Planning a successful development? Make sure you have the right structure.

Planning a successful development? Make sure you have the right structure.

A question for you: What do you know about structuring when it comes to purchasing a block for development?

Firstly, let’s kick this off by making it very clear – we are not lawyers, legal professionals in any way, keen unsolved murder podcasting sleuths, or any member of the cast of ‘Suits’.

Speak to your legal people before entering into any purchase contract and don’t take the below as advice, it’s not.

Now, to get into the things to think about section of the article, after you’ve moved on from the whole Harvey/Donna moment you’ve been having…….

Purchasing a property for development purposes is a little different to purchasing a property to live in. In the biz, it’s called ‘site acquisition’, and it comes with a raft of options, two of which are discussed below. Structuring your purchase can assist with tax minimisation, protection of rights and options for exit, depending on your needs and how you see the development process playing out.

(Once more, with feeling: As always, speak to your legal and financial professionals before making any decisions about the purchase of property or undertaking of a loan.)

The regular ol’ Conditional Contract

This is Australia’s stock-standard way of purchasing property. You download a generic COS from your states Real Estate body, fill ‘er in and away you go. Or do you…….

Property developers need to ensure they have covered their as…  backsides with a few additional points:

  • Due diligence

    • A period of time that you are granted to complete various checks on the property that may (unknowingly, or not) cause issues with your development further down the track. This could include things like:
      • Legal advice (there it is again!)
      • Town planning and assessment requirements – can you actually build what you want to build?
      • Feaso preparation – there is a whole post about this here
      • Site constraints
      • Site survey
      • Local amenity – what’s around that will make people want to purchase what you are developing? Schools? Hospital? Shopping centres? Public transport?
      • Soil and pest test
      • Access planning – how are you going to get in and out of the site during development? What considerations will you need to undertake?
      • Finance approval
    • One of the key things to discuss with your legal team is how the clause will be executed by the developer. The most common clauses are:
      • Absolute discretion – This is the general favourite of the developer. It allows the developer the full right to terminate the contract if they are not satisfied with any aspect of the due diligence.
      • Reasonable discretion – This moves into the grey a little. The developer must act ‘reasonably’ when terminating the contract. The seller could argue that the termination was not completed ‘reasonably’ and therefore should be renounced. This option is generally favoured by the property seller.

 

  • Development approval:

    • When considering a property for land banking or development purposes, a clause that relates specifically to development approval is a must. This clause makes the contract conditional on the developer satisfying the council requirements for development and obtaining development approval. Having this clause included provides the developer with the opportunity to terminate the contract if the approval is not obtained, or if the approval is considerably unreasonable and affects the feasibility of the project.

 

  • Finance approval:

    • This would often form part of due diligence, However, given the current delays with banks and their hesitance to lend to the development sector, this could mean including a separate clause for the purposes of obtaining alternative finance to complete settlement (after the due diligence requirements have been attended to), while the bank is working on the long term finance option. Something to think about and discuss with your legal and finance advisers.
    • If you’d like to talk options for finance – you can contact us here – https://ibndirect.com/contact/

 

The unconditional contract

An unconditional contract generally provides the developer with options to negotiate price. Where the seller of a property can see that finance is not an issue and that they have a buyer ready to go, they are often willing to talk turkey.

A contract of this nature, however, means all the risk is on the developer.

Before signing an unconditional contract, the developer needs to ensure that they have carried out as much of the due diligence process as they possibly can to ensure they won’t face any roadblocks later on.

It’s a solid risk, but one that is used successfully by many experienced developers who understand the suburbs they build in, the councils their developments fall under, and the demographics of their future purchasers.

 

Are there any other contract types?

You betcha. There are two more options when thinking about contracts, these include:

  • Option agreement (Put and Call Option Agreement, or Call Option Agreement)

    • This is a really flexible option, but comes with some risk.
      • A Put option gives the property owner the right to compel another party to purchase the property at an agreed upon price
      • A Call option, gives the purchaser the right to compel the property owner to sell at the agreed upon price
      • There are options for adding in a third party purchaser to avoid a second round of payable duty
      • Developers can benefit from delayed payment of duty improving their cashflow and deal timing
  • Joint Venture Agreement

    • A Joint Venture Agreement, or JV as it’s commonly called, is an agreement between the purchaser and the seller to fund the project – the property owner provides the land, the developer develops it and both parties benefit from the profits

So, there you have it. It’s rough and rudimentary but should provide a starting off point for discussions with your legal and financial advisers.

We are always here to discuss scenario’s and structuring options from a funding perspective, just give us a call or drop us a message to get started.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.