Small Development Group

Hi there Sydneyboy,

I am looking to do a similar thing in Perth, so I am not looking at being your investor, but did have a few questions to ask you and some suggestions that may help you.

Do you already have a DA approved on the site you are planning to develop? Have you done a full feasibility study? The reason I ask is that you should be able to give the investors an idea of the amount they should expect to put into the development already. Providing them with more information (ie how many bed and bathroom, an idea of the quality etc) gives them more confidence as to what they are investing into.

If you are offering the investors the house/unit at 20-25% below market value then you may have difficulty getting finance from the bank for the developing. The bank wants to see that the town houses / units are going to sell for market value.  Additionally when you try to sell the other town houses/ units (not the investor ones), if a buyer wants to know what the others sold for then you are at risk of them wanting to purchase it at the same low price.

An alternative is that you offer a cash back to your investors. The house/unit is valued at current market, the investors pay market price but you include a cash back on settlement in the contract. With this sort of investment you would usually have the investors release their deposits to you so you can get started on the development. At least that is how I understand is the best way to do it I am no expert, but I hope this helps. 
 

Hi
I have a similar development cooperative project on the go here on Queensland Sunshine Coast.  A DA in place and eight residential 2 and 3 bdrm apartments aimed at those wishing to downsize without loss of amenity and space.  Detailed figures are available and contributors join the trust by depositing $100,000.00 each which equates to 30% of the overall construction cost.  I have a bank prepared to finance the trust on this basis provided each individual guarantees to settle on completion.

This concept was developed to overcome a general reluctance in the market to commit to pre-sales and is very much a win win for everyone involved (well after I realised that I would have to sacrifice margin to get this financed that is).

I have been contacting potential participants over last week and have three apartments left to finalise arrangements and put everything in place to start in Feb 09.

Figures demonstrate a potential capital gain in excess of $100,000.00 dependant on the apartment chosen and state of the market at the time (Nov 09).  My opinion is that we will see price increases in that later half of 2009 driven largely be the pent up supply/demand situation here.

This is a very genuine and transparent offer that i would be pleased to send detail should anyone be ineterested enough to consider.

Incidentally I have a very experienced Project Manager, outstanding location and all the essentials for future success for this development.

Consider the situation whereby the initial contribution is made on a line of credit or loan with interest only and capitalised.  This results in very minimal outlay  over the entire construction period.  Ability to settle at the end on the balance is required though (some may desire units to be sold when a display is available).

 Hi Bernstar,

We have been looking at a dual occupancy development (two husband and wife teams).  We have doen the ground work and all the sums.  But with the uncertainity in the market and everyone warning hat prices will fall further, we are sceptic about our decission.  When we calculated our margins they are quite tight it dos not have room for a price reduction.  If there were to be a price reduction we may not lose out but we may not make any money.  If you could part with some advise I would appreciate very much.

Regards,

Opportunity

Sounds like you need to do some more research.

If you transfer the properties from the company (or trust) to each individual investor, you WILL pay stamp duty.

If you sell down some of the stock at wholesale, you will KILL the future plans to sell the units at market value, as the valuation will rely heavily on the comparable sales.

By allowing each investor to take a unit at cost price, you will open everyone up to far more CGT than is neccessary, and increase your tax obligation on the project. If anything, you should sell the units down to the investors at the upper end of market value, and keep the margins of the project as thin as possible.

Personally, I would decline to take part solely on the basis of the poor quality of your post, and the obvious lack of experience it shows.

Advice – Go get someone experienced to assist you

Speak to an account than can count to ten (or preferable more)

As EVERYONE said, invest some time and $$ in a fesability study to see where you are at.

Hi Sydneyboy (and others),

Firstly, nothing I say here should be taken as advice.

Tim (Mortgage Plus) is right about the stamp duty – at least in Qld and I assume in other states. The CGT can be a future issue when selling later if done at cost price but there are ways of doing it at valuation without triggering a CGT event. Since the investors are retaining the completed product for investment, even though it will be transferred to the individual investors, you will most likely find you cannot claim the GST input tax credits from the development costs. 

But wait, there's a much bigger problem and it has to do with the Corporations Act 2001 as covered by the Managed Investments Act 1998 and the Financial Services Reform Act 2001. See http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/  This might seem like a long winded post but the penalties for being in contravention are severe. In the earlier part of my property development career (1980's – early 1990's), in the pre Managed Investments Act era, I used to use an almost identical scheme .

