best way to structure loans for small developments

Hi all,

Just intersted how any forum members are setting up loans for small developments (via company,trust etc)

Im just trying to understand a bit more as to what methods are being used.

My situation is myself,my partner and my brother are looking to buy an existing property that sits on a reasonable size block of land.

We are looking at constructing 3 units at the rear of the land in a year or so time and selling the units and older house once all strata titled.


1. How are forum members structuring these type of developments (in a trust with company as the trustee?)

2. Is the loan usually in the companys name with the borrowers as guarantor?

3. Is it typical that developers will have the propertys in the company name to pay only 30 percent tax or how are you doing your developments?

4. Can anyone explain what the are doing, i have read up briefly on company vs trusts but still not sure should the loan been in the companys name with the trust as trustee or is it the other way around?

5. we would need to register for gst and could collect it along the way and pay it back on sale of the units?


I will get some advice before going ahead just curious as to how others are structuring these type of developments

In the past my brother and I have just purchased in our individual names and had my partner down on the loans for servicability, this is just for an existing house no developing envolved in past purchases.

would appreciate as to what has worked for some of you others on this forum.

Cheers Heath

 

Hi Chief

You are conflating loan structure with ownership structure. Usually the owner of the property will be the one getting the loan. So if a company is the owner it will be the borrower then the directors and/or shareholders will give a personal guarantee.

The is the case whether the company is acting as trustee or not.

So you need to get legal advice first on what way the property should be owned. Then you can decide on the loan structure.

to answer your questions
1. I specialising in advising on structure and everyone does something different. It will depend largely on where the property is located, who is involved, where the deposit money will come from, existing debts, intention for the future etc.

2. Usually a developer will use a company to own an asset. Either in its own right or as trustee. The loan will be in the company name with personal guarantees. Things should be structured to minimise risk by minimsing guarantees.

3. Could be. But this can be archeied by either a company owning or a trustee of a discretionary trust owning the asset with a company beneficiary.

4. explained already

5. The owner of the property would likely need to be registered,

 

Thanks for the reply Terry, I will defiently need to get some advice as it appears to be quite confusing to me at the moment - tho I do understand having ownership in our own names would not be the way to go, seems there maybe a few posibilties depending on our current situation.

 

You need to engage both an Accountant and a Finance Broker and they both need to work together to give you an answer. An Accountant may say that the best structure is XYZ but the Broker may say that this structure will get you so far in terms of lending or lender options. This in turn impacts many things such as profit, how much cash out put in the deal, etc.

A couple of lenders don't factor in debts in a company name for future borrowing if the company is trading profitably in its own right or is able to meet its financial obligations. Then there are lenders like Westpac that don't do company/trust loans under residential lending and only via commercial/business banking and thats the last place you want to go for a B&B application.

Then there are some lenders (not many) lenders that allow you to have the property purchase under a company name yet the loan under the directors/sponsors name.

So there are a lot of quirks, variations, etc between lender policies so its really beneficial to have these conservations concurrently with both the Accountant and the Broker. You can't do one without the other.

 

You are best off seeing a lawyer for structuring advice as it is after all legal advice. Many accountants think they can advise on this, but they can only do the commonwealth tax side. They can't advise on land tax, stamp duty, trust structure, trust law, company structure, company law, related party loan agreement terms, asset protection, estate planning, family law. Which are all at the heart of structuring.

 

I was wondering Is it possible to claim interest on loan if borrowing for an investment property in a family trust or has this been discussed before in a thread

 

Depends who is borrowing. if the trustee borrows the trust could claim the interest as per normal.

Tax Tip 89: Borrowing and onlending Interest Free to a Discretionary Trust Tax Tip 89: Borrowing and onlending Interest Free to a Discretionary Trust

 

Have you guys seen a normal straight-forward company set up (without trust and trustee) with personal guarantee, and it keeps doing small developments conservatively and successfully for years?

Or do they change the company into trust and trustee structure later down the track as the stacks and risks get bigger? Is it more costly then to change structure? Is it even possible?

 

Yes, seen that.

How would a trust structure improve asset protection in this situation? It wouldn't.

 

Everyone does it different but the serious developers set up a new entity for each new project and then close it down post completion of project. Profits are distributed accordingly.

 

So spinning off from a simple company structure, of banks need personal guarantees from all directors, who’s actually taking out the loan? Company or directors?
If the latter, does it matter that one is them is a non-resi?

 

Generally, the legal owner of the property would take out the loan and give the mortgage. This would be the company in your example and personal guarantees will be taken from all directors and sometimes from shareholders.

 

Does the bank assess personal wealth of directors in that case?
Even if the company has ... say...40% deposit?

 

Yes. Income and debts of the guarantors and the company would be taken into account.

 

Sorry, too many questions. Please put up with me for one more.
So does the bank use a different method to assess a non-resident director’s income and debt differently from a local one? Because the company we set up would be a brand new one with no track record of revenue, etc. It will just have a pile of cash for 30-40% deposit and other expenses.

Plus I’m looking if there a point at all for us to form a company after all. We’re just doing a simple purchase with small subdivision options, might not involve any construction.

 

Hi

I know someone that keeps all properties in separate entities. As in a new company structure is always setup solely for the purpose of purchasing and owning a particular property and yes back around 10 or so years ago they were able to finance the purchase under a new structure that had no previous revenue etc.

I can't confirm if this is still available today?

Regards,

alicudi

 

Ask away, i don't mind.

Yes non-residency complicates things more with the finance side, as well as the legal side.

The developing entity probably shouldn't have a pile of cash - think of the risks

 

Most new structures will have no assets. I guess it is to be expected by a lender. Depend on how big it is they will potentially want guarantees from other entities though.

 

Hi

Ah yes silly me, I am having a blonde day today which is better than my usual bald no hair days!

Regards,

alicudi

 

Hi Terry, thanks for the answers. Not sure how complicated it will be with one non-resident director’s guarantee. What’s the best way to find out?