REAL ESTATE INVESTMENT ALERT NO. 1

REAL ESTATE INVESTMENT ALERT NO. 1

I have always been passionate about mentoring people so that they can achieve their desired outcomes. This not only extends to lawyers achieving their desired career outcomes but also to clients in relation to achieving their desired real estate investment outcomes. In the case of an investor, an essential part of achieving these outcomes is to have an informed understanding of the issues likely to be faced when entering into the types of projects they wish to invest in.

Common risks avoided

During my long career in finance and property investment law, I have seen the negative outcomes that can arise when a party to a real estate transaction is not familiar with the issues relevant to the transaction they are going to embark on. These negative outcomes include:

  • The client not having sufficient control of its investment
  • The transaction not being structured in the most optimal way for the client
  • Time delays in getting to settlement
  • Legal and other adviser fees blowing out
  • Clients having to compromise their position on important matters
  • Parties to the transaction walking away from the deal

Peter Faludi Consulting (PFC) was established for the purpose of assisting clients overcome these negative consequences.

How we can help

By getting involved in the very early stages of a transaction, prior to any term sheet, heads of agreement or memorandum of understanding (“ Summary Document”)  being executed, PFC works with the client (and, if appropriate, its advisers) to help them understand the relevant issues and make sure they are dealt with in the terms of the Summary Documents. In this way, both parties interests will be protected and they will be working on the same page. This will substantially reduce or overcome the need to renegotiate terms resulting in savings of time and costs.

The level of service we provide is structured to meet the client’s needs. The services available range from providing a general overview of the common types of issues that need to be addressed to working with the client (and its advisers) in negotiating the terms of the Summary Documents and the main formal documents to be entered into.

It is not our intention to replace the client’s legal, tax or accounting advisers which, in each case, will still need to be involved for the purposes of signing off on the terms of the Summary Documents and/or the formal documents to be executed, the structure to be adopted and implementation of the transaction. Our role is to make sure clients enter into transactions with their eyes open to the relevant issues and thereby achieve better outcomes in relation to their property projects.

Benefits of our service

Through our services investors will:

  • Become more knowledgeable about issues relevant to future transactions
  • Be seen as a more capable, savvy and confident counter-party for other projects
  • Gain more respect in the marketplace
  • Feel in control of their investments
REAL ESTATE INVESTMENT ALERT

In keeping with our goal of helping clients understand issues relevant to their projects we will be producing regular editions of our Real Estate Investment Alert highlighting current or impending developments. We hope you enjoy this first edition.

Federal Budget Indicates Improvements to Regulation of Foreign Investment in Real Estate

Much has been written about the additional taxes and surcharges which are currently being imposed of foreign purchasers of real estate. Most recently the New South Wales Government has advised of a planned increase to its foreign purchaser surcharge duty on residential real estate from 4% to 8% resulting in total duty of upto 15% of the purchase price being charged on the purchase of that type of property.

Away from the headline grabbing news, in relation to the acquisition of commercial property a number of issues arose from changes made to the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA) which took effect in December 2015.

I have worked closely with The Property Council of Australia over the last 12 months in making submissions to FIRB and Treasury in relation to the sensitive land issue (as referred to below) and other matters arising from the December 2015 changes.

Important changes to sensitive land criteria

Of particular concern was the inclusion of a concept of sensitive land which, if applicable, resulted in the monetary threshold above which Foreign Investment Review Board Approval (FIRB) was required being lowered from $252m to $55m. Consequently, a larger number of acquisitions were subject to the lower threshold than was expected. The main concern arose from the inclusion of “land under prescribed airspace” as sensitive land. Given the broad reach of this criteria, it was clear that changes needed to be made to overcome any unintended consequences.

In the 2017 Federal Budget the Federal Government announced it would make a number of changes to the foreign investment regulatory framework which are intended to overcome the above concerns. The Government has stated that “land under prescribed airspace” is to be removed as a criteria for sensitive land. In addition, other sensitive land criteria (such as that relating to land leased to the Federal or a State Government or a Federal or State Government body) are also to be refined so as to ensure they do not extend to transactions which were not intended to be subject to approval.

It is our understanding that these changes are likely to commence from 1 July 2017 although this is to be confirmed.

Once the changes become effective, foreign investors will be able to invest in a broader range of commercial real estate without the need to seek FIRB approval.  This will facilitate such acquisitions and reduce the transaction costs involved.

Broader range of exemption certificates

In addition to the above, the Government announced the introduction of a broader range of exemption certificates which foreign investors could apply for. Once obtained, investors will be able to rely on such certificates in relation to future acquisitions without seeking further FIRB approval for a particular acquisition (provided the acquisition falls within the scope of the matters the subject of the certificate). Further details of these certificates are to be released before 1 July 2017. Subject to seeing such further details, these certificates may be particularly useful for foreign investors seeking exposure to Australian real estate through a passive portfolio investment in Australian wholesale property funds.

Revised fee structure

The fees payable in relation to applications for FIRB approval (for vacant land, non-vacant commercial land and agricultural land) are to be streamlined with transactions involving amounts of $10m or under being subject to a lower fee ($2,000) than is currently the case. Transactions involving vacant land, where the consideration is over $10m but under $1bn, will be subject to an increase relative to current rates (moving from $10,000 to $25,300).  Transactions involving consideration over $1bn will in each case be subject a higher fee of $101,500. Previously this did not apply with the maximum fee being $25,000.

Once again it is our understanding the above changes will become effective on 1 July 2017.

Importance to all property investors

With the increased involvement of foreign investors in commercial property transactions, both local and foreign investors need to be aware of the FIRB rules applicable to ensure that they are complied with. Breaches of the rules can lead to the issue of infringement notices. In addition, in circumstances where the Treasurer is of the view a scheme has been used to avoid the application of the rules (and the result is not in the national interest), orders can be made to prevent a transaction from completing or requiring the foreign purchaser to dispose of the interest it has acquired in breach of the rules. Such orders, if made, could have a significant negative impact not only on the foreign investor but also the Australian investor or investors who are party to the transaction.


We trust you have found the above information useful and hope it will assist you in current and future transactions. If that is the case, please feel free to share this email with your business network. I welcome your feedback at peter@peterfaludiconsulting.com.au

Regards
Peter

The comments made in this Alert do not constitute the provision of any legal, tax or accounting advice by Peter Faludi Consulting or any Director or employee thereof and therefore you should not rely on this Alert in making any decisions relating to present or future transactions in which you are involved. We strongly recommend that you seek legal, tax and/or accounting advice (as relevant) in relation to the same.

Comments are closed.