset class. Therefore, if a trustee is being appointed to a trust structure with significant exposure to property (or it will be acquiring a property portfolio) then it is prudent, and advisable, to seek assurances that the trustee is experienced with the asset class and capable of properly administering the asset.

Therefore, given that nuances will exist between different jurisdictions, what should typically be considered in advance of purchasing a residential property? Firstly, there are still some basic elements, which will need to be considered Irrespective of who is buying the property, the reasons for which it is being purchased or how it will be financed/paid for. The points noted below are relevant from a trustee’s perspective, touching on the fiduciary considerations and then the practical steps which should be taken to acquire and then administer a residential property.

With this in mind, from a fiduciary perspective, a trustee will need to consider several points in advance of resolving to purchase a property such as;

  • Is the investment in line with the trust’s investment strategy,
  • Does the trust instrument allow them to purchase an asset of this nature,
  • If income is required will the property be able to meet the beneficiaries’ income requirements,
  • Are any beneficiaries receiving benefit through the acquisition of the property,
  • Is the trustee able to hold the property effectively or are there better alternatives to consider,
  • Is the structure able to fund the purchase from existing assets or will borrowing be required and,
  • Are they able to properly administer the asset?

Once this has been properly considered, and a trustee has resolved to purchase a property, then it will be a case of administrative muscle memory kicking in. When purchasing a property, it’s important to remember that the onus is on the buyer to perform due diligence on the property in advance of signing a contract and making a purchase. This will include carrying out due diligence on the vendor to ensure they are a party that the trustee and beneficiaries wish to transact with. A trustee will therefore need to engage expert advisors to advise on the correct structure to purchase a property (if one has not already been established), to complete all the required conveyancing and to review all the relevant documentation.

If it is proposed that the trustee acquire the shares of an existing offshore company, which in turn owns a property, then detailed due diligence needs to be completed on the company to ensure any liabilities are identified, that it remains in good standing and that it has not been used for other, perhaps less wholesome, activities in the past. The trustee also needs to be clear on if it’s acquiring the property’s freehold, if it is acquiring the leasehold or if it will be the sole owner. If the leasehold is being acquired, then it is quite possible that a share in the freehold owning entity may also be acquired.

Any financing will need to be sourced in advance of completion and the bank will have their own requirements in relation to the financing which will include clarity on the purchasing entity, any collateral being offered, independent valuations and a legal opinion setting out the purchasing entity’s capacity to enter the purchase. If the structure is funding the purchase from liquidity it already holds then clarification is required on how the purchasing entity will be funded (i.e. via shareholder loan or capital contribution) as it may be another entity in the structure which holds the liquidity. Once the trustee has considered the above, and where appropriate appointed, lawyers, surveyors, bankers and tax advisors they will then be able to proceed with the acquisition and complete the purchase and it’s at this stage that the administrative work arguably begins.

When acquiring any asset, a trustee should always be mindful of its underlying fiduciary responsibility which is to preserve and enhance a trust’s assets. Therefore, once the purchase of an asset has been considered it is important that it is properly administered and maintained. Matters to be addressed in the administration process include, but are not limited to;

  • Appointment of an able and professional agent to manage the property, source tenants and ensure that the tenants have a right to rent the property, deposits are taken and registered as appropriate, the terms of their occupancy are properly documented, rental income is collected on time, the property remains in good condition, all relevant certificates are maintained in relation to jurisdictional legislative requirements such as gas, electric, fire etc.
  • If the property is to be occupied by beneficiaries of a trust on rent free basis then the trustees will need to consider how they will fund any ongoing property as well as structure and tax expenses.
  • If debt has been sourced to purchase the property, then this needs regularly serviced and to ensure that the lending entity does not default on its obligations.
  • The property needs to have a comprehensive insurance policy which is fit for purpose (ideally with cover for any rental down periods, acts of terrorism etc) and may need to cover the contents as well as the property itself.
  • A suitable qualified accountant should be engaged to prepare the entity’s tax returns, ensuring all income, net of any allowable deductibles, is paid on a timely basis.
  • The landlord will also need to ensure that they have registered and on a timely basis, settle, any other taxes which may be due (municipal taxes etc).

Despite it being over 75 years since FDR’s death, given property’s enduring popularity as an investment and its continued performance as an asset class, we think FDR’s view on property would still be as bullish today as it was originally. That said, given the potential pitfalls and complexities of property acquisition and ownership, it is possible that FDR may now choose to caveat his views a little more. It’s possible he may additionally note the need for a purchaser to engage with professionals who are able to ensure a property is correctly purchased and that they are able to properly manage the property on an ongoing basis. Potentially noting that the financial cost of getting this wrong can be quite high and time consuming.

Important Information

Standard Bank Offshore Trust Company Jersey Limited is regulated by the Jersey Financial Services Commission, to provide corporate and trust services. Registered office address is Standard Bank House, 47-49 La Motte Street, St Helier, Jersey, JE2 4SZ and registered in Jersey under No 9153.