Partnerships attracting more investors

Press, 14 April 1984, Page 23

Partnerships attracting more investors

By

Martin Freeth

Special partnerships are an increasingly popular form of investment venture, raising the prospect in future of a market in partnership shares. They are a long-estab-lished entity, but registrations, in areas such as horticulture, gold mining, property ownership, and filmmaking, have risen in the last five years as more investors seek the related tax benefits. Fruit Farm Limited and Company, in which public subscription closed yesterday, is one of the largest such partnerships to be floated so far. Its promoters indicate similar horticultural ventures may be set up at the rate of one a year, and they have expressed interest in building a trade in partnership shares. An investment analyst this week put the number of special partnerships now in existence at between 100 and 200. While units of partnerships do change hands,, widespread trading will await the maturity of individual partnerships past a 10-year tax penalty period or a law change in this area. The tax credits flowing to those investing in special partnerships which incur losses make them particularly suitable for horticultural ventures requiring

some years to reach profitability. The high value of good horticultural land has also promoted a splitting of land ownership from its productive use.

Fruit Farm has raised $4 million for the acquisition and establishment of two orchard blocks in South Auckland. The venture has been promoted and will be managed by Agrisystems International, Ltd, a private Auckland company which specialises in horticultural expertise and manages several other special partnerships. The special partners in this project are the investors who have bought the $lOOO partnership units. The minimum investment has been $5OOO, and tax benefits are maximised by investing $25,000. A 1982 tax law amendment limited the size of the annual tax credit such partners can claim against their earnings to $lO,OOO. For the investor taxed on his or her earnings at the highest rate of 66 per cent, the first, loss year of Fruit Farm’s operation will provide a tax credit of $9750.

The tax credit provision has been used as one of the promotional features of Fruit Farm. Its prospectus shows one example of the “after tax cost” of a $lO,OOO investment by someone whose earnings were taxed at the top marginal rate. The venture is expected to show a deficit result for

its first five years to 1989, and the tax credits apply to each of those years. Payment of partnership shares will be spread over the first four. “The venture is not geared up as a tax deal, but it could have been if we had wanted it to.” Agrisystems’ business development manager, Mr R. H. Stevens, said this week. This would have been done, by moving more of the first partnership capital call into tax deductible expenditure, he said. Land purchased outright from the call could instead have been heavily mortgaged. Instead, Mr Stevens-said, the venture had been structured to minimise the risk, with the result that only 52 per cent of the first call proceeds would be used in deductible expenditure. The security of the investment has been another promotional feature. Investors have been told they are not simply buying shares but becoming a part owner of prime land. Half the land acquired is zoned residential, making it available for housing development should that option be preferred in future. Fruit Farm is projected to make its first surplus in 1989 and reach a $2.3 million surplus in 1994. “It is our intention for profits to be paid to partners if and when it is feasible to do so,” Mr Stevens said. The investment is in-

tended to be seen as a longterm one, and the partners have good incentive to stay involved. Those wanting to sell out within 10 years are likely to be subject to a heavy tax penalty. The present tax “claw-back” provision, provides for a tax on capital gain resulting from certain types of investment. Partnership shares can be traded with the consent of the general partner. In this case, that partner is the trustee company Fruit Farm, Ltd.

Mr Stevens said they had encouraged investors to. see the venture as a medium to long-term commitment, “but if a partner really needed to sell, we would make every effort to find a buyer, and if the worst came to the worst, we would consider buying out the partner ourselves.” One Wellington stock broking source said sales had been arranged in other special partnership arrangements. “There are certainly interested buyers around, but and some unwilling sellers who have to sell out because of their personal circumstances.”

He predicted the tax claw-back disincentive would inhibit a general growth of trading for some years, with partners in in-' dividual partnerships waiting the 10 years before going to the market.