Tips and Traps for Property Developers
Property development can by a tricky business if you don’t do your homework from the outset.
There are a number of traps that can occur at different stages of the life cycle of a development and a savvy developer needs to be aware of where the pitfalls lie.
Structure – Individual, Company, Trust, MIS (beware)
Before any contract of sale to purchase land is signed, you will need to consider the correct structure for the purchase and future development of the property. The tax consequences of a particular structure can be significant further down the development line so it is important to consider this issue from the outset and obtain the appropriate advice from your accountant, financial advisor and lawyer. Once documentation has been signed, it can be difficult, and sometimes costly, to change things after the ink has dried.
The most common structures (company, unit or discretionary trust or managed investment scheme) each have their own advantages and disadvantages. The choice of structure requires careful consideration of the party’s interests and intended nature of the development.
Site Acquisition and Due Diligence
Once the structure has been chosen, the next phase is the site selection and acquisition. It is critical that you do sufficient due diligence prior to committing to the acquisition to ensure that you don’t end up with a property that cannot be developed. Issues such as site contamination and planning restrictions are two of the most important factors affecting a site. When looking at a site, you need to understand its history (what has it been used for, who were the previous occupiers) and its potential future (what do you want to do with it and what are the restrictions).
Significant developments around Melbourne have ended up in lengthy and expensive litigation simply because the appropriate due diligence wasn’t done and environmental and planning issues were missed. Engaging the right experts at the outset will mean that you have all the information from the beginning.
Planning issues such as zoning, overlays and the Growth Areas Infrastructure Contribution (GAIC) can have a significant impact on the timing and cost of a development. It is criticial that you understand the nature of the site you are purchasing, the requirements for development and the time it may take to address such planning issues.
If developing land in Melbourne’s growth areas, you will need to understand the impact of the GAIC and whether the land is affected. Mechanisms need to put in place to manage the timing of the payment of the GAIC as this is a significant cost.
How are you going to develop the property? Do you have all of the expertise in house to complete the project or will you be looking to join forces with others who offer skills and expertise you need? If so, it is preferable that the relationship between the parties involved is addressed from the outset. It is recommended that a joint venture or development agreement is entered into.
This document will set out the rights and obligations of the parties – who is contributing the land, the funds, the equipment, the labour and other expertise? How will the project be financed? How will the costs of the development be apportioned and dealt with and most importantly, how will the end product of the development be dealt with?
All of these issues, as well as a plethora of others, have the ability to derail and delay a project. A joint venture or development agreement should set out the ground rules so that if a dispute arises, the parties have a playbook to follow.
Sale – Off the plan?
The end product of a development will often be lots that are intended to be sold off the plan to other purchasers.
If this is the case, off the plan contracts will need to be prepared and entered into. With the recent changes to consumer protection legislation, the area of off the plan contracts has become more regulated requiring those preparing the documentation to be more vigilant.
More consumer protections have been introduced which has impacted significantly on the form of the contracts used and some of the provisions used historically, are now no longer acceptable. This is particularly the case with respect to extending completion timeframes for the developments and dealing with deposits paid by purchasers.
The consequences of non-compliant documentation can be disastrous, often giving rise to termination rights on behalf of purchasers. Project financiers and their lawyers are also aware of these issues and documentation that is not compliant can often result in a difficulties in obtaining project finance.
If the development is intended to be sold off the plan, MST can assist to ensure that all of the relevant documentation is prepared in accordance with all the relevant legislation.
Many developers intend to retain one or more lots in a development site, either to live in or to generate a rental income. Once again, consideration should be given to the ultimate holding entity and how the property will be transferred, if necessary, from the development entity to the holding entity. Such transfers could trigger stamp duty and CGT consequences.
Whilst it may seem a long way off, it is actually very important to consider the end game at the very beginning of a development. Doing your due diligence, choosing the correct structure and putting you plans in place will go a long way to preventing costly errors and delays during the development. Getting the right advice at the outset is critical.
If you are considering a property development project, contact the Property and Leasing team on +61 3 8540 0200 for assistance.