Save tax, get hotel nights at SA’s best address: 12J investment fund Pearl Valley Hotel

The Pearl Valley Hotel by Mantis is situated on the Jack Nicklaus Signature Pearl Valley Golf Course at the international award-winning Val de Vie Estate just outside of Paarl in the Cape Winelands. Arguably the best address voted number one Residential Estate in South Africa and recently voted Best Leisure Development in the world, it offers investors an opportunity to cut their tax bills, with special hotel rewards. In this interview, Deon Lewis of Futureneers speaks to Jackie Cameron of BizNews about this 12J investment offering. Click here for more information. Or register here for a webinar on the  investment opportunity. – Jarryd Neves

Deon Lewis on the Pearl Valley Hotel by Mantis:

The Pearl Valley Hotel by Mantis is situated on the Pearl Valley Golf Course in the greater Val de Vie precinct, just outside of Paarl. People will probably know that Pearl Valley Golf Course has now been rated the second best golf course in South Africa. It’s a very desirable destination, specifically for golfers. The hotel is situated right next to the clubhouse. It’s got the most amazing views of the Paarl Valley, overlooking the Simonsberg – with all the Val de Vie amenities that investors and hotelgoers can actually enjoy.

On Futureneers Capital:

Futureneers Capital has been around for just over four years now. We currently have around R300m in capital under management [and a] R100m-odd property/investment pipeline. We’ve got 140 unique investors that’s invested with us – many of them for the second year. 23 underlying 12J investment companies. Importantly, this is now the third round that we will be raising capital for the Pearl Valley Hotel by Mantis, through our 12J structure. We’ve got a very good relationship with them and we’ve been working together very closely for the past few years, raising fund through 12J for this particular site.

On the 12J investment:

Section 12J is an initiative that Treasury introduced as far back as 2009. In the first few years, it didn’t get much traction because there were all sorts of restrictions, in terms of how much investor could invest. A few years later, they amended the regulations to try and get it off the ground and get some traction. The main purpose of Section 12J in South Africa is to incentivise taxpayers to invest into assets or underlying projects where government feels there has to be a focus.

In a nutshell, a 12J investment gives an investor 100% tax deduction. For argument’s sake, if an investor is on a 45% marginal tax rate, it means that 45% of his investment – let’s use R1 million as an example – R450,000 of that R1 million, SARS will then pay on behalf of the investor. That will either be in the form of a rebate or a claim.

If the investor, as a PAYE taxpayer, has already paid the tax across – or their company has paid the tax across – you merely claim the tax back from SARS and we pay it back to you come August. If you’re a provisional payer, you simply deduct the amount off your next payment to SARS. From a property perspective – important for listeners to understand – you’re effectively discounting your property investment by as much as 45%, which is unheard of.

On the underlying investment:

Hotel development, on the Pearl Valley Section of the greater Val de Vie development. In terms of structure, what the investor will invest into, is a share in the Futureneers Capital VCC. The VCC will then deploy the investor’s funds into an underlying qualifying company. That company (or special purpose vehicle) then acquires the assets – in this case hotel rooms – from the developer. The investor is effectively invested into a property-backed company, a company with underlying assets being hotel rooms in this particular hotel.

On the targeted IRR:

One has to break it down into bits and pieces. if you look at elements like the tax saving – that accounts for 8.1% of the total IRR breakdown. Conservatively, we worked on a 5% capital appreciation of the underlying asset. It ranges from between 8%-12%. We were conservative on that. The other component of our calculation is the hotel yield – the yield that the operator will produce, which is then payable to the QC.

We’ve actually secured a 6% per annum guaranteed gross yield from the operator, for the first two years of the investment. That’s a Covid hedge. Then there’s obviously a free-use element for investors in this hotel. So every million that you invest – if it’s a cash investment, for example – you will get up to 10 nights free usage per annum.

Depending on which funding option you choose to invest into this particular fund, those room nights will differ slightly. I think 20.3% IRR is very achievable. Once you start using gearing in the other funding mechanisms, you can see that IRR going up because you’re putting less cash in.

On funding options:

The downfall or limitation of 12J is that you have to be liquid with the full amount you want to invest. Two years back, we introduced our smart loan. This particular year, we’re giving up to 95% of the funding available on these. On the smart loan, [it’s] only 5% cash down. On R1 million investment, it’s only R50,000 in cash down. Then the investor then lends 95% of the investment from us on an instalment loan.

You’re looking at a R9,500 monthly payment over a five-year period, but you actually settle this entire loan in under five years. If you consider that R9,500 on, let’s say, R950,000 borrowed, it’s similar to what you would have paid on a 20-year bond. The question now is, but how can you then settle the loan in five years? The way that we do it, the Section 12J return – the break that you’re getting from SARS – you’re obligated to offset that against the smart loan. Within six to 14 months – depending on if you’re a provisional buyer or a PAYE payer – you’ve settled half of this loan.

What we also do is we take the hotel yields and we offset that against the loan for you, enabling you to settle this loan in under five years, yet paying a monthly premium similar to a 20-year bond repayment. Then we have a small bridge – which is effectively a bridge loan. You pay 55% cash – on R1 million it’s R550,000. We bridge the 45% for you over a period of time – again, depending if you’re PAYE or provisional. That can range anything from four or five months to 14 months at a very desirable interest rate. Bearing in mind, on both the smart loan and the bridge loan, you don’t have to sign any personal sureties. In this case, your IRR and bridge loan, is 20.8% pre-tax and 16% after tax.


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