Hi guys,
I'm trying to figure out how this all works. I am looking at a subdivision site (10+ sites) ~30kms from Brisbane CBD. My questions are, how would I go about structuring the JV and organising the contract?
For instance, I've been taught to tie down the property with a contract before finding the investors. I'm quite new to property investing myself (just recently purchased first property [+ve]) but have been reading and training for 8months now and am not sure how the contract would work. If the contract is under my name, how would my money investor finance money to invest with me? Do and can I transfer or add them into the contract at a later date? And is it advisable? Can it be done legally without terminating the initial contract?
Secondly, how would I structure our JV to protect myself if things go haywire? I don't want to be financially responsible for losses nor do I want to take on the risk involved with this. Is it possible?
And thirdly, aside from the usual subject to finance, due diligence, soil test, DA approval, what other conditions should I consider? And what is the duration for all these conditions which you'd recommend, especially the subject to DA approval clause? Should I do a one year settlement and if so, should I buy the property at a higher price to what I would offer if I bought it today?
Any thoughts and help on shedding light on this would be greatly appreciated.
Cheers,
Donnie
It is most important to set up a suitable structure in the begining that allows future investors to enter into your project or jv , something like a unit trust where you can bring new investors / partners in as unit holders ie set the trust up with 100 units which you own , then sell amounts of units off relative to the value of the property . Also make sure your lender can provide a non recourse loan otherwise your partners may need to also guarantee the loan.
Hi Donnie
There are multiple ways to structure this depending on the situation.
I would normally draft a contract like this that has 60 days due diligence and 12 months settlement, need to included consent to advertise and sell proposed lots prior to settlement also. I would not normally include a subject to DA clause initially, it will help with negotiations. You would have a pre lodgement meeting with Council during the 60 day period and then if you can not have high levels of conference of an approval at this stage you then go back to the vendor and and say that you will only agree to DD clause being satisfied if they make contract subject to DA. Vendor is already committed by this stage and if PLM shows issues it is usually easier to get consent at that stage then straight up.
Firstly, do you need to JV it? Could you do a staged subdivision where you sell off the lots that do not require streets etc in stage 1 and then use those funds to complete the works required to sell off the next stage. Can be more expensive than all in one go but then if numbers still work and it means you don't need investors.
If you only have 1 or 2 investors than it may be desirable to investigate the use of partitioning. Partitioning allows people (or entities) to buy one lot and then leave the development with owning the same percentage of the finished development without paying CGT or stamp duty. They can then sell or hold their share and it is not affected by the other parties.
Otherwise buying in a unit trust structure which allows the sale of units later on, a comprehensive unit holders agreement would be necessary. You would also establish a separate entity that would be the project management entity that would contract with the owning entity to do the development. You control that entity. Need comprehensive contract also.
I have bought a similar site this week but will be doing so without investors, am trying to buy the 15000m2 next door also. Have also negotiated 3 other contracts for clients lately.
DD has all been 60 days
Settlement 6,10 & , 12 & 12 months
Consent to advertise and sell
If it is an Emerging Community zone your largest initial expense will be the Structure Plan. You should not scrimp on this, a comprehensive structure plan includes preliminary approval for the different zoning, this allows you to change the assessment levels (eg impact to code) for the blocks as well as vary the conditions, setbacks, density etc. A structure plan will cost you around $25k in planning fees alone, plus hydrological, civil, arborists, surveying etc. Can be $100k. Then you have the subdivision fees after that.
If not EC, you would be looking at around $2-$2.5k + $500 per lot over 3 lots. Infrastructure contributions are $26k per lot.
Don't forget that you may have to dedicate some land to parkland, detention pits, road dedications, conservation easements etc.
PS, I always aim to get 50% gross profit on estates of this size. They are not without risk, delays, cost overruns etc. There should be substantial coin in it to make it worthwhile unless it is extremely straight forward.
regards
D
RPI | Certus Legal Group / PRO Town Planners
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Thanks guys, would I need to setup the trust before going in for a contract? Or can I do this at a later date after I have signed the contract under my name?
And how would this protect me if the deal turned sour financially? Could I liquidate the trust and be protected from banks etc in the sense that I did not put up the finance?
RPI wrote:I have bought a similar site this week but will be doing so without investors, am trying to buy the 15000m2 next door also. Have also negotiated 3 other contracts for clients lately.
DD has all been 60 days
Settlement 6,10 & , 12 & 12 months
Consent to advertise and sell
Thanks RPI. I'm assuming you're using the DD clause to cover you for finance as well?
I am also looking at another property within the same area which is approx 320,000 m2. So from what my mentor has taught me, as a rough calculation I would do:
(320,000m2 – 320,000*30%)/600 {its currently an Investigation zone but surrounding areas are 600m2 minimum lots}
= ~373 lots total
The 30% is to consider parks, roads, etc.
And for construction costs, I've been told to allow $60,000 per lot with an extra $28,000 council contribution. That makes a total of 373*$88,000= apprx $33,000,000.
Each land should sell for minimum $180,000 so total profit will be $67,140,000 – $33,000,000 – SD – interest – purchase price – contingency.
Do these numbers look alright? And how would I plan development stages? Do I need to put a clause in the contract to perform construction works?
Yes you need to setup the trust before signing the contract.
Protection is done by separation of assets, if you have assets in your own name then you are going to have personal guarantees for the development funding and if it goes wrong you may well go bankrupt. If you have assets in discretionary trusts but nothing in your own name, you can go bankrupt and although inconvenient you are much better off, can still receive income have the benefit of trust assets etc.
As rough figures go you are not far off. On small subbies you can get in at 60K inc council contribution, which is only $26k in Brisbane City, $28k is state maximum.
I have not personally done sites that large, I like sub 20 lots, quick in and out stuff as I make a large part of my money on the change of use side, rather than the actual construction side.
RPI | Certus Legal Group / PRO Town Planners
http://www.certuslegal.com.au
Email Me | Phone MeProperty Lawyer & Town Planner
What about taking an option to purchase the property – may be hard to do.
When entering contracts you must consider what will happen if things go wrong. You can set up a corporate trustee for your unit trust and this company will enter the contract. If you cannot settle for whatever reason then the company will be sued, not you. But many vendors insist on personal guarantees from directors – some don't so it may depend on how smart your vendor is. If there is a special condition for a personal guarantee you can try to have it removed too. If this is no possible then make sure there is only 1 director of the company.
Getting bank finance is different. They will insist on guarantees from all directors of the trustee company and probably all unit holders of the trust. You must also generally get the lender's permission to change control of the company or to transfer units in the trust. Failure to do this may be a breach of the mortgage conditons which could result in the lender asking you to repay the loan in 30 days or so.
Limited recourse is where the lender will only take the security property and not ask for personal guarantees. This is very hard to secure, especially for smaller loans. Even Allan Bond had to give personal guarantees.
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
Terry once again provides a very comprehensive response.
Maybe you should bundle them up together and write a book.
D
RPI | Certus Legal Group / PRO Town Planners
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Email Me | Phone MeProperty Lawyer & Town Planner
Thanks Darryl,
I have been slowly writing 2 books, 1 on trusts and 1 on asset protection – my two great loves.. But it is a very slow process.
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
Do you guys have an estimate on how much town planning and surveying will cost per project?
Donnie
Planning $2200 plus $500 per lot over 3 lots if it is already master planned, once you get over 30 lots we will price it up on a per job basis, on your 373 lots you are probably looking at $75-$100K. Master Planning will be around the $100k inc outlays for hydrologists and arborists etc.
Surveying depends on how many trees, sight lines etc. But quite a lot.
RPI | Certus Legal Group / PRO Town Planners
http://www.certuslegal.com.au
Email Me | Phone MeProperty Lawyer & Town Planner
Thanks RPI
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