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Property: Acquisition & Transaction Structures

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At our Wednesdays With Redchip event in July, experts from our property team discussed the common issues and questions that arise surrounding major transactions, including:

Development, funding and joint venture structures.
How do put and call options work, and why would I use one?
Transactional and holding taxes: can I limit, defer or avoid?

Published in: Law
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Property: Acquisition & Transaction Structures

  1. 1. Wednesdays With Redchip WELCOMETO
  2. 2. Put and Call Options LAURENCUTULI LaurenC@redchip.com.au
  3. 3. Legal stuff - disclaimer All material contained in this presentation is delivered by way of general comment. No material should be accepted as authoritative advice and anyone wishing to act upon material contained in this presentation should first contact Redchip for properly considered professional advice, which takes into account specific situations.
  4. 4. What are put and call options? Call Option Future right to compel a seller to sell land Put Option Future right to compel a buyer to buy land
  5. 5. Call option benefits to buyer • Gives buyer the opportunity to: • Undertake due diligence on land • Lodge/amend a DA • Obtain approvals to develop the land • Secure finance for the acquisition • Source partners pre a ‘fund’ being structured Slide 5 • Nominate third-party buyer with no duty consequences (“Contracted Property” is taken into account for share transfers of the Buyer) • Defer duty liability: due 30 days from unconditional contract • Prove up a development before commitment to raising capital & establishing an entity • Gives rise to a caveatable interest in the land in favour of the buyer
  6. 6. Put options benefits to seller • Same overall outcome as a contract subject to conditions • Defer any capital gain until exercise of option (potentially!) Slide 6
  7. 7. How are they documented? Slide 7
  8. 8. A separate agreement that sits on top of the contract
  9. 9. Slide 9 Option Notice
  10. 10. How are they documented? • Terminology: • Grantor = Seller • Grantee = Buyer • Complete and valid contract for sale/purchase as annexure • All aspects of transactions agreed prior to option deed • Contract becomes binding on exercise of option Slide 10
  11. 11. Features • Option fee • Usually a nominal amount as this fee attracts duty (consider a security deposit to secure obligations) • Option exercise period • Assignment/Nomination • Can allow rights to assign option to third party – option can be sold • Potential for uplift in purchase price as a buyer to a third party • Allows for an entity/fund to be determined post signing the option Slide 11
  12. 12. Transfer Duty • Payable on purchase price as per usual conveyance (not triggered until option is exercised) • Payable on option fee • Implications arise when assigning option or appointing nominee (dependent on amount paid for assignment / manner of nomination) • Advice should be considered Slide 12
  13. 13. Funding, Purchase & Development Structures ROBERT LALOR RobertL@redchip.com.au
  14. 14. DISCLAIMER: I’m not a numbers guy!
  15. 15. Securing finance increasingly difficult • Across the board, not just in development finance • Hurdles: • New to bank • Only capacity to service debt is selling lots • Even with great relationships: • Lower LVRs / lower contribution to total development costs • Significant Presale Requirements – 100% debt cover Slide 15
  16. 16. The result? • Developers need more capital • Leading to interesting funding and development structures Slide 16
  17. 17. Types of structures • FundThrough • JointVenture • LongerTerm Options • Preferred Equity / Mezzanine Debt / Stretched Senior Slide 17
  18. 18. FundThrough • Traditional realm of the large scale property fund, e.g. office towers • More service stations and childcare centres being structured in this way • Developer acquires site or takes control of site (option!) • Achieves development approval • Potentially pre-leases – build asset to order for end user • Developer contracts with a buyer to sell land at a fixed price • Deliver project to the buyer through a development management agreement Slide 18
  19. 19. Why FundThrough? • Not capital intensive • Developer might option site and pay for costs to construction, buyer funds the rest • Can generate equivalent returns to developing off own balance sheet, with less risk • Developer can theoretically take on more projects • Buyer pays duty on land value rather than finished asset value – better end value than if buying completed product Slide 19
  20. 20. JointVentures • Can take all manner and form • Bringing together different skillsets and assets to deliver a specific project • Differs from Partnership – joint undertaking that will be an ongoing relationship Slide 20
  21. 21. Property JointVenture Scenario • Party 1 (Landowner) – makes land available for development, allows development finance to be secured against it • Party 2 (Developer) – brings some skills and manages development of asset • Parties agree to a cascade of funds after development of the land, e.g: • Pay back debt • Pay development costs • Land cost to owner • Development management fee to developer • Balance split as agreed
  22. 22. Why JointVenture? • Land owner • Get an uplift on the valuation of land • Potentially keep proceeds on capital account (CGT considerations) • Developer • No duty on acquisition • Not required to fund the acquisition – less capital required, more capacity to fund development Slide 22
  23. 23. LongTerm Options • Developer takes an option over a parcel • Developer contracts development rights – subdivision in particular • Developer cuts up land and either acquires piecemeal or nominates third parties to acquire Slide 23
  24. 24. Funding Options • Mezzanine • Stretched Senior • Preferred Equity Big words, but… It’s all debt!! Slide 24
  25. 25. Mezzanine Debt • Usually expensive short term debt to get project finished (or bridge gap to allow next project to start) Unsecured or secured behind a second mortgage • Not necessarily dirty word – relies on developer understanding timing and cash flow • If only outstanding for a short while can be efficient • Many major banks do not allow mezzanine at all (e.g. NAB) Slide 25
  26. 26. Stretched Senior • Debt provided at a much higher LVR than traditional bank debt • Will apply a higher blended rate of interest – roughly equate to cost if you had both mezzanine and senior debt in a project • Will apply for the duration of the project rather than be called on as you would with Mez. • Usually private / third tier lender Slide 26
  27. 27. Preferred Equity • Often talked about as equity or JV funding, but is most often debt • Funder provide equity component required to secured senior funding • Often used interchangeably with mezzanine debt but if unsecured often avoids hurdle of subordination with primary funders • Typically take a coupon plus a preferred equity stake – allows a fixed rate of return plus an upside based on development profits Slide 27
  28. 28. Asset Holding Structures • Many different arrangements available • Investment structures – trusts • Ongoing development activities – company • Larger developers use tax consolidation to manage tax deferral and sharing of losses, expenditure and gains across a group • For land tax purposes, consider partnership of trusts • Strategies available to split existing trusts to take advantage of land tax thresholds Slide 28
  29. 29. Questions? Slide 29
  30. 30. Wednesdays With Redchip THANKS FOR ATTENDING

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