Split Finance for Duplex Development

Hi all,

Is anyone able to provide guidance on the best way to go about satisfying funding requirements in the hypothetical example below:

- 2 people (A and B) buy a parcel of land which has permits approved for 2 townhouses (Dwelling 1 and Dwelling 2)
- Persons A and B purchase the land in a 'Tenants in Common (TiC)' arrangement
- The permit exactly splits the land into 2 exact land components. It is an exact 50% split on land
- Dwelling 1 is 26 squares and Dwelling 2 is 31 squares, making Dwelling 2 more expensive to build
- Person A will be using Dwelling 1 as their PPR and Person B will be using Dwelling 2 as their PPR

The question is as follows:

What is the most efficient way for Persons A and B to obtain PROPORTIONATE finance for their individual build contracts, despite being exact 50/50 owners TiC of the underlying land?

Thank you

 

simply split the loan into 2 with each taking one split on a notional basis with both as borrowers, or 2 splits, one in each name with the other guaranteeing.

 

Okay great. So does this mean that each person's block can be individually used as security for their 'notional' portion of the overall loan?

Further, does this mean that upon subdivision, if one person was to hypothetically default, it would not affect the other (given they would be individually titled at completion)?

 

no x 2

since there is one title each loan would need to be secured by it - or other property.

If one defaults the lender can take possession of the while property.

After subdivision the loan would need to be renegotiated so each loan can be secured by each property title.

 

Okay - that makes sense. How do you go about renegotiating the loan into 2 equal parts upon subdivision/individual titling?

 

Why don't you subdivide prior to the build? that would be easier and have less ramifications tax wise.
Then you could own 100% of your own block and get a construction loan each.
The problem I see with the way you have described it, at the end the larger house will be worth more and on paper you will own 50% of that. When you go to transfer that 50% to the other party it will be worth more than the 50% they will be transferring to you. This could have stamp duty and tax and other downsides. If you subdivided first then the value of the property has not increased, is the same value transferred and may have little to no stamp duty or tax.

 

Thanks for this. We have essentially mitigated all CGT and Stamp Duty implications upon the eventual transfer through a Bare Trust + Deed of Partition, but the more I have thought about it, it will be much easier to do what you just said - subdivide prior to construction beginning. The ONLY negatives are:
1. The increased time frame in waiting for subdivision first (local council has indicated 3-6 months); and
2. Any additional costs associated with subdividing first (from your experience, does subdividing first result in increased costs that would otherwise be mitigated by subdividing during/after construction is complete?)

 

My experience is that there are a number of positives for doing it first
1. once subdivided the land value may increase. What was a $700k large block may turn into two $450k blocks
2. that increase in value may generate equity that can help with the construction loan deposit
3. it is easier to finance construction with one construction to one block. If you are financing 2 houses on one title (ie not subdivided yet) the bank will value it lower and you will need to input more cash to meet the lower LVR

The downside is time and finding the money to do the works required to get the additional services (power, water, sewer). However I have found it to balance out positively with the lower cash deposit needed for construction so you might be no worse off or even better off subdividing first.

In most states you can do subdivision of land approvals concurrently with the development approval of the design. That way you don't have to wait for titles then get designs approved you can start straight away.

 

Great summary.

The additional ‘costs’ I previously referred to was the power, water, sewer etc. that you mentioned. I had been advised by a builder that this would need to be done, but I’ve never understood why this has to be done when subdivision occurs prior to construction?

My confusion arises from the fact that if someone opts to NOT subdivide first, the existing services would have to service both properties upon completion anyway?

Also, there is currently a house on the block, while the permit application is with our local municipality. Can the subdivision process occur concurrently with the permit application process, even though there’s an existing dwelling that crosses the proposed plan of subdivision?

 

You just apply as per normal

 

Hi Rolf,

No, there is no parting wall. They are 2 distinct dwellings.

 

Thank you

 

Thanks for the breakdown Rolf. Just a couple of clarifying questions:

1. By splitting titles before, do you mean to demolish, subdivide titles and THEN begin construction after subdivision has been approved?

2. What do you mean by the 'in on line haircut' getting in the way?

 

Understood - and are you saying the power, water, etc. would cost circa $55k for 2 dwellings?

When on sep title, each dwelling probably circa $1.2m each when fully built.

 

Basically when you subdivide first you need to create everything you need for 2 independant lots. So each will need their own services.
If you were building first they would put the additional services in during construction so there will always be 2 sets no matter which way you do it.

I can't speak to your state but here we get conditional approval for subdivision which has conditions on it. Those conditions are generally put in services (power, water, sewer), demolish house and have a cleared block. So before you get final approval yes you will need to demolish it for titles.

 

Makes sense. So, the subdivision application can still run concurrently to the permit application, but it will just include conditions - one of which will obviously be demolition.

From your experience, what's the time and cost of doing this?