Need some advice on next development project

Hi All, Looking for advice on how to go ahead with this development.

Here is the scenario.

I bought an investment property on a big block few years back. It had good development potential given its size and proximity to train station and shops. Few months later, the guy next door approached me with the idea of developing the 2 sites combined for a greater yield. After exploring this option, we went to the council with a 10 townhouse proposal, 5 on each block with a driveway down the middle. However due to recent changes, the council was looking for a higher density development in the area. So finally after a long and expensive town planning/VCAT process (due to neighbours objections) we finally have a permit (DA) for a 30 apartment building.

Now I own my block in my personal name and my neighbour owns his in his personal name. Question is what is the best way of developing it through a company so that we retain a few apartments each. Also how can we develop it so that the entity developing and selling the apartments is a company, but we retain the land in personal names until the actual sub-division occurs. One suggestion has been that we can do this thru a JV between the land owners (us) and the company directors (us again) to satisfy the banks and avoid the stamp duty.

Finally, We realise we have to seek professional advice on this before we proceed any further. However it will be good to be armed with some ideas/suggestions from you all.
 
Have you done any developments before? 30 apartments is a massive task, i'd consider selling it with approved plans or possibly doing a JV with a more experienced developer.
 
Wow

Great opportunity.

However, also a great deal of risk. Tread carefully and slowly - expect lots of trials and challenges.

Make sure that you have significant cash reserves - and then some more. Cash will keep you and the project alive.

If you or your JV partner dont have the cash in hand at the start - dont start!

Get a good (great) lawyer and accountant involved now. The sooner the better.
Find a good broker with experience in multi dwelling developments.

Your first job is to set up a JV (lawyer and accountant required). This will detail who does what and when. Plus you need to establish how you are going to fund the whole thing.

Once that is in place you can go about combining the titles.

As Sanj says if this is your first development it may be easier to sell the properties with DA, take your cash and give all the headaches to someone else. Or at least involve an experienced developer/builder in the JV

Good luck.
 
Great advice so far. The key thing is asking the right professionals that are experts in developing, to ensure that you receive the right advice. My experiences have been very bad with people who have claimed to know what they were doing very confidently, but really didn't have a clue.

Get an accountant that specialises in property development (not just property) as your starting point, as tax considerations will make a big difference to the amount of money you get to keep and get them to recommend the right lawyer to set it up for you.

As the others have alluded to, a development on this scale will take alot of cash/equity (as a starting point assume $1M+ until confirmed otherwise) and there is much higher risk due to the number of units.

The large scale will impact every step of the process, compared to the smaller 5 townhouse development site you originally had planned:

1. Banks will want to see your history as a successful developer with at least intermediate sized developments, or see a very experienced project manager running the project, who has previously done similar projects. For this sized project, they are probably going to want to appoint a project manager from their own panel. Not sure of the exact cost, but assume big $

2. When you do presales, keep in mind that the bank will at least want to cover the debt that you borrow. Depending on the profit margin, you are probably looking at 20+ sales, in a slow market. Consider, are you trying to sell to investors, or people who want to live there? For investors, what sort of yield would you expect in that location at your purchase price and what is the vacancy rate? Why would someone choose to invest in that location ahead of others? If selling to owner occupiers, they tend to want to see a finished product and are much less likely to want to buy off plan. This becomes a big issue when you need presales!! There are specialised marketing firms that can sell off plan, but expect 6%+ sales margin if you engage their services.

3. Have you performed a feasability, to understand the construction costs and likely sale prices? If so, what is the anticipated margin on costs?

4. Because of the scale of the project, any issues / cost blowouts will be magnified significantly. As an example if you calculate that you need $1 million in the deal and scrape this together, then have a blowout of just $20k per unit, you would need to somehow find another $600k.

5. Even smaller projects can be stressful at multiple points in the process. Again this magnifies when you have so much at risk, where you would probably be bankrupted if something seriously went wrong, that could be out of your control. i.e. the builder becomes insolvent during the build.

6. Your selection of business partner is key. I currently have 3 JV projects, with other parties. In your case, the business partner was selected by them owning the property next door, rather than their temperament, ease to work with or knowing them for a long time to have alot of trust in them. As I have discovered, difficulties arise throughout a project and you need to both be able to manage the low points.

7. What happens if you or business partner split with your partners during the construction phase? Make sure that all potential scenarios such as this are covered adequately in your contract.

8. Assuming 50/50 ownership, how will you break a deadlock for key decisions. When I set up an agreement in a 50/50 partnership, we started with a list of pre-decided outcomes that we could agree on at the time we entered into the contract. This will cover things such as:
- How many units you plan to keep or sell
- How do you set the asking price. i.e. if you cant agree, the average of 3 selected agencies is used.
- How much under the asking price you are willing to accept if an offer comes in that is 5, 10, 15% under and can't agree at the time.
Predefine what is acceptable, so you don't fall out later over these decisions.

9. Figure out how much you would get selling it as is, compared with what you would receive for all the pain of doing the project, AFTER tax. Discuss with your new specialised development accountant if there are differences in gst and cgt consequences of doing the development.

For example, if selling without developing resulted in no gst and allowed cgt concessions, while developing required you to pay gst and full income tax, the difference may not be that significant. There may also be stamp duty considerations if you do plan to transfer into a company name.

10. Also consider the opportunity cost of maybe an extra 18 months to get presales and build. In that timeframe you could have taken your profit and completed another small development on your own with the proceeds, to reach a similar profit outcome, but with much less risk!!

I hope this helps. Not trying to freak you out, but it is a large undertaking with serious consequences if you get it wrong.

Cheers,
Matt
 
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Hi Guys,

Thanks heaps for the advice. I was away this weekend hence could not check on my post earlier.

Sanj, I am currently in the middle of a 4 units development, demolition complete with construction to start in Jan. True about the apartment project, it really is a massive project and my first instinct was to sell it and tried to sell as well with no takers.

Blacky, Thanks mate, We have some cash in hand and lots of equity in the land. My JV partner owns his block outright. We have spoken with a finance broker and he is very optimistic about finance. Next step is setting up the JV.

Mattnz, Thanks for the exhaustive checklist.

Spoken to a finance broker and he had an indicative offer from CBA based on some preliminary numbers. As you suggested we will need to engage an experience PM given our lack of experience. The banks want 80% debt coverage and it works out to about 20 units. Have spoken to few local agents and projectmarketers. We will probably have to engage both at some stage.

Did a feasibility with some conservative numbers, comes to 23% margin on costs.. So far, its been great with my JV partner. We are doing a 4 unit development at the moment. He is old school, no emails, internet etc.

Finally, if any of your know any accountants/lawyers (in Melb) experienced with similar projects, please pass on the details.
 
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