Peter Faludi Consulting

The post Unfair Contract Laws to Impact Development and Property Financing appeared first on Peter Faludi Consulting.

NEW BUILDING LAWS EXPAND THEIR REACH

Peter Faludi — Thu, 06 Jul 2023 01:21:48 +0000

The changes to the regulatory regime applicable to the construction industry in New South Wales, which started in 2020-21, are still not fully understood in the industry. This is particularly the case in relation to repairs and renovations of strata residential buildings.

The purpose of the new laws was to improve the standard of construction of residential apartment buildings by requiring such things as:

Building plans and designs to be registered,
Design and building practitioners to have minimum qualifications and be registered,
Adequate insurances to be in place for such practitioners.

DUTY OF CARE EXPANDED

The laws also introduced a new statutory duty of care applicable to persons who carry out construction work requiring them to “exercise reasonable care to avoid economic loss caused by defects”.

While initially focused was on Class 2 buildings (residential apartments), it was always known that the laws could be extended to other classes of building.

Recent case law has expanded the reach of the statutory duty of care so that it applies to any class of building. It is not limited to construction work in respect of Class 2 buildings. This will probably come as a surprise to many in the industry.

Case law has also highlighted that the type of parties who may be subject to the duty of care is very broad and can potentially extend to directors of a builder or developer, senior management involved in a project, and perhaps even financier representatives who sit on project control groups.

LAWS TO COVER MORE TYPES OF BUILDINGS

From 3 July 2023, the laws were extended to Class 3 buildings (being any residential building other than freestanding houses or townhouses) and residential/aged care buildings.

In times of an acute housing shortage, the increasing ambit of these laws may add to the problem. Of course, if the building/construction work is done properly and all the requirements of the law are satisfied, the ever-expanding reach of the laws should not be a problem.

Time will tell.

Contact me by email if you would like to discuss.

Peter Faludi
Director
Peter Faludi Consulting
peter@peterfaludiconsulting.com.au
https://lnkd.in/gwZ6Utu

The post NEW BUILDING LAWS EXPAND THEIR REACH appeared first on Peter Faludi Consulting.

How Easy Is It for Property Developers To Shift into Build-To-Rent Projects?

Peter Faludi — Thu, 04 May 2023 01:25:55 +0000

The property market continues to be significantly disrupted by inflation and high-interest rates.

Buyers are increasingly considering whether they should defer the purchase of their home and accept that they will be renting for longer.

Rental returns are improving for property owners due to the shortage of housing and an increasing population, driven predominantly by higher migration and returning students.

Given the above, many developers may be considering a move from the build-to-sell (BTS) model to the build-to-rent (BTR) model. The question is whether this is a realistic strategy.

While the concept sounds simple, the reality is very different.

FUNDING ISSUES TO CONSIDER

One of the major impediments for developers, (other than tier-one companies such as Mirvac and Lendlease), to shift into BTR is that its funding has some fundamentally different characteristics relative to traditional BTS construction funding.

The developer will need to have access to significant equity to service debt throughout the project and repay the debt on completion. This is not required in BTS projects where interest is capitalised and repayment is funded from sales.

OTHER ISSUES

The number of counterparties involved in a successful BTR project is greater than in a BTS project. An experienced operator of BTR projects will need to be involved and will likely have significant input in the project design.

If equity investors are bought into the transaction to assist in the funding, the developer’s control of the project is likely to be further diluted.

For these reasons, developers will need to think carefully about whether BTR is really for them.

Feel free to contact me by email if you would like to discuss.

Peter Faludi
Director
Peter Faludi Consulting
Email peter@peterfaludiconsulting.com.au
Connect with me on LinkedIn at Peter Faludi

The post How Easy Is It for Property Developers To Shift into Build-To-Rent Projects? appeared first on Peter Faludi Consulting.

Will you be better off under NSW stamp duty reforms?

Peter Faludi — Mon, 05 Jul 2021 06:29:37 +0000

REAL ESTATE FINANCE AND INVESTMENT ALERT

July 2021

Will you be better off under NSW stamp duty reforms?

As mentioned in our April 2021 Alert, in November 2020 the NSW Government issued a Consultation Paper, and subsequently received submissions, on a proposed new way of taxing property in NSW.

