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?

1. Wednesdays With Redchip
WELCOMETO

2. Put and Call Options
LAURENCUTULI
LaurenC@redchip.com.au

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. 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. 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. 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. How are they documented?
Slide 7

8. A separate agreement that sits on top of the contract

9. Slide 9
Option Notice

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. 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. 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. Funding, Purchase &
Development
Structures
ROBERT LALOR
RobertL@redchip.com.au

14. DISCLAIMER:
I’m not a numbers guy!

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. The result?
• Developers need more
capital
• Leading to interesting
funding and
development
structures
Slide 16

17. Types of structures
• FundThrough
• JointVenture
• LongerTerm Options
• Preferred Equity / Mezzanine Debt /
Stretched Senior
Slide 17

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. 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. 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. 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. 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. 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. Funding Options
• Mezzanine
• Stretched Senior
• Preferred Equity
Big words, but… It’s all debt!!
Slide 24

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. 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. 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. 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. Questions?
Slide 29

30. Wednesdays With Redchip
THANKS FOR ATTENDING