JV's - Structures, Taxation, Finance and Stuff

[Ebbie]

I'm thinking of buying a block of land with a friend, and yes - before I get a lecture from anyone I've read all the warnings about friendships turning bad when things go wrong, and the importance of having every possible outcome documented and agreed on from the start so for now that won't be an issue.

The purpose of this thread is to get some opinions on the structure, taxation and finance side of things.

The plan is to buy a vacant block of land with a long-term settlement, obtain development approval for a 2 lot (dual-occ) subdivision, split the block in half, build two houses and come out with a house each at the end of it all.

We're trying to decide which is the best structure to use for buying the land. Starting with the end in mind, the aim is to purchase the land together but as soon as construction starts and the footings are laid we will create two separate titles and hold one title each - in our own individual hybrid trusts. We both intend to hold the properties long-term with no plans of selling.

On the finance side of things, each partner will finance half of the purchase cost of the land (plus the DA fees etc) from our own funds; i.e.- existing LOC's against other properties. This way we don't need to approach a lender until we have separate titles and can arrange our own individual finance for the construction using our own trust structure/s.

In regards to taxation I recently read an interesting article written by Julia about PBR 30342 where she pointed out the possible CGT consequences of building a duplex with a friend. The catch is the ATO sees the transaction as each partner transferring their share of the other’s house on completion, so they are each up for CGT on the gain on half the other’s house. In the example the two houses were built first and then the titles were subdivided so I don't know if this is relevent in my situation?

I'm sure I'll have a lot more questions but for now any suggestions or advice would be very helpful.

Thanks, Ebbie.

 

[Rolf Latham]

Hiya Ebbie

Well u have the finance sussed so I cant say much .

if u didnt then, youd probably get a lecture ......but you do have a cleat exit strategy so that would be one of the key things where you would need money to do the deal secured against the joint.

ta
rolf

 

[Ebbie]

Thanks Rolf. I thought I would have had a few more replies about this.

 

[obiwan]

I would be interested to hear how this turns out, it's something a friend of mine and I have talked about.

Can anyone help Ebbie (and me too)?

Obi

 

[hschmid]

Ebbie, some vendors might allow u to seek DA under a PUT/CALL option or 5% exchange with delayed settlement subject to subdivision approval.

You won't need any SPV (special project vehicle).

You can even negotiate to even start footings, create 2 titles and then settle each block to each of your trusts.

Sounds complicated, but you might be suprised what u can negotiate.

Especially if you have funds for bank g'tees and other (vendor) comforts.

 

[Ebbie]

Ebbie, some vendors might allow u to seek DA under a PUT/CALL option or 5% exchange with delayed settlement subject to subdivision approval.

You won't need any SPV (special project vehicle).

You can even negotiate to even start footings, create 2 titles and then settle each block to each of your trusts.

Sounds complicated, but you might be suprised what u can negotiate.

Especially if you have funds for bank g'tees and other (vendor) comforts.

I think Hans has a great idea! This would be the the ideal way to go if I can find a vendor willing to accept those terms.

What do people think about releasing the 5% deposit to the vendor up front with a long-term settlement (of say 1-3 yrs) as an incentive for them to delay settlement? Some people might say this is risky but is it much different to paying a 5% non-refundable option fee? If a REA is involved it might assist in getting the deal accepted since the agent can still get their commission up front instead of waiting until settlement. Once contracts were exchanged I'd get my solicitor to put a caveat on the title.

If I can't find a vendor willing to accept my terms (i.e.- start the footings and create two separate titles before settlement) I guess the back up plan would be to buy the land as Tenants in Common between the two Trusts and then do the subdivision. Would we have to pay Capital Gains Tax when we transfer the vacant lots into each of the trusts? Is there another way around this?

Cheers, Ebbie.

 

[hschmid]

settlement 1 to 3 yrs is a bit ambitious.

These are more 3 to 6 month delays.

Enough time for DA and subdivision.

Releasing deposit is ok under prudent circumstances.

Be careful that the vendor does'nt default on any existing debts on the land during your settlement period as any mortgagee has priority over you.

You could lose yr deposit and expenses to date.

Don't be afraid to use "subject to" offers.

Clearly articulate yr outcome expectations (DA for x end result), get yr people to create the contract (usually terms in yr favor) and go 4 it!

 

[grossreal]

hi eddie
I will have a stab at it.
but all the information is information only and under no circumstance use it for investment purposes etc.
first the structure you need to build the structure to suit both goals and as they will be very different you need to build that with someone that does trusts and companies
as hans says you don't need a suv but they to me are the best vehicle.
not sure about subdivision straight away and getting your own lending for each half usually a lender will do land and construct loan on the project,
you wouldhave to talk to a couple of lender to see what they think of doing half a site,once its subdivided I think they would not have a problem.
the main part in this exercise when you say you are using your own funds and getting the loan further down the track
is to see the margin at the start.
so for me
I would do my figures on a whole site
cost the land,construct,gst, interest and fees and put that against resale value.
and if after the mixing of the number there is not a 20% margin
totally rethink the idea.
I would not release deposits unless you have to and when you do remember to kiss the money good bye because buy or not you won't be getting it back.
I don't think you will get control of the land as you think unless you do it under a management contract and thats a very different kettle of fish.
you could option the land subject to you doing the subdivision and paying the da and then settle on the da being approved thats relatively easy
would have to be a put call option.
hope this helps.

 

[Ebbie]

settlement 1 to 3 yrs is a bit ambitious.

These are more 3 to 6 month delays.

Enough time for DA and subdivision.

Releasing deposit is ok under prudent circumstances.

Be careful that the vendor does'nt default on any existing debts on the land during your settlement period as any mortgagee has priority over you.

You could lose yr deposit and expenses to date.

Don't be afraid to use "subject to" offers.

Clearly articulate yr outcome expectations (DA for x end result), get yr people to create the contract (usually terms in yr favor) and go 4 it!

Hi hschmid,

Would there normally be a time limit on a "subject to" offer? If you buy subject to DA for 2 units, what is stopping you taking 12 months to come up with a suitable design and another 12 months to get it through council etc? The vendor may have already signed up for a long settlement without realizing it?

Sure 1 to 3 years might be a bit ambitious but as you said earlier you never know what you can negotiate.

 

[Ebbie]

you could option the land subject to you doing the subdivision and paying the da and then settle on the da being approved thats relatively easy
would have to be a put call option.
hope this helps.

Hi grossreal, a put and call option is another one of the ideas we are still considering. Thanks.

 

[Ebbie]

You can even negotiate to even start footings, create 2 titles and then settle each block to each of your trusts.

Hans, getting back to the suggestion of negotiating to create 2 titles before settlement, how would this work? The original contract is signed as two buyers purchasing the one title so when it comes time to settle on the original contract it wouldn't be valid would it? How do you replace this contract with two new contracts allowing each buyer to purcahse a new (separate) title, without losing out on the deal?

 

[hschmid]

The vendor solicitor usually will demand time frames and sunset clauses.

Again I think the spirit and expectations from these negotiations are 6 month delays.

If you are applying for a complete new rezone that takes time but a DCP/LEP compliant proposal is usually with the 6 months.

Hey, some vendors will GIVE you their land in expectation of a part of the improved end product.