To all the seasoned developers,
I’m posting this to work out if I’m on the right track. For a multi-unit development with several partners, it seems a good way to go would be to set up a unit trust (maybe a hybrid?). Plan would be to buy a block of land, develop the units, sell some and possibly retain some.
Questions are:
1) Borrowing under unit trust – evidence on this forum suggests banks/lenders are amicable to lending on such setups. So each unitholder to sort out own finances then buy units in the trust – yes?
2) Under (1), scenario I see is if unit trust holds 1 property worth $100K and there’s 100 units, then investors can easily borrow based on this $100K asset value. What happens with funding for DA and construction costs? Do unit holders then have to pump the money in (either own money or further borrowings?) And if one or two are unable to keep up, what is the usual outcome or solution?
3) What are some good things to outline from the outset to protect against unit holders who for whatever reason become “blockers’ to the project?
4)What are the laws I need to be aware of when setting up a property unit trust?
Thanks in advance,
Scarecrow7
“In times of crisis, both danger and opportunity are present”With borrowing under a unit trust structure, lenders will usually require all unit holders to guarrantee the loan, each being jointly and severably liable for the whole debt. If there are several people, then this can get very messy, and risky- what if the others stop paying?
Terryw
Discover Home Loans
Parramatta
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SC7
Asset protection and flexibilty (income tax and stamp duty) is the issue.
A partnership/JV or whatever you want to call it of trusts (the most flexible being Hydbrid discretionary) goes a long way to solving most, if not all of the issues. Combined with a deed of partition on the title you have the flexibilty of some partners wanting to sell “their” allocated units on completion and other partners retaining theirs without stamp duty issues on transfer (this is the case in NSW best to check in VIC).
The tax (ordinary income for those that sell and CGT for those that keep their units ) issues are simpler with a partnership as there is no triggering of a taxing event and the controlling interest test is often failed with a unit trust as you proposed.
As the partners are trusts (with Corp trustees) then this goes a long way to protect other assets should things go wrong on the job. You can go one step further and appoint a nominee company to deal on behalf of the partnership to streamline admin, things like signing building contracts ect.
I guess the hard thing is to find the right accountant and solicitor to assist (without learning on the job). And I’ve found the best way is to ask recommendations from people who have done developments with unrelated people.
Good luck
Regards
tony
Hi Terry & Tony,
Thanks for your excellent feedback. Since posting this I have also asked around, and seems to be that it’s best to go with a trust (unit or hybrid).
The question if this land being put into a trust, with the aim of subdividing and selling some blocks and retaining some, would that be considered a trading/developing gain rather than a CGT. One partner’s accountant suggested the former while an accountant friend said it would still be CGT unless it becomes a regular event.
Comments?
Scarecrow7
“In times of crisis, both danger and opportunity are present”
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