It sounds like the perfect property investment ... one that could return between 9% and 12% per annum in return for an outlay of less than $50,000. Even in times of low inflation, there are property syndicates that return these figures - a fact that causes many promoters to push property syndication as the answer to the investor's prayer.

While there are many successful syndicates in the marketplace, according to Greg McMahon (a partner of Teys McMahon Lawyers in Brisbane) there are also hundreds of illegal syndicates now operating.

"Many of these do operate quite successfully, and you only ever hear of them when something goes wrong," McMahon says.

However, there is always the possibility that an unscrupulous promoter will try to use the magic word "syndication" to offload a property with dubious potential.

Ideally, syndication offers the smaller property investor with limited available capital the opportunity to invest in commercial, retail and industrial properties that would otherwise be out of reach financially. Syndicates can produce income from several sources: cash, through a lease to a quality long term tenant; tax benefits and capital gains.

What then should a potential investor do when approached by, or responding to an advertisement from, a syndicate promoter?

"The first thing I would do would be to ask if he had a dealer's licence, and I'd want to see a prospectus," McMahon said.

McMahon, who is also a director of CTM Collective Investments Ltd, a company which sources and promotes syndicated properties, said that while a dealer's licence was not required for syndicates with less than 15 members it was advisable that the promoter of any syndicate hold a licence.

"Dealers are bound by certain rules, and one of these is the 'Know Your Client' rule. While this does not involve specific knowledge of a potential investor's finance and taxation circumstances, there are certain questions I should ask a potential investor."

"The first is 'Have you invested in property before?' This tells me that the person is familiar with the property market. I'd also like to know if the investor has a financial plan; for example, how much of the portfolio is to be held in property, and if that person can afford to have the capital tied up for the fixed period of the syndicate."

"The second important rule a dealer must consider is 'Know Your Product.' This means a dealer has to know the expected yield, to acquaint the client with the risks, and to advise of any factors which have the potential to affect the investment," Greg said. "Unlike a real estate agent, who is primarily acting for the vendor, a dealer must consider your interests at all times."

A prospectus is required by the Australian Securities Commission (ASC) because, under Corporations Law, when people are invited publicly to became part of a syndicate the investment becomes what is known as a 'prescribed interest.' Under the law such an offer requires a prospectus.

That prospectus should contain all the information that any investor needs to know before making the investment, including such aspects as yield and risks involved.

The following are some of the risks that should be considered by a potential investor.

• Performance of the tenant. Your property needs a quality tenant with the capacity to fulfil the lease requirements. If the business goes bust owing the syndicate money, it will affect your yield.

• Increase in property expenses. Have these been taken into account... and how will they affect your investment?

• Increasing interest rates. If the syndicate's funding package is on a variable loan basis, how will changing interest rates affect your bottom-line returns?

• Government policies. Like all property investments, performance may be affected in relation to taxes, exchange rates, legislative changes, land tax, income tax and other government revenue factors.

• Illiquid secondary sales. Unlike other securities, such as shares on the Stock Exchange, the interest which you will hold in the property is relatively illiquid. To sell your interest in the property you need to find a buyer who wishes to make an investment in a property of this kind under the legal structure of this syndicate.

• Responsibilities of property ownership. Like all property owners, you will bear the responsibility for unforeseen items of expenditure, such as a local authority requiring work to be done on a property which has not been budgeted. This has the potential to affect yields.

• Capital Gains Tax. Each investor will be personally responsible for his own tax liability and any CGT will be payable on disposal of his interest in the syndicate. While the prospectus need not be an elaborate glossy document, it should set out all of this information.

The ASC requires that a prospectus be registered before marketing commences. "You should be aware that this does not meet that the ASC has approved the prospectus," Greg cautions. "There are promoters who make this claim. It's actually illegal for them to say this."

The rules relating to property syndication will change in the near future. The ASC is working to a timetable to have these in place by July 1, 1998. These are not likely to have any discernable effect on the investor. However, complying with the new requirements will mean considerable additional expenses for promoters.

Investors should be aware of this situation and make sure that these costs are being borne by the promoter. They should not be asked to make a contribution to cover these increased costs.

McMahon stresses that like all property investments, you should make certain that you are getting value.

"Always buy a property at bank valuation or better," he says. "If the vendor is genuine, you should see a bank valuation."

"When assessing your investment make sure you are not in fact paying more than valuation because legal and other consultants fees are being added to the purchase price. You should pay only for stamp duty, search fees and registration fees. The other costs should be paid by the vendor."

One of the benefits of investing in a property syndicate is that most are funded on the basis of non-recourse finance.

This means the financier's loan is secured by the property alone, and your liability under the finance arrangements is limited to your initial cash contribution.

"Even given the worst case scenario, the most you can lose is the money you put into the syndicate. Your other assets, including cash and house, cannot be touched."

It is important to remember, however, that the property will be mortgaged, and if you are going to buy an allotment in the name of a company or trust, then you should make sure borrowing is permitted under the memorandum and articles of association of the company or the trust deed of the trust.

While these considerations relate to all forms of investment, they became especially significant in the case of property syndication, given that some syndicates sell out very quickly, often in a matter of days. Unless you have done some homework before you consider property syndication, there is a danger that you may rush in unwisely purely for fear of 'missing out.'

An excellent example is the Vicroads Property Syndicate which involved the purchase and construction of land and buildings for Victoria's transport authority.

"This involved 60 syndicate members and sold out in three weeks," McMahon said. "Others, with fewer investors, have sold out in five days." This rapid filling of an investment opportunity means you need to get a prospectus and read it quickly if you are interested in the property. There is no doubt the returns from properly structured syndicates are impressive.

There are certainly benefits for the small investor in well planned and well managed syndicates. However, to make the most of those opportunities, you need to do some homework, and have the proposal considered by your own legal and accounting professionals to ensure that the syndicate you invest in is likely to keep all its promises.

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