The Government released its Progress Paper last month in which it refines its initial proposals. The Paper raises some potential alarm bells in relation to how the proposed reform would work.

In this Alert, we highlight the following issues from the Progress Paper on which some of you may wish to lodge submissions to the Government. Submissions can be lodged up to 30 July 2021:

Increased property tax rates for residential investment property and introduction of a property tax surcharge on aggregate landholdings,
Uncertainty regarding existing exemptions for stamp duty and land tax,
Annual increases in the proposed property tax rates,
Foreign investors to be excluded from the opt-in regime,
Residential developments to be treated as commercial property and be subject to a higher property tax rate,
Buyers of off-plan or newly constructed residences may not have the benefit of the opt-in scheme,
Certain types of property to be excluded from the opt-in regime.
Uncertain tax consequences

The bottom line:

The proposed new property tax regime, although on its face a simple system, in fact, has a number of complex and potentially unacceptable consequences.
Property investors and developers need to understand what is proposed and ensure they raise their concerns with the Government while the opportunity to do so remains open.
I recommend you review the Progress Paper as soon as possible and provide your submissions before the 30 July 2021 cut-off.

Increased property tax rates for residential investment property and introduction of a property tax surcharge on aggregate landholdings

Increased rates

The Progress Paper proposes to increase the property tax on a residential investment property from $1500 plus 1.0% of its unimproved land value (ULV) to $1500 plus 1.1% of ULV.

Property tax surcharge

The Progress Paper also proposes to introduce a property tax surcharge of 0.3% on landowners with investment or commercial properties with an aggregate ULV of $1.5m or more. This surcharge will not apply to a person’s principal place of residence or farmland.

This structure is similar to the current land tax regime (and provides for a higher threshold than currently applies to land tax).

Uncertainty regarding existing exemptions for stamp duty and land tax

There are currently a number of concessions and exemptions applicable to stamp duty and land tax in NSW (including the land tax on Build-to-Rent projects). It is not clear whether such exemptions will also apply to the new property tax.

The Progress Paper proposes that:

Existing stamp duty and land tax exemptions will continue to apply to properties that are not opted-in to the property tax regime (i.e those in respect of which stamp duty was paid); and
In relation to properties acquired by buyers who opt-in to the property tax regime, certain exemptions will apply. The Government is still considering these exemptions. The Paper refers to the guiding principles it will use in finalising such exemptions (see page 39 of the paper)..

Clearly, this needs to be clarified as the imposition of any additional burden on investors/developers may not achieve the increase in housing affordability suggested by the reforms.

Annual increases in the proposed property tax rates

To provide certainty in relation to potential future increases in the property tax rate, the Progress Paper proposes that there will be an annual increase in the rate of the tax limited to the growth in the Gross State Product per capita and growth in land values.

Basis for increases

The proposed formulae for calculating such increases are specified in the Paper. There is a separate formula for calculating increases in the property tax surcharge mentioned above.

The growth in the Gross State Product per capita will be calculated each year by the Australian Bureau of Statistics. The growth in land values will be calculated each year by the NSW Chief Commissioner of Revenue for each category of property subject to the property tax.

Ongoing uncertainty

While the basis on which the increases would be calculated is more certain, the actual amount of the increases are not as they will depend on the growth rates included in the formulae. As payment of stamp duty is a once off cost (not subject to any future increases) this uncertainty may reduce the number of buyers willing to opt-in to the new property tax.

Foreign investors to be excluded from the opt-in regime

The Paper proposes that foreign purchasers of residential property will not be able to opt-in to the new property tax regime.

In addition, all foreign purchasers would continue to be subject to existing foreign purchaser stamp duty and land tax surcharges, even if they purchase a property that is in the property tax regime.

Although the Paper seems to say that a foreign purchaser would have to pay the property tax and the foreign purchaser's stamp duty and land tax surcharges, the basis on which the surcharges are to be calculated in that scenario is unclear.

This needs to be considered further as foreign developers, investors, and homebuyers are a very large part of our property market. Imposing any additional burdens on them may reduce the supply of new housing and adversely affect domestic developers who rely on foreign purchasers to achieve the required level of pre-sales for their projects.

Residential developments to be treated as commercial property and be subject to a higher property tax rate

Higher rate to initially apply

The paper proposes that where a development site is purchased for the purposes of developing residential property, the developer will have two choices.

These are to either pay stamp duty (provided no previous owner, including the vendor, had chosen to opt-in to the property tax regime when it purchased the land) or opt-in to the property tax regime. The property tax rate which will apply will be the higher rate applicable to commercial property (not that applicable to residential property).

Switch to a lower rate

The paper provides that when the property is capable of being used as a dwelling, the lower residential property tax rate will apply.

It is not clear when this change of rate is triggered. Can a completed apartment (intended to be sold) be regarded as being capable of used as a dwelling if the strata plan has not yet been registered?

This and other issues will need to be clarified.

Build to rent

The Paper deals with Build to Rent properties and provides that once the development is complete, and provided the developer chose to opt-in, the property tax will apply to each dwelling on the site.

It is unclear whether the rate payable on completion would be the lower residential investment rate or the higher commercial rate.

Buyers of off–the–plan or newly constructed residences may not have the benefit of the opt-in scheme

If the developer of an apartment building or other residential project chooses to op-in to the property tax regime, it appears that the buyers of the apartments or other developed dwellings would not have the choice of paying stamp duty.

This may not suit all buyers and may work against the developer in achieving sufficient pre-sales for the project.

Certain types of property to be excluded from the opt-in regime.

The Paper provides that the Government may limit the availability of the new opt-in regime by including zero thresholds for different types of property thereby precluding buyers of such properties from being able to opt-in.

This is a fiscal measure to limit the application of the new regime to properties with an ULV below specified thresholds.

Uncertain tax consequences

The initial Consultation Paper, as well as the Progress Paper, assumes that the property tax will be tax-deductible for residential investors and commercial property buyers.

While land tax is generally tax-deductible for the above purchasers, stamp duty is not (but is rather added to the cost base of the property). As the property tax is in lieu of both land tax and stamp duty it is not clear whether it will be fully tax-deductible.

TIMING UPDATE

According to the AFR on 5 July 2021, the NSW Treasurer has indicated the new property tax regime is not likely to be implemented until after the next State election due in 2023. Hopefully, this will give all stakeholders the opportunity to comment on the proposals so that when implemented, the issues identified in this Alert and others are dealt with for the benefit of all concerned.

Please feel free to contact me to have a complimentary 20-minute discussion to see how these matters may affect you and your current and future projects.

Peter

Author of “The Ultimate Short Guide to Property and Development finance in Australia. There is much more to it than numbers”

Peter Faludi Consulting

Connect with me on LinkedIn

Subscribe to our Website

Call 0401 500 528

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.

The post Will you be better off under NSW stamp duty reforms? appeared first on Peter Faludi Consulting.

NSW stamp duty reforms – Boom and gloom

Peter Faludi — Tue, 20 Apr 2021 03:21:46 +0000

REAL ESTATE FINANCE AND INVESTMENT ALERT

April 2021

NSW stamp duty reforms – Boom and gloom

As you are aware, in November 2020 the NSW Government issued a Consultation Paper, and subsequently received submissions, on a new way of taxing property in NSW.

While conceptually the ability to avoid large lump sums of transfer duty each time a person buys a property is attractive, the proposed reforms raise more questions than answers.

The examples given by the Government as to how the new regime would work are simplistic and do not address a number of significant issues buyers and owners of property will face due to the reforms.

In this Alert, we discuss the following issues which in our view should be addressed before the reform can have any widespread positive outcome for property buyers:

The complexity of a multi-tier tax regime,
The lack of flexibility in deciding which tax mechanism (upfront or ongoing) a buyer can use,
The uncertainty as to whether any limits will apply to future increases in the property tax rate and the thresholds which will apply to such rates, and
The lack of other options.

The bottom line:

Developers of lower-priced housing, as well as their buyers, will be the primary beneficiaries of the proposed new tax system. Buyers of higher-end residential property and commercial property are likely to miss out on the benefits of the new system.

There appears to be no proposed timeframe by which these reforms are to be introduced. As a result, property buyers and investors will have to live with the current laws or defer their decisions to buy until the reforms are clarified and the timetable for introduction is known.

Having taken the initiative to propose reforms to a universally disliked tax, the NSW Government should consider all issues raised and put forward the proposed timetable for the introduction of the new laws as soon as possible.

The complexity of a multi-tiered tax regime

Matters to be considered by buyers

As currently proposed, if the reforms are adopted, NSW will have a multi-tiered property tax system. Property buyers and owners would have to consider:

If the property they are intending to buy can benefit from the new regime (as their will initially be price thresholds above which the new regime will not apply),
Whether:
paying the current upfront transfer duty based on the improved value of the property together with an annual land tax (if applicable) based on unimproved land value, or
opting into an annual property tax based on the unimproved land value of the property, which would be in substitution for both transfer duty and land tax,

is better for them financially,

How the new regime applies to the structure of their proposed acquisition, e.g if a buyer is buying the entity which owns the land rather than the land itself, and
Whether any existing exemptions relating to transfer duty or land tax will apply.

Thresholds

It appears that the reform will not apply across all property types. To protect government revenue, the Government’s Consultation Paper indicates that thresholds are likely to apply resulting in properties with a higher unimproved value not being able to opt-in to the new regime.

Differing tax rates

The rates of the annual property tax differ between property types. For example, the rate will be higher for investment and commercial property than for owner-occupied residential property.

Due to the proposed perpetual consequence of their decision as to the matters in point 2 above, buyers should consider the impact of their choice on future buyers. The choice of property tax to apply to a property may impact a buyer’s ability to raise finance and their current and future cash flow.

In our view, simplification of the property tax regime is an important consideration for the proposed reforms and other alternatives should be considered when finalising them.

The lack of flexibility in deciding which tax mechanism (upfront or ongoing) a buyer can use

The reforms currently only allow the first buyer of a property, after the reforms become law, to choose whether to pay the lump sum transfer duty or to opt into the proposed new annual property tax regime. If a decision is made to opt into the annual tax regime, each subsequent buyer of the property will be bound by that decision. They will have no option to pay lump-sum transfer duty on the acquisition of the property.

While the Government acknowledges that buyers have different objectives and goals in relation to their property acquisitions, it has only provided flexibility to the first buyers of the property after the law changes. Subsequent buyers will have no such flexibility where the vendor has previously opted into the annual tax regime.

This may not suit all buyers (especially those who intend to hold property for the long term). The level of buyer interest in properties subject to the annual tax may be less than would be the case if subsequent buyers had a similar choice.

For example, the Government’s Consultation Paper proposes an annual property tax for commercial property to be 2.6% of the unimproved value of the property. If a vendor (who did not intend to hold the property for an extended period), chose to opt-in to the annual property tax, a buyer with a long-term objective would be paying 2.6% of the unimproved value throughout the duration of its ownership. Although this may be tax-deductible, it may still not be acceptable.

If this type of scenario results in fewer people switching to the new regime, the reform may not achieve its objective of relieving the current stamp duty burden of buyers.

Tax reform should ideally be neutral or favourable to the market. Allowing all buyers to have the same choice between a once only lump-sum transfer duty or an annual property tax would achieve this.

The uncertainty as to whether any limits will apply to future changes in the annual property tax rate and the thresholds which will apply to such rates.

As Government finances and agenda’s change, there is always a risk that taxes or tax rates may also change.

With lump-sum transfer duty, once paid it is no longer a tax which the buyer has to consider. The proposed property tax, being annual and perpetual (if an earlier buyer opts-in to that system), leaves itself open to increases if the Government needs to bolster its finances in the future.

Further uncertainty will arise from potential changes to the monetary threshold above which the annual property tax will not apply as well as changes to the valuation methods to be used in determining the unimproved land value on which the annual tax is calculated.

The lack of other options.

The Consultation Paper does not put forward other options to ease the burden of the current stamp duty regime.

Commentators have touched on other possible alternatives, including retaining the current regime but allowing the duty to be paid by installments over a period of years.

Hopefully, such options (and others) will be considered before any final proposals are submitted for approval by NSW Parliament.

Please feel free to contact me to have a complimentary 20-minute discussion to see how these matters affect you, including your current and future financial arrangements.

Peter

Author of “The Ultimate Short Guide to Property and Development finance in Australia. There is much more to it than numbers”

Peter Faludi Consulting

Connect with me on LinkedIn

Subscribe to our Website

Call 0401 500 528

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.

The post NSW stamp duty reforms – Boom and gloom appeared first on Peter Faludi Consulting.

How to improve your property funding outcomes in 2021

Peter Faludi — Thu, 18 Feb 2021 01:11:44 +0000

REAL ESTATE FINANCE AND INVESTMENT ALERT

February 2021

How to improve your property funding outcomes in 2021

If 2020 has taught us anything, it is that you need to expect the unexpected. You need to adapt/change your way of doing things to minimise adverse outcomes arising from unforeseen events.

In the context of property transactions in 2021, this includes:

considering a broader range of funding options, and
rethinking the type and location of your projects and the people you wish to involve in them.

In this Alert, we discuss some of the changes investors, developers, and borrowers may need to consider in their approach to funding their 2021 projects. In particular, we discuss:

The property funding spectrum. Broaden your horizons but beware of the risks,
Why negotiating funding documents will improve your funding outcomes, and
Some practical lessons learned from the:
- Mandatory Leasing Code, and
- the NSW development and construction industry reforms.

The bottom line:

Given our comments below, for property investors and developers to improve their funding outcomes in 2021 they should:

broaden their funding sources while at the same time being more aware of the terms of such funding and the benefit of doing due diligence on the proposed funder,
be more conscious of the need to negotiate documents before signing them to ensure their interests are protected in difficult times,
consider if their strategy for 2021 is appropriate in view of the market and regulatory changes,
assess their internal processes and procedures to ensure compliance with new laws and,
review their consultants and contractors to make sure they will meet the standard required by the new laws and their financiers.

The property funding spectrum. Broaden your horizons but beware of the risks

As mentioned in previous Alerts, the sources of funds available for property investment and development have exploded in the last 3 years.

Whereas traditionally such funds were provided by the major Australian banks, now such funds are available from a variety of sources. These include foreign banks, a variety of non-bank/private lenders (including private equity and high net-worth individuals/family offices) and funds established to lend money for property transactions.

Funds can be provided by way of senior or subsequent ranking debt or equity (including through joint ventures) and can be secured or unsecured (although this would be unusual, especially in the case of debt).

To improve the likelihood of getting funding, investors and developers need to consider a broader range of funders than those they are used to. We have recently been involved in a number of matters where borrowers severely limited their potential source of funds. This resulted in loans being accepted at a higher cost and on more onerous terms than was otherwise available in the market.

The broad spectrum of funding brings with it a number of additional risks for borrowers. These include:

potential issues as to the availability of funds on settlement or to meet progress claims in development projects, and
the inclusion of different or previously unused terms and conditions in loan documents which may have adverse financial consequences to borrowers.

The above risks can have significant adverse financial consequences to borrowers. These include:

settlements falling over or being delayed, and
progress claims not being met resulting in project delays, purchasers walking away from their contracts and the borrower going into default under other loans or becoming insolvent.

While the above risks and consequences are less likely when borrowing funds from a major Australian Bank, in the case of some of the alternative funding sources now available, to minimise such risks borrowers may need to do due diligence on their funder.

Borrowers need to get comfortable that funds will be available when needed and that the funder will be reasonable in dealing with problems associated with the project.

Why negotiating funding documents will improve your funding outcomes

Some alternative funders include different or more onerous terms in their loan documents than those traditionally found in Australian bank documents.

These terms can lead to significant additional costs or adverse outcomes to the borrower. An example is the minimum return requirement (and other fees charged) and when they are payable.

Borrowers need to pay more attention to these and other terms found in loan or funding documents. The days of assuming the documents will be “standard” are gone. Even standard documents need to be understood before they are signed as they inevitably contain terms that will surprise a borrower.

One of the benefits put forward by non-bank lenders is their ability to be more commercial and reasonable than the major banks when considering transactions. An investor or developