Hi everyone, we are very new to this forum and also very new investor. We just have question in relation to setting up the Discretionary Trust to by an investment property. Hopefully someone can point us to the right direction.
We have 4 partners, not related at all, wanting to buy an investment property – a block of 6 units in one title. Initially, for the asset protection and tax benefit purposes, we wanted to set up a Unit Trust with the four unit holders being 4 Family Trusts. The 4 partners will be the guarantors for the Family Trust to borrow the money to buy the Units in the Unit Trust. However, the bank is now very hard with the Unit Trust. All the banks that we have talked to did not like the structure that we have proposed and only offer commercial loan with the LVR of 70%. Only one bank would lend us 80% of the purchase price at the residential rate as long as we use Discretionary Trust to the buy that investment property. The Trust will have a Corporate Trustee with 4 partners being 4 directors of the Trustee Company. However, we are not sure whether it is a good choice as it is risky with the Discretionary Trust if one partner (s) wants to be the bad boy in the future. Accordingly, we are thinking of drafting up an agreement between the partners to cover every possible risks that can happen in the future such as income distributions, capital contributions, signing power…My questions here are…
1. Whether such an agreement will have binding on all partners and in case of if there are some conflictions, can it be used as the Bible to solve the problem and protect the other partners?
2.Do you think this is a workable solution for the Trust that is not a Family Trust? If you can think of anything that should be addressed in the agreement, please let me hear it.3. After reading lots of topics in this forum, I have the impression that there are still the banks out there willing to lend the money to the people who want buy the property in the name of the Unit Trust but borrow the money using the Family Trust. However, all banks and brokers that we have talked to said to us that it is too complicated and the bank would consider the loan to be the Commercial Loan. Does anyone know any brokers that can help us to find the bank that we can borrow the money using the Unit Trust structure at the residential rate. Would appreciate your recommendations.
Thanks in advance for all your comments.
Hi Andrew
We and two friends recently bought a buy & hold property with a unit trust with a corporate trustee. The units are equally divided and owned by our separate Family Discretionary Trusts. We feel comfortable with this structure and it also works well in regards to Land Tax (in NSW).
In relation to lending to Unit Trusts, I wouldn't give up yet. Have a talk with some of the mortgage specialists in the Finance sub forum. If anyone can find a way, they will.
Cheers, Paul
Paul Dobson | Vendor Finance Institute
http://www.vendorfinanceinstitute.com.au
Email Me | Phone MeAn alternative way to finance your home.
Hi Paul,
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Thanks for your advice. Yes, we would feel much more comfortable if we can set up a Unit Trust with the Family Trusts being the Unit holders. And now, considering the Land Tax issue, that structure is even more appealing.If you don't mind, could you tell me if you had to borrow the money to buy the property you have mentioned with the Unit Trust? If yes, did you have the problem with the bank classifying the loan as commercial loan?
I will make a post in finance forum as well as. ThanksAndrew
Hi Andrew
Yes we used an 80% LVR loan to buy the property. From looking at your other posts on this, I think the reason you've only been offered a commercial loan is because the property has 6 units. As far as I know, this reclassification to commercial happens as soon as your property has more than 4 units.
I'd suggest you have a talk with Richard Taylor. You'll find him on the forum as Qld007.
Cheers, Paul
Paul Dobson | Vendor Finance Institute
http://www.vendorfinanceinstitute.com.au
Email Me | Phone MeAn alternative way to finance your home.
These days lending to a company complicates things and these loans are often pushed to the commercial sections. There is no real reason why the bank has to know the company is acting as the trustee, unless the banks ask.
Having a side agreement separate to the discretionary trust may be ok if things go well, but the trustee of the discretionary trust has absolute discretion over distributions, so who ever controls the trustee controls the distributions. Since there are 4 directors (which is risky) any 3 could gang up and deprive the 4th person of getting anything. The appointers control the appointment and removal of the trustee so the same thing could happen there. I think the unit trust is the safest route.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Hi Andrew
This structure is not uncommon. Some issues to consider, however, are the effects of CGT Event E4 (may or may not be an issue, I assume you are using a 'standard' unit trust and not a hybrid trust) and whether or not you will 'fetter' the discretion of the trustees.
Good luck!
Hi Paul,
I am also look into buying a block of 6 units. Would you advise me which lender give you 80%LVR lending under commercial loan and if possible what interest rate they offered you?
Maybe able to do it as a residential loan subject to the location.
More regional it is harder to finance.
City or regional town should be able to be done at a competitive rate.
Richard Taylor | Australia's leading private lender
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