THE 10-year old 5-star Pepper Club Hotel in Cape Town’s CBD is the focus of a Section 12J investment fund launch by Pepper Club Hotel Investments (Pty) Ltd, administered by Grovest Corporate Advisory.
The hotel, located on the corner of Pepper and Loop Streets has been successfully operated by SBG Hospitality and has been the winner of numerous hospitality awards over the years.
Solomon Brothers Group of which SBG Hospitality is a subsidiary, are a forty year old diversified real estate, investment and development group, spearheaded by directors David, Irving and Jeffrey Solomon, all of whom were the founding directors of Cape Town’s Central City Improvement District and served on the boards of two JSE-listed REITs (Real Estate Investment Trust).
“Pepper Club Investment fund is the only one of over 170 registered Section 12J funds that owns a 5-star hotel as its underlying asset and our intension is to raise approximately R300m, or two-thirds of the property value, through an attractive offering to investors which employs the tax benefits of a Section 12J Venture Capital Company listing” said director Jeffrey Solomon.
Partners in the investment fund are Grovest Corporate Advisory who pioneered the first Section 12J fund in 2014 and today administer over 40 funds with a total current investment value of over R1,4 billion.
The Investment
The investment is 100% tax deductible and requires a five year minimum hold. Investors subscribe for shares and receive a share certificate as well as a Section 12J tax certificate, which is submitted with the Investors tax return (instead of a tax payment).
Any unused amount of the Section 12J tax certificate may be deducted in the following year and an investor recovers 45% of the investment from SARS (assuming a tax rate of 45%), either as a deduction from tax payable on 29 February, or as a refund of tax already paid.
This tax recovery becomes the investor’s down payment on the shares in the Venture Capital Company (or VCC), Pepper Club Hotel Investments (Pty) Ltd, which owns the un-bonded hotel property and its business operations.
The minimum investment is R1m with a maximum of R2.5m for individuals (and trusts) and R5m for companies per tax year. There are no capital raising fees, so there is a 100% allocation of the investment funds into the hotel assets.
Guaranteed Minimum Yields
“We are guaranteeing a minimum average yield of 7.6% pa for the first 5 years, which equates to 13.9% pa on the net cost of the investment (net of the tax recovered by the investor), with a projected yield in year 6 of 17.4% on the net cost (pre-admin fees and taxes). In the unlikely event that the minimum return is not achieved, the parent company guarantees the shortfall to the investors. As a bonus Life-Style return, investors receive six free room-nights pa per R1m investment!” explained Solomon “which equates to an extra shadow return of 3.8% pa”
No Cash Out-Lay Finance Facility
A major investor incentive is the no-cash outlay finance facility, bearing interest at prime. Investors may make use of a 45% “Bridge Loan” for the down-payment (repayable on 30 September 2020 from tax monies recovered from SARS) and a 55% ‘Term Loan” repayable (with interest, less guaranteed dividends) at the end of the five-year term. So, no loan service is required from the investor at any time during the 5 year minimum hold period.
Exit options
“Should an investor decide to exit the fund, there are a number of options:
- Guaranteed Buy-Back (Investor may exercise a Put Option)
- VCC lists on JSE ALTX – investors shares become publicly tradable
- VCC takes mortgage on the hotel property and distributes the capital to investors (to re-pay their Term Loan)
- VCC sells the entire hotel to a large single investor or hotel group
Or, simply hold and reap long term benefits of growing income and free room nights.
CGT (at 18%) is only payable if an individual sells his shares. Companies may, however, exit free of CGT after 5 years” he said.
Management fees
“VCC companies often demand high fees – typically 2-3% pa, plus performance fees of 20%. But, our fees are only 0,5 % pa with a 10% performance fee (thereafter pro-rata to shareholding), which makes our fees the lowest of any 12J investment in South Africa”, added Jeff Solomon.
Conclusion
“So, with a fund that is 100% tax deductible, requires no cash outlay, offers guaranteed minimum returns with a guaranteed buy-back, a 100% investment allocation (no capital raising fee) and free bed nights, we’re confident of an extremely positive reaction from investors” enthused Solomon.
