The financial strength of co-investment consists of two major components, cash and loan capacity. Is cash $1 equivalent to loan $1 in a real life scenario?
Assuming Mr. A is planning to set aside $50,000 cash and he has a borrowing capacity of $500,000; and Mr. B is keen to invest with cash of $500,000, but due to age factor, his loan capacity is almost negligeble amount. Both Mr. A & Mr. B financial strength is about $500,000 respectively. In this scenario, will Mr. A & Mr. B agree on 50:50 equal shares in a co-investment?
There are no hard and fast rules in share distribution. However, in a purchase of property (in Singapore), the cash component is always the key criteria or resources to trigger the investment. No bank will grant 100% loan for a property purchase. People with cash, it simply means that they have the resources, and they have other options in investment.
In the above scenario, there is very high chance for Mr. B requesting a higher share. On the other hand, Mr. A will most likely agree to the request, as Mr. A could not enjoy the investment opportunity without Mr. B’s money.
In order to resolve this share distribution problem, we have created four types of models for co-investors to consider and to mutually agree on. Of course, co-investors could always determine their share distribution based on their own preferences or other considerations.
- Deposit-based – Individual’s share amount is derived by the cash deposit contributed by the individual cash amount. Upon successful selling of the property with profit, each of the co-investor will enjoy the same rate of return.
- Profit Equalization – Individual’s share percentage is derived based on the equalization of a hypothetical profit. Which means, upon a profitable selling of property, all the shareholders will enjoy the same profit (not same rate of return).
- Borrowing weightage type 1 & type 2 – The sum of cash & borrowing capacity is an individual’s financial contribution to the co-investment. However, the borrowing capacity is always multiplied with a factor before adding into the contribution amount. We recommend 5% or 10%. Which means, a $100 in loan is considered $5 or $10 in financial contribution. The factor is a variable, it could be altered to satisfy all co-investors.
Here is an example with four users, different cash deposits and borrowing capacity. The four co-investors target to buy a $1mil commercial property, and mutually agree to exit the investment at $1.2mil. (To simplify the illustration, the cost and tax are excluded in the overall calculation).
| Deposit | Borrowing Capacity | |
| User 1 | $50,000 | $150,000 |
| User 2 | $70,000 | $200,000 |
| User 3 | $100,000 | $200,000 |
| User 4 | $25,000 | $300,000 |
The total cash is $245,000 and the total borrowing capacity is $850,000. Assuming all $245,000 is utilized as cash deposit, the loan will be reduced to $750,000. It is always important that the borrowing capacity is more than the actual required loan amount. Our Pooling Share Distribution Sandbox includes auto adjustment of the respective loan amount contributed by individuals.
Deposit-based
| Share | Profit | Return | |
| User 1 | 20.41% | $72,449 | 145% |
| User 2 | 28.57% | $101,429 | 145% |
| User 3 | 40.82% | $144,898 | 145% |
| User 4 | 10.20% | $36,224 | 145% |
Profit Equalization
| Share | Profit | Return | |
| User 1 | 23.13% | $88,750.00 | 177.50% |
| User 2 | 26.46% | $88,750.00 | 126.79% |
| User 3 | 31.46% | $88,750.00 | 88.75% |
| User 4 | 18.96% | $88,750.00 | 355.00% |
Borrowing Weightage Type 1 – factor 10%
| Share | Profit | Return | |
| User 1 | 23.13% | $68,371.04 | 136.74% |
| User 2 | 26.46% | $93,981.90 | 134.26% |
| User 3 | 31.46% | $119,366.52 | 119.37% |
| User 4 | 18.96% | $73,280.54 | 293.12% |
Borrowing Weightage Type 2 – factor 5%
| Share | Profit | Return | |
| User 1 | 19.73% | $70,123.84 | 140.25% |
| User 2 | 27.33% | $97,182.66 | 138.83% |
| User 3 | 36.56% | $130,340.56 | 130.34% |
| User 4 | 16.38% | $57,352.94 | 229.41% |
In the current version, only the Host & Co-host of the Pooling have the right to access the Pooling Share Distribution Sandbox. The rest of the keen investors shall declare their cash and borrowing capacity for the investment.
