NewZimbabwe.com has invited Mr. Vengai Madzima, the Senior Partner at Madzima Chidyausiku Museta Legal Practitioners (MCM Legal), to discuss with us legal issues that affect Zimbabweans living in the diaspora. The discussions are of a general nature and those seeking specific legal advice should contact their lawyer.
Reporter: Welcome back Mr. Madzima, this week we want to discuss fractional ownership of property by multiple investors. Is it a viable model, especially for the diaspora community?
VM: Thank you
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If we are to consider the entry costs for acquiring investment properties in some areas of Zimbabwe, especially those investment properties that will give a significant return for the investors, fractional ownership is possibly one of the viable options to consider.
Although this model is available for both the local and the diaspora community, in response to your question, I will address the unique circumstances faced by the diaspora community.
It may be helpful to first explain what fractional ownership is. It is a joint ownership model where a number of investors 'invest' in the construction or purchase of an income-generating property or even a holiday home, each investor literally owning a 'fraction' of the property commensurate to their level of investment.
The property may be let out for rentals or the investors have time shares, meaning they enjoy exclusive use of the property at allocated times of the year.
Examples of such properties that are usually invested in using this model are commercial centres that will be let out, specialised medical centres or hospitals, resorts, holiday homes or airbnb's which may also have a time share model.
Pooled investing allows for cheaper access to ownership as no single investor will be individually burdened with the full cost of development. All attributable risks are shared among the investors with opportunities to share ideas among investors that result in the best outcomes at the lower costs.
If lucky, in some instances, some of the investors may have specialist skills useful for the project, reducing costs and mitigating potential errors that would have occurred had the project been carried out by an unqualified individual.
Reporter: What challenges are commonly faced when the combined investors undertake such projects with such ownership structures?
VM: The common problem is that of limited ownership; the investor is hamstrung from exercising full ownership rights and is bound by the decision of the collective. This really comes down to temperament and individual idiosyncrasies.
Some investors may still want to act as if they have full ownership in situations where they do not.
Further, in circumstances where the investors are constructing and managing their own properties, the common problem is that the investors may have a different understanding of the project costs and outcomes. Normally, the project proponent, advocate and coordinator may not have fully explained or given provision for unforeseen events to the extent that there are disagreements between the various investors at project inception, implementation and or completion.
Let me use the example of a completed project, a significant portion of the returns have to be reinvested in the property for maintenance and improvement, some investors will not have considered this eventuality.
Lastly, challenges are definitely faced where arrangements do not provide for disengagement or disinvestment procedures and processes. Investors will most likely end up resolving their issues in court at a significant cost.
Reporter: How best can investors mitigate against these disagreements?
VM: In my view, the best way to mitigate against the common problems that arise as a result of fractional ownership is to ensure that the agreement governing the fractional ownership arrangement is as comprehensive as possible, detailing and providing various options on how the relationship may be dissolved, for example, what steps should an investor take when they intend to liquidate their investment, at what point may an investment be liquidated et cetera.
Other common issues will include how the property is managed, by whom and how the investments are selected etc. Long and short, the preliminary processes have to be comprehensive enough to mitigate against the 'would be' grey areas.
If the property to be developed or invested in performs a specific function, for example, a dialysis centre and the investors operate in that specific field or have specialist knowledge, then field-specific circumstances must also be addressed in the initial agreement, including mitigating the potential adverse situations.
The other pressing issue is that some investors may intend to enjoy their dividends in the diaspora, if that is the case, registering their investment with the Zimbabwe Investment and Development Agency (ZIDA) will be useful as such registration comes with state backed protection. The investors will be assisted in repatriating some of the dividends and capital.
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The general investor who wants to invest in property fractional ownership is best suited to invest in a REIT.
Reporter: Why do you think a REIT is a more appropriate investment model?
VM: In circumstances where the investment property is not for timeshares or other speciliazed use, real estate investment trusts offer a quick in and when required, out option, allowing for investing in high return property.
I say this because such trusts are typically managed by professionals with experience in these fields, who are able to identify high-rental and capital-return properties.
REITs are also governed by the Securities and Exchange Commission of Zimbabwe, which means that companies operating them must satisfy minimum capital requirements and are obligated to make public disclosures and distribute dividends on a mandatory basis.
VM: Thank you.
You can contact Vengai Madzima on vengai@mcmlegal.co.zw or at www.mcmlegal.co.zw.
