Choosing the right structure when purchasing a development site is critical to ensure tax is minimized and your rights are protected. An experience property development lawyer is a crucial part of this process.
Here are some of the different structures you might consider.
This is the most common way to purchase a property and this is the structure you are likely most familiar with. For Queensland property developments, we would expect to see the REIQ contract with special conditions annexed.
The contract conditions you will commonly see for a development site purchase are:
- Due diligence – The due diligence period gives you an opportunity to ensure there are no unknown issues with the property that may impact on your proposed development. The due diligence you would carry out usually includes, legal, town planning and feasibility. The due diligence period is often anywhere from 14 to 60 days after the contract is signed. Your town planner and property lawyer are an important part of this stage.
- Development approval – Making the contract conditional on you obtaining development approval is an effective way to mitigate the planning risk. Not only is there a risk that your development will not be approved, there is also the risk that it will be approved with unreasonable conditions that impact the feasibility of the development. This may include a reduction in lot yield, infrastructure upgrades or many other items.
You may also see the contract be conditional on finance approval or a satisfactory building and pest inspection. Although these are common conditions for the purchase of a residential home, they are generally unnecessary for the purchase of a development site as those items would usually form part of your due diligence.
You can read more about how to ensure your due diligence clause is appropriately drafted here: Click me
An unconditional contract will often provide you with the best opportunity to purchase the property at the lowest price. In turn, you take on the highest level of risk that there will be issues with the development site or that you are unable to finance the acquisition.
It is critical that you carry out as much due diligence as possible before signing an unconditional contract to mitigate the developer risk as much as possible.
It is fairly rare to see a development site purchased using an unconditional contract.
Option Agreement (Put and Call Option Agreement or Call Option Agreement)
A put and call option agreement is a common way to purchase a development site as it offers a developer a high level of flexibility. Some of the benefits include:
Ability to nominate another buyer without paying double duty
One of the main reasons to use a put and call option agreement is that it allows you to nominate another party to be the buyer under the end contract. This means you can on-sell the property to a third party or you can nominate another entity of your own.
Delayed payment of transfer duty
A put and call option agreement can delay the timing for payment of transfer duty. Transfer duty is generally payable 30 days after a contract becomes unconditional. For a put and call option agreement, this means transfer duty is generally payable 30 days after you exercise the call option or the Seller exercises the put option. This can have significant cash flow benefits for a developer.
Changing the date of disposal for the Seller
The date of disposal for tax purposes is generally the contract date, not the settlement date. There may be tax advantages for the Seller to delay the date of disposal into a later financial year and a put and call option agreement is an effective way of achieving this.
You can read more about option agreements here: Click me
Joint Venture Agreement (JVA)
Have you ever considered doing a joint venture with the land owner instead of a traditional purchase? If not, you should keep this strategy in mind as it can have a lot of upside for a developer. Some things to consider:
No need to pay transfer duty
If the joint venture agreement is structured so that the land stays in the name of the existing owner, this avoid the need to pay transfer duty on an acquisition. For a development site worth $3 million, this means a saving in excess of $150,000.
The transfer duty saving can have a big impact on the profitability of the project and may even be the different between the profit on capital being high enough to proceed with the project. In fact, we have acted for several developers where this was the only option for them to proceed with the development.
No need to fund the land cost
A traditional joint venture agreement between a land owner and a developer has the owner contribute the land to the project and the developer then pay the development costs. Using this structure means you don’t need to find the capital to fund the land purchase and you also don’t have an interest bill accruing for the land amount.
An experienced property development lawyer is crucial to ensure a JV agreement is properly drafted to protect your interests.
You can ready more about joint venture agreement here: Click me
Got more questions?
Choosing the wrong acquisition structure can cost you $$$.
At McAndrew Law, we are experienced in advising on the right acquisition structure for your personal circumstances. Call us on (07) 3266 8555 or get in touch with us online to get started. We offer a FREE initial consultation to discuss your needs.