27 March 2017 | Adam Boros | Case study
ApexHi Properties was a listed property loan-stock company that offered investors the opportunity to invest in a diversified and professionally managed portfolio of retail, office and industrial properties, and distributed income to unit holders on a quarterly basis. In 2009, ApexHi merged with Redefine Properties
In 2008, the ApexHi Properties executive decided to establish a charitable trust to support community development in South Africa. This brief paper sets out how the ApexHi Charitable Trust was established. The trustees believe that other listed companies can employ similar strategies to create new charitable vehicles, thus increasing social investment funding in the country.
At its inception in 2009, the Trust had an endowed fund of R66-million, with a grantmaking budget of R4-million for the year. In the 2013/14 financial year (July to June) , it distributed around R12-million towards development initiatives in South Africa. At the end of the 2012/13 financial year, the Trust had disbursed grants of just over R32-million since inception, and its assets amounted to R121-million.
Specifically, the Trust provides grants to a variety of (mostly non-profit) partners working in three areas:
- Early childhood development (ECD) – the Trust supports initiatives that help to increase access to ECD services through home- and community-based programmes, as well as training (for parents and practitioners) relating to children with disabilities
- School leadership and teacher development – the Trust supports initiatives that help to increase the content and pedagogical knowledge of teachers that have been in the profession for less than five years, as well as those that strengthen the management capacity of school leadership
- Community strengthening – the Trust supports initiatives that target some of the more vulnerable portions of the population, including the aged; homeless and destitute; people with disabilities; victims of gender-based violence; and orphans and vulnerable children
Establishing the Trust
ApexHi Properties, with the assistance of its corporate advisors, Java Capital, implemented a series of transactions that established a charitable trust with limited risk and cost to both ApexHi Properties, its unit holders and the Trust.
As a first step, the ApexHi Charitable Trust was registered under section 30 of the Income Tax Act to qualify as a public benefit organisation, thereby obtaining tax-exempt status. Then, ApexHi Properties issued, for cash, R643-million worth of ApexHi Properties units to the Trust. The units were issued at market value, there being no dilution to existing unit holders.
ApexHi advanced, on loan account, R643-million to the Trust to pay for the units. The loan was for five years and the rate of interest payable on the loan was equivalent to the distribution earned by the Trust on the units it had acquired. Because ApexHi distributed income pre-tax and the Trust is tax exempt, there were no adverse tax consequences from the transaction.
As the interest payable on the loan was equivalent to the distribution earned by the Trust on the units, there were no adverse income consequences to the Trust, ApexHi Properties or its unit holders.
There was an informal agreement between the Trust and ApexHi Properties that if and when the ApexHi Properties units held by the Trust traded on the Johannesburg Stock Exchange (JSE) at a profit to the Trust, the units would be sold and the loan repaid. The profit would constitute the capital of the Trust. The capital would be invested and the income derived from the investment would be distributed by the Trust for community benefit.
Given the performance of the listed property sector at the time, within a short period of time the units were sold, the loan was repaid and a surplus of R66-million was realised. This amount was invested in a series of property company units and the capital has grown to R121-million.
In short, in just a few months this process established and funded a charitable trust with an endowment of R66-million, at absolutely no financial cost to the “donor” (ApexHi Properties Limited).
The scheme works particularly well with listed property funds that distribute pre-tax income, and depends entirely on the associated shares or units appreciating in value. Obviously, there is a risk that the units would not appreciate in value, thus undermining the entire scheme. However, given the historic performance of the JSE, this risk would minimise over time.
The above outlines the process that ApexHi Properties undertook to establish the ApexHi Charitable Trust. It should be noted that ApexHi Properties established an earlier Trust in 2006, the ApexHi BEE Trust, which was wound down after seven years and realised a total of R166-million to the benefit of six development beneficiaries. However, a variety of strategies could be employed, depending on the specific needs, interests and financial structure of the donor company.
South Africa faces numerous, often overwhelming, challenges, not the least of which are high levels of unemployment and inequality. Overcoming these challenges will only be possible if all societal stakeholders play a proactive, cooperative role as the country moves towards Vision 2030 as laid out in the National Development Plan.
One of the key roles the private sector can play is to provide funding to support development initiatives that are complementary to the government’s efforts. Unlike the state, with its large, relatively immobile structures and processes, private funding vehicles can be nimble and are able to invest in innovative, sometimes high-risk, projects with the potential to be game changers, if successful.
Moreover, by establishing charitable trusts such as the one described above, the private sector can create such vehicles at little to no cost, with minimal risk.
Potential social investors who would like to learn more are encouraged to contact Adam Boros at Tshikululu Social Investments (firstname.lastname@example.org or +27 (0)11 544 0300) for more information.