Development Investments SMSF

Hi All,

Anyone got any experience using their SMSF to invest in development projects.

There are several developers advertising 10-30% returns (depending on project/development).

Just want to see if anyone has experience in this type and has it worked out well, what did you do to verify the developer and make a decision.

They usually have around 5-6 projects history and you can see they are built but have no way of verifying how successful they were - only information is what they feed you through the information memorandum.

Some are willing to give references, others are more like a 'you dont know who I am?' attitude

 

I'd be very very careful, by careful, I mean fine tooth ....

Look at the agreements they have and think, if they go bust, how do you get your money back? most of them will reply with we won't, but then refer to the agreement and you will see what their lawyers have written in.

Cheers Ivan

 

I'm yet to get a lawyer to give some advice which I'm planning to. Most of the memorandum just say directors guarantee. I guess I should be asking for a list of assets? Hard to determine how many others are also got stake on same asset.

 

in one of my first jobs as a lawyer there was a client who had lent $1mil to a developer, secured and had personal guarantees. He lost the lot.

 

I had a client who did this for under 10% of a large smsf. The auditor qualified and reported this. The ATO didnt penalise the fund but agreed with the auditor and suggested the investment strategy was deficient as it failed to consider all risks and therefore the sole purpose test was not met at all times. In time the fund lost the whole sum. They didnt get a cent of income and didnt get their capital back and the developer walked away since no lender had more than 10% interest so none were sufficiently committed to sue in the supreme court for breach of trust.

Loans that are secured over real property may be a suitable strategy however generally developers are usually seeking "mezzanine finance". They have a loan for the property and then need cashflow to sustain the build. Its an unsecured loan (or a ******** fake security eg guarantee, unregistered floating charge etc) and you may never get the interest OR the capital. If anyone needs to pay credit card rates they are a BAD risk. You are their lender of last resort beacuse a professional lender of last resort declined it.

IMO its like standing outside cash converters and approaching some one refused a payday loan and offering them a loan. Unsecured smsf investments are as sound as a investment strategy to store cash in a fireplace.

 

My client was dealing with a family of builders with different entities. The guarantor was bankrupt at the time.

 

I dont know why I liked that. It sorta seems wrong. Yes entities can be used to befuddle. ie Loan to a company that doesnt build. It onlends to the builder. And builder doesnt own land.

Could even just be a unsecured scheme to defraud. But if not, its a civil matter even if it seems dodgy.

Consumer law has caveat emptor (buyer beware) as the latin but strangely the romans didnt come up with one for lending money.

 

That is really messed up. Surprised there isn't more regulation on this as it can be turned into 'legal' scamming.

Going bankrupt during a build due to force majeure or something similar is a different story.

 

What was the security that turned out to be nil?

 

i can't remember now, but think it was a second mortgage over the land being developed - which had nil value after the first mortgagee

 

I had a look into this structure its correct in that your deposit is entirely exposed whilst the developer doesn't put in cash. They usually don't put a focus on it but they do say there are risks. To the normal person I guess they wouldn't think too much about it and just think their money is secured, but it is actually fully exposed.

Having said that and I understand I could lose all of it if the developer is bad or a scam, but I am sure there are developers out there that would be legit and profit. Anyone heard of this? Or is it too good to share around.

 

Property development is high risk - if a developer is offering stupid rates, you are looking at a desperate developer who hasn't sourced adequate finance and poses a much greater risk to anyone who stumps up cash to finance them.

This shortfall could be due to a lack of sales or Banks being unwilling to lend or the developer's track record.

OTP buyers on the other hand have their deposit held in the agent's trust account.

 

no

 

Good developer will have access to finance. Bad developers wont and are also more likey to have been refused finance based on their past record as well as inexperience. This is why bank hold a first mortgage. When they exercise righst tos ell its inevitable that the developer has a accrued number of debts. Land tax, rates, compound interest unpaid contractors etc....Their equity is that of profit and if they have spent it all then there is no equity. Bank gets its $$$ and creditors aget whats left - Cents in the dollar often since the develop has stripped the company and cash cant be traced or is a costly recovery.

There are some good developers who have friends who work together to get devs done. The lender will know them.

LLR (Lender of last report) finance is common for some developers. Some will even then chase further debt when its looking tight. Its like paying credit cards debt with a new credit card.
Just because you have a debt doesnt mean you can recover it.

 

In regards to the access to finance are you referring to fully financed all projects so never looking for more? The developers I've been looking at have 70% bank loan and looking for JV or investors to make up the 30% capital.

One of the developers was offering access to their accounts Xero and you can see live payments. Would you think this level transparency is sufficient or the money is still at risk in paying other debts.

What do you think of the JV versus Investor options. Some developers offer 15-30% as investor and others offer 50% as a JV. Is this purely developer and project based or is the JV structure better and more reliable.

Thanks

 

A mezzanine finance party may be at risk of 100% unsecured debt as last in the chain of creditors and be just as unsecured as the unpaid conceretor...Often worse. The JV lender may actually be last to be paid wand when the cash runs out they say - Hmmmm there isnt any cash left. . A JV where you lend is NOT a JV. Many dodgy developer use JV like some sort of bait to reel in suckers

 

Need to be clear, the difference between debt and equity.

Debt investment ; Lending from first mortgage to mezzanine, all going you will be paid interest only. Strong to weak security. Interest rate will be fixed at time of investment.

Equity investment ; “JV” investment where you take pro-rata (or capped) share of the profits on the development. Lowest position in the capital stack….Developers that are offering Equity (JV) to unknown parties is a massive red flag, you’ll be stitched up with almost 100% certainty.

 

Equity is often better where you have suitable hard security and clout over the assets. eg a first mortgage against a private loan. And commonly some covenants in the loan which deal with what sort of paymnets and costs and approvals are OK so the develop doesnt spend up the borrowed funds. Loans that are "mezzanne finance" eg lender of last resort are usually that way as no lender will touch it or the project doesnt stack up and the unsecured lender will just rank equally with unpaid tradies etc after the developer takes the cash out and thinks they made a million. To find they lost money. Sueing for this is slow and costly and problematic. Smart lenders will limit the problem and ensure their interest is safeguarded