“I’ll put in the land and you pay the development costs”
By Jonathan Tisher
27 October 2015
Many developers approach us with different concepts for developing land.
A typical request that we receive from a developer is along these lines – “We have found a person who wants to contribute their land to a development. We will cover the development costs by developing it for them and will organise a mortgage. We think we can get a permit for 8 apartments. They will keep one apartment (the penthouse) and we will also receive one apartment. We have agreed on a profit share split for the balance of the apartments. Please prepare a short document to cover us.”
These forms of agreement are complicated and require careful thought.
Some of the key issues that need to be considered include:
- What is the value of the land and the amount contributed for development expenses?
• How have these values been determined?
• What is the profit split?
• What if the desired permit is not obtained?
• What if the development expenses are more than anticipated (i.e. because of issues in obtaining the permit, construction cost blowouts, etc)?
• Who makes decisions?
• Can the developer lodge a caveat to protect its interest and/or a mortgage to secure the development expenditure?
• Who signs the mortgage for funding purposes (presumably the land owner) and is an indemnity provided from the developer?
• Is stamp duty payable because it is deemed that the developer is obtaining an “economic entitlement”?
• Will any off the plan contracts be entered into to save on stamp duty?
• Have all relevant tax issues been considered for both the owner and the developer?
• Should the developer be paid a fee as part of the development expenses?
• What happens if all the lots are not sold before the construction is completed or some of the lots cannot be sold at their desired price?
There are a range of ways that these agreements can be structured and it is important that the issues are thought through carefully from a structuring and tax perspective.
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