Townhouse joint venture / profit share

Hi all,

Keen to hear about any experiences with JV/profit share, along these lines;

• Purchased a flat TH zoned site in Brisbane + submitted DA for townhouses to BrisCityCouncil.
• Have received approval for 8 townhouses with minimal conditions.
• Noticeable lack of similar approved townhouse sites available in the 5-10km radius.
• Instead of moving to construction stage, instead chose to partner with a builder/developer, and retained ownership of your land (no sale) as the builder/developer completed the development.
• Negotiated to a win-win scenario for both parties .... eg; scenarios being;

(a) Sell DA'd site to a builder/developer at 15-20% gross profit, and move on to find a new deal.
(b) Retain land + partner JV with builder/developer, builder completes works, returns initial capital (land + DA costs etc) + hands over 1 certified/complete townhouse at no charge (which I prefer to hold/rent out to provide cashflow).
(c) Builder returns all capital (land, DA etc) at completion/settlement + proportionate profit share from total development ie. his MDC. (risk; delayed return + transparency risk, weighted risk)
(d) No capital returned + 4 completed townhouses handed over (preferred option for me; as I wish to maximise holdings/rent to provide cashflow). Also a potentially viable for builder; as there is no land cost, but he builds 8 to keep/sell 4.

Considerations;

• Legal/tax structures that will support the chosen model/option (JV/partnering/ATO etc) - seeking property/dev legal advise on this currently.
• Risk: completion, partner/solvency, time/opportunity loss, caveat protections etc.
• Effort vs reward.

Looking forward to hearing about your lessons learned guys..

Cheers.

 

a) would be my pick, but sounds like you want to hold for the rental return? What kind of rental return % would you be looking at?

 

Hi Lindsay, rent return would be zero debt (on the 1 TH) & circa $500/wk gross.

 

So if assuming the townhouse is worth $500K you've got a 5.2% gross return ie. not factoring in rates, water and PM costs , (if using a PM).
That's if I'm understanding this correctly, you want a builder to build the rest of them and you keep one when finished but don't have to pay the builder?
I think the real questions is, would a builder/developer agree to any of those proposed options, seems like they could be outlaying a fair chunk of money to complete the builds with the hope of selling some to make the money and profit back, interesting.

 

Hi Lindsay, yes, your read is correct. The builder would build his 7 TH on my land (ie. zero costs to me, I'm passive / in the background only), once he reaches OC/sale settlement of his 7 THs, he then passes agreed figure to me (returns my initial capital and pays out my old loan), passes me 1 TH and we sail into the sunset.

Thoughts..

 

I am on the same boat.

I have DA approved site to build 12 townhouses. But dont know how to propose deal to builder/developer.

I am thinking that builder bring his finance to construct 12 TH, sell 6 units and earn 20% retun on his investment. And i keep 6 units.

Let me know how you go. We could learn from each other's experiences.

Cheers

 

I choose (d) because SELLING all you means GST and CGT. Plus if i reinvent somewhere else then i pay stamp duty. I like to keep half unit with some mortgage and have large assets.

 

Have you considered developing by yourself by using non bank lenders?

 

Hi mate, like you I'd prefer a value exchange (use my land + reimburse my costs & loans + give me a debt free asset) vs a CGT trigger. As to your equation above, it appears like there may not be enough fat in the deal for the builder.. perhaps instead 2 TH (from 12) and your land/DA costs refunded.. We need to hear from guys who've walked the walk on this..

 

It's high risk proposition for the builder, especially if their name is not on title, let alone the cost they need to outlay for the build.
Is land for this kind of development scarce? My thinking behind this question is why wouldn't a builder just do it all themselves?
If I could buy land, get the DA and sell for 15% - 20% profit in say 6 months I'd take that all day everyday over the other options

 

Because site with development potential is not cheap to buy and holding cost of expensive raw development site can take away a good chunk of profit.

Preparation of DA can take time and the Council can take anywhere between 6-12 months to give approval. After DA approval, he needs to prepare structural plans, pay council contribution and obtain construction certificate. Which also take time.

Until builder, get the DA approval there is no guarantee of return. Every site is unique and poses some development restrictions. Because the site is zone medium density and FSR is 0.6:1 does not mean the builder will able to use all Floor space ratio.

Sometimes council force their own agenda on the development. Such as

· widening the existing footpath at your cost,

· providing communal open space within your development site because there is less parks & a garden within close proximity,

· ask you to plant a mature tree on their land,

• ask you to change your design to improve visual surveillance and reduce crime,

· Force you to have more visitor parking space because on-street parking is an issue in the neighbourhood.


· Council may not allow you to cut one/two trees due to heritage/native protection that could pose threat on your profitability.


· Last and important part is objectors. Proposed development may get some serious objectors/nasty neighbour whom against the development due to privacy, loss of view, future noise, obstruction of solar path, any many more reasons. Large scale DA can get anywhere up to 20 submissions. And some of them do have valid point to oppose. And may can go to council meetings and can get political and some DA goes through NSW Land & Environment Court.

Many things are unknown even to the experienced builder until he gets approval from the Council. So Risk is also high when Builder buy the raw development site and do everything by himself.

In my situation, it took 6 months for me to prepare DA documents and it took 8 months for the Council to conduct the assessment. Construction Certificate will be another 3-4 months. So total of 1.5 years and over $200,000 cost.

By JV with the landowner, builder is not parking his fund for 1.5 years in securing land and approval. That means he can use his fund in other projects. In my case, land cost is 40-45% of total development cost. So he can run two JV project instead of running 1 project and do everything by himself.

 

Thanks ParraEels, Lindsay, your thoughts...

 

sell for 20% profit hopefully, is that a large sum for the two years worth of holding costs and worth?

 

YES, it is worth holding land for 2 years.

We got two choices.

Sell with DA and CC take 20% profit on total cost.

JV and take 20% of total development.

It is easy to say that take 20% and move to next project but development sites are not easy to get. So squeeze last drop of juice from that fruit because you may not get that fruit again.

 

What is your ROI on both the scenarios, when you say 20% they both just sound similiar, so the less risk more immediate return would be the optimal choice.

There is the risk of builder going bankrupt, not completing the builds, only building some of them, any other things that could go wrong during a construction project of that size.

There is also the market on completion, what if the demand drops and they can't be sold, how will the builder be paid.

Comes down to risk vs reward.

 

Sell the block with DA and take the 20% profit now.
If I was a builder I'd rather get paid for the job of building the project rather than have to wait for the profit to be realised, who knows where the market will be by the time it finishes and how long it may take to sell them, lot of cash to have tied up in the build costs as a builder, just my 2 cents