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Legal Tip 127: Structuring a Development Part II

Discussion in 'Legal Issues' started by Terry_w, 26th Apr, 2016.

  1. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
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    Location:
    Sydney
    Structuring a Development Part II


    See Part I here Legal Tip 126: Structuring a development Part I


    Where you are both the developer and the builder you should make sure you are operating 2 separate entities. One entity to own the loan and one to build. The builder should contract with the land owner. Money borrowed will be paid by the owner to the builder so that if there is a problem later the bank may end up taking the land and buildings but the money paid to the builder will be much harder for them to get at.


    The builder should also not retain profit. A trading entity is at risk of its assets being taken by creditors in disputes. So the quicker that money is moved out the safer it will be. The money could be paid as a dividend to the shareholders which would be a discretionary trust and then out to another bucket company.


    It may also be possible to set up another company or trust to project manage. A fee can be paid to this entity to manage the project and divert money away to a less risky entity.


    Where you don’t own the land and you want to develop you can transfer the land to a related party but this will result in stamp duty and CGT possible for the current owner. A Joint Venture agreement could instead be entered into. Your entity can then develop someone else’s land. There are very complex legal and taxation issues to consider but profits can be diverted from the owner to the other party and these may reduce the total income of the owner of the property when it is eventually sold.


    In these situations, finance will be more difficult because the bank will lend to the owner usually. But it is possible for the bank to lend to the developer with the landowner giving the guarantee. The developer will have a development agreement with the land owner and the land owner will get paid for their property at the end.


    There are also risks with being classified as a general law or tax law partnerships which can have taxation and other consequences. Careful planning can avoid this.
     
    DoubleD likes this.