Development on Fathers Property - How?

Hi everyone. I was hoping someone here could give me some advice on how to do this or who to speak to. Will have to get paid professional advice as well, but some help in the right direction would help start it off or see if it is even possible. Sorry for the lengthy post but I thought it is easier to put it in know and have less questions later.

The situation is: PPOR owned by a father (divorced for 40yrs and no further marriages/defectos) with only one child. The father does have one brother as well, but that is the only other remaining direct blood relative. He intends the PPOR to go to his child when he dies and in turn their children. Think he has a will stating this (will have to check).

The PPOR is a large block in Sydney with an old house he lives in. He still works but wants to retire some stage and have enough money to live off (and not have to sell the house so it can be passed on). He doesn't want to borrow money but is open to his child to do a development there (maybe 3 townhouses or something similar) so he can live in one free of charge, get rent from one (or part of one) and the third's rent (and part of the second's rent) going to the child to cover the cost of the development. The father could live in the child's property while the development is being built. There are probably other development options as well.

Anyway, how can this development be done so that everyone is happy. Eg not keen on child buying part of property they will inherit anyway and have to pay stamp duty, etc (unless they can just buy 1%)? Father has small income so no point in him owning development as he would have little taxation benefits (child has reasonable taxable income so can benefit more from deductions). Child doesn't want to spend money on development they have little legal access to (in case there was ever a falling out between the two - not likely, but you never really know).

Would the child need to buy in to part of the property? Can it just be resolved by a form of contract? Some sort of development agreement? The child wants to help the father out but not disadvantage themselves by doing so either. Ideally there can be a development to help fund the father during retirement, cover the child's costs (or ideally some extra as well) but not affect the inheritance (ie property goes to the child on the father's death at no or little extra cost to the child).

Thanks so much....

 

Why even bother developing? Your post makes it sound like its guaranteed that developing will be better off financially - its often not.

Unless someone involved here is very experienced at being a property developer, all I can see is extra hassle and costs compared to just selling the property and buying whatever properties each party wants/needs.

And that's not even taking into account the family issues, which just complicates things further.

 

Dont see why the father would be happier developing than selling the house?

Thing is he can pass the house to his child. He cant control what happens after that.

 

So no experience and developing property in a falling market, recipe for disaster

 

if its a pre 1985 asset there are other options such as just renting it out as its cgt exempt anyway.

 

The property was inherited from his parents about 10yrs ago. It has never been investment (only ever PPOR). I presume the date he inherited it becomes the date of acquisition, therefore it is post 1985 and CGT is relevant.

There is no finance on the property, therefore the development costs would relate to the construction costs and related items and not land. The land value is over $1m and spending $600-900k on construction (haven't done any real numbers yet - just a stab for the purposes of this post) would make the value of the property ~$2m. Again, I haven't done the numbers, but I imagine that the development on this would stack up (rent on one of the dwellings would be an easy $700+ a week and probably closer to $1k/wk).

Also, I didn't mention anything about development experience, however that isn't an issue in this instance.

The father inherited the property with the intent for it to be passed to his grand children. He doesn't want to sell, but also doesn't want to use his own money and build a granny flat out the back to generate money in his retirement (which he could wither rent out or move into and rent out the main house). I'm trying to figure out a way he can keep the house, not use his money/borrow money and generate an income when he retires. So that when he eventually passes away it will go to his child (may need to set up a Testamentary Trust so that it can be split up between the child and grandchildren as needed).

I haven't spent hours doing calculations on what the returns will be as yet. Just trying to figure out how to help the father out at no/minimal cost to him so he has a place to stay and an income; the child isn't out of pocket and ideally makes a little money from their "investment" (that will eventually become theirs); and it passes down through the family like the grandparents originally wanted. Is it possible, or really up to the father to do his own thing?

 

My parents owned their house since 1990.
Their retirement plan included developing the property into 4x units.

Our position is not the same as yours.

However parents sold the property to a trust (with corporate trustee). They are directors of the company, along with 2of3 children (4directors in total).

The trust then developed the property and sold 2x apartments (clearing debt) and profits from the rental is distributed to parents.
Obviously this transaction incurred stamp duty and other additional costs.
However no CGt was applicable to parents as the asset was their ppor.
The trust pays GST on the sale, as well as CIT.

It is not ‘tax’ perfect, and is costly. However provides other benefits going forward. Allowed the equity to be released to parents, and company took on the debt.

Also note we have experience with developing, Plus have significant banking/finance knowledge.

However you do have options. But as others have stated, options may not be your friend here. You may be better selling it, allowing a professional to do the work, and move the equity to the end goal earlier, easier, and more efficiently.

Blacky

 

Natebell

How will it be funded?

 

Thanks Blacky - useful info.

Terry - funded primary through finance, although the child has some funds available to use if need be as well. Equity ideally would be the fathers property or at worst the child's property (either property have more than enough equity for the loan).

 

Who will borrow the money? do you realise that you can't borrow against someone else's property?

If you can borrow against your properties you could then lend this money to your dad to do the development.

 

Not an expert, but I think the end value of the development would need to be more than the value of the land plus the value of the build.

Would using rent from 1 or 1.5 of the 7 it’s as suggested (!?) really pay for the development as mentioned above?

 

2-3k a week on a 2m property in sydney? That sounds optimistic.

 

• Which local government area?
• What is permissible on the land? Zoning?
• How many dwellings will it yield?
• Is the land subdivisible?
• Does the existing house need to be demolished to allow development? Or can development be staged?
• Where will the owner live during construction? How will he pay for this?
• What are similar units/townhouses selling for?
• What are similar units/townhouses renting for?

 

Hi Terry. The loan would have to be in the fathers name if using that property, but the child would be the guarantor (and would be the one who would pay it off). Or as you say, it could be loaned against the child's property. Whichever works out best financially.

Joynz/Trainee - the $2m property as noted would be worth more than that. Was just using simple numbers of what the council land value is plus the construction cost. The council land value is ~$1.3m (is a 1,000m2 property on the Sydney Northern Beaches). That block with a number of dwellings on it would be worth much more than $2m. Depending on what could be built, it would be 3 (or at most 4) dwellings (eg one could be 2 storey with small dwelling down the bottom for the father who doesn't need much with the upstairs; and part downstairs another dwelling). Other two could be 2-3 bed dwellings (again speculating as haven't done the maths, just want to know if it is possible). If being conservative the rent is $800/wk for each of these two larger units, then x 1.5 = $1200/wk (could be more if doing 4 dwellings as the rent would include an extra dwelling). IO loan on say $900k would be ballpark $750/wk? Not including rates and other costs, but indicates it would seem to be worth investigating further?

 

Maybe the best person to ta;k to is the title holder,because this sounds like a mess ..

 

Unlikely you will find a lender willing to lend on this basis.

First work out how you will finance it and then I suggest you speak to a lawyer about the various issues.

 

I need to look into what can be done (townhouse, subdivide, granny flat, combination), but need to see if it can be done before working out what can physically be done on the property.

 

Sounds like it fits in the too hard basket. Will see if I can convince the father to build a granny flat and live off the income of that...

 

So far to date how has your father planned to fund his retirement , Does he have Super, a SMSF or was he planning to go on the pension.
I think at the moment the PPOR is exempt.
when applying for the pension , but not sure how it works if he subdivides,but you did mention he does not want to take on debt .
Something else to keep in mind is that in many years to come he may need to go into a retirement home or hi care .

 

Because theres someone available with lots of experience?