Unit block strusture

[markj]

I am posting this question for any recommendation for the best structure.

Purchase:
Unit block = $3,300,000.00 purchae price
Deposit = $500,000.00
Mortage = difference + NSW stamp duty
Partner = $450,000.00 used to reach 70% LVR against their property
Renovations = $150,000.00
Furniture = $100,000.00

Rental income $195,000.00 per annum
Negativley geared at 9% mortgage estimate
Forecast positve = 2 - 4 years

My questions are around recomendations for the purchase with partner to purchase property: company, individual, trust etc.

The purchase is for long term for both parties. Any recommendations from experience would be greatly appreciated. I would not like to purchase this property and regret the structure that we purchased under.

 

[JoannaK]

I would be exploring the use of unit trusts for this type of purchase with other parties. Things change and you will do well to anticipate any changes now and structure yourself to accomodate those changes now.

Is the property strata titled or on one title at the moment?

if it's already strata'd that could potentially give you other options regarding the purchase, such as each individual trust agreeing to buy particular units in the block or something along those lines.

 

[markj]

Thanks for the reply Joanna,

The block is common title so unfortunatley those options are not availible for this deal.

I was thinking unit trust with a company under the trust. Do you have any experience with any finance applications with the company applying for loan under this structure.

At the moment we qualify for the loan under 70% LVR and current incomes. Do you know how this is effected under the unit trust?

Also we would both look to loan the unit trust 500K each for the purchase to meet LVR conditions. Any experience in complications we may run into?

 

[geoffw]

Mark

While I cannot offer an opinion on the structure, I am interested to note the inclusion of an expense for furniture.

While I have done well personally furnishing units, it was something I was able to experiment with (one unit at a time) before I went further.

It can be a very market specific thing- make sure that you know the market you are getting into, and know what the demand will be.

And, while I realise that you are just getting general ideas of experiences, you will obviously need professional advice.

Having said that, Joanna has "been there, done that", so she knows what she is saying.

 

[JoannaK]

Thanks for the reply Joanna,

The block is common title so unfortunatley those options are not availible for this deal.

I was thinking unit trust with a company under the trust. Do you have any experience with any finance applications with the company applying for loan under this structure.

At the moment we qualify for the loan under 70% LVR and current incomes. Do you know how this is effected under the unit trust?

Also we would both look to loan the unit trust 500K each for the purchase to meet LVR conditions. Any experience in complications we may run into?

HI Mark,

Firstly I'll just say that I'm not an accountant or a solicitor, and I'm not giving any advice here; but I'm quite interested in discussing options that a purchaser may have here...

I assume you mean Company Title rather than common title. Will your structure be buying all the shares in the Company that currently owns the title or will your structre be buying the title from the company that currently owns the title. Personally I would go the second option over the first option as you never know what sort of dealings the company has had in the past.

When you say that you are thinking of a unit trust with a company under the trust, I am assuming you mean that you are thinking of a unit trust with a company as the trustee of that unit trust. This would be a better way of doing it rather that having yourself or your jv partner as the trustee personally. Who will own the units in the trust? In this regard you should speak to an accountant about it...perhaps it may be beneficial to discuss options here...the may be benefits to you having another trust structure that has beneficial ownership of the units in the unit trust. then again, I'm a bit of a "security" freak so that may just be overboard, but definately something i personally would look at.

I just thought, a unit trust with a company under the trust could also mean the unit trust with a "bucket" company under the trust to collect excess income, which would then limit your tax to 30%. In this case you will still need to address the issue of a trustee of the unit trust. In this case, I am guessing that it would be the bucket company that borrows the money the buy the property. With respect to finance in this type of arrangement the banks may have a problem as they may want to see that the company is the owner of the property (sures up the banks security).

From a taxation point of view (and i'm not an accountant) you would probably need to get advice on whether it's more beneficial to have a trust own the property rather than a company.

I guess what I'm saying here Mark is that there are many many options available and you would do yourself alot of justice to seek out an accountant who is on top of all this sort of stuff.

Most deals are do-able if you have the right people around you.

I hope i haven't complicated it too much, but instead given you more options to consider.

 

[markj]

Hi Geoff,

Thanks for the good advice. May be worth furnishing 50% of the units and 50% unfurnished to see the uptake of the furnished ones first.

Thanks again
Mark

 

[Mry]

It all depends on what you value more - negative gearing now or income splitting in the future. I would not have a company involved as the unit holder unless you have major tax problems and would like to hold onto the property long term.

If you prefer negative gearing, have the unit trust units owned by the entity that earns the most income. If you prefer income splitting, a corporate trustee with a discretionary trust would be worthwhile. You do a combination of the two and own some of the units in the name of the entity earning the most income (to bring the tax down) and rest in a discretionary trust.

Again, any investment structure requires you to speak to your accountant because even I would not be satisfied with this recommendation without a full look at what you are up to. Losses in other entities, trading, asset protection risks, bringing people into the structure, land tax, etc have not really been considered here.

 

[markj]

Joanna,

Thankyou for taking the time to respond.

Yes it's company title for the unit block and thanks for the tip in this area.

Re Unit trust. I was thinking the unit trust with company under the trust, bucket company sounds more like it as it's sole purpose would be to purchase the property and cap the tax at 30% for income. It would then pass the franked income to the unit holders. This property is forcast to be positive in approx 3 years so figuring out the best long term, tax effective structure is important. This porperty will also be used as leverage into some other developments so the company is important as those other developments will be purchased under the same company.

I do need to visit the accountant to figure out the best structure or how best to structure the unit trust and company.

Thanks again Joanna for taking the time to respond to my questions.

 

[Mry]

Thats one complicated structure.

Company - to act as corporate trustee of the ...

Unit Trust - Which owns the property

Company - Which owns the units to the unit trust

Discretionary Trust - To own the shares, receive the dividends and distribute at will to beneficiaries.

A pretty good structure that does the job, as long as you don't sell.

 

[Welcome]

Would there be no CGT exemption if it was sold as the units are held by a company?

 

[MattR]

Thats one complicated structure.

Company - to act as corporate trustee of the ...

Unit Trust - Which owns the property

Company - Which owns the units to the unit trust

Discretionary Trust - To own the shares, receive the dividends and distribute at will to beneficiaries.

A pretty good structure that does the job, as long as you don't sell.

I take it Mry you are referring to the CGT position of the company?!?

 

[Mry]

I take it Mry you are referring to the CGT position of the company?!?

Partially. I wrote a quick article on not buying properties in a corporate structure, which still rings true here. If the property is sold, you will not have easy access to the proceeds and they will not benefit from the CGT discount.