What you are proposing is by definition a MIS (Managed Investment Scheme)under S9 of the "Corps Act".
managed investment scheme means:                  
(a)  a scheme that has the following features:                             
(i)  people contribute money or money’s worth as consideration to acquire rights (interests) to benefits produced by the scheme (whether the rights are actual, prospective or contingent and whether they are enforceable or not);                            
(ii)  any of the contributions are to be pooled, or used in a common enterprise, to produce financial benefits, or benefits consisting of rights or interests in property, for the people (the members) who hold interests in the scheme (whether as contributors to the scheme or as people who have acquired interests from holders);           
(iii)       the members do not have day?to?day control over the operation of the scheme (whether or not they have the right to be consulted or to give directions)

Your proposal has all three features and point (iii) is always the most damning. Jointly signed cheques, powers of attorney, management agreements won't beat it. You will be the promoter and manager of a MIS. Yes, it's also an incorporated joint venture and syndicated development but it is a MIS.

Registering a MIS with ASIC is a nightmare and very expensive. Product Disclosure Statement, responsible entity, compliance committee, compliance plan, constitution, pulic company etc. etc.

Section 601ED (2) in (part) gives some relief for having to register a MIS.
(2) A managed investment scheme does not have to be registered if all the issues of interests in the scheme that have been made would not have required the giving of a Product Disclosure Statement under Division 2 of Part 7.9 if the scheme had been registered when the issues were made.

Certain Excluded Offers such as certain Small Scale Offerings are exempt from requiring a PDS and therefore, as described above, don't need to be registered. At the very least a comprehensive information memorandum would be advised.

One such exemption under Section 1012E(2) covers what is commonly known as the 20/12/2 rule.
1012E  Small scale offerings of managed investment and other prescribed financial products (20 issues or sales in 12 months)            
(1)  This section applies only to financial products that are:                    
(a)  managed investment products; or                    
(b)  financial products of a kind prescribed by regulations made for the purposes of this paragraph.            
(2)  Personal offers of financial products do not need a Product Disclosure Statement under this Part if:                    
(a)  all of the financial products are issued by the same person (the issuer); and                    
(b)  none of the offers results in a breach of the 20 purchasers ceiling (see subsections (6) and (7)); and                      (c)  none of the offers results in a breach of the $2 million ceiling (see subsections (6) and (7)).

Note what constitutes a personal offer (Section 1012E(5). It precludes public offerings, advertising etc.
  (5) For the purposes of subsections (2) and (4), a personal offer is one that:                    
(a)  may only be accepted by the person to whom it is made; and                    
(b)  is made to a person who is likely to be interested in the offer, having regard to:                             
(i)  previous contact between the person making the offer and that person; or                            
(ii)  some professional or other connection between the person making the offer and that person; or                            (iii)  statements or actions by that person that indicate that they are interested in offers of that kind.

The fact still remains that you would be dealing with a MIS. Section 764A (1)(b)(i) and (ba)(i) defines a MIS as a Financial Product.

764A  Specific things that are financial products (subject to Subdivision D)            
(1)  Subject to Subdivision D, the following are financial products for the purposes of this Chapter:                    
(a)  a security;                    
(b)  any of the following in relation to a registered scheme:                             
(i)  an interest in the scheme;                            
(ii)  a legal or equitable right or interest in an interest covered by subparagraph (i);                           
(iii)  an option to acquire, by way of issue, an interest or right covered by subparagraph (i) or (ii);                   
(ba)  any of the following in relation to a managed investment scheme that is not a registered scheme, other than a scheme (whether or not operated in this jurisdiction) in relation to which none of paragraphs 601ED(1)(a), (b) and (c) are satisfied:                             
(i)  an interest in the scheme;                            
(ii)  a legal or equitable right or interest in an interest covered by subparagraph (i);                           
(iii)  an option to acquire, by way of issue, an interest or right covered by subparagraph (i) or (ii);

Under Section 911A a person who carries on a financial services business must hold an AFSL (Australian Financial Services Licence). Among other things financial services include dealing or providing advice in a financial product (e.g. an unregistered MIS) where the scheme among other things "is promoted by a person (or associate of a person) who is in the business of promoting managed investment schemes". My discussions with a former ASIC lawyer suggest "in the business of" includes your first scheme and thereafter. It is possible to outsource the licencing but the MIS would need to become an approved product of the licencee. Not an easy process for a syndicated property development . 

In summary what you are proposing is fraught with danger. Ignorance of the law is never a strong ground to argue. Some people still unwittingly or brazenly conduct similar MIS's. But if ASIC gets hold of you watch out. They will immediately shut down the scheme (development), fine the promoter and put the investors funds at risk. I know some people who still play Russian roulette and don't get caught and I know several who have beem smashed.

Before proceeding with any such scheme seek legal advice – not from your average lawyer but from someone who specialises in corporate law, property syndicates, capital raising etc. I have no financial affiliation with them but I would recommend McMahon Clarke Legal in Brisbane as being at the forefront of this specialised area of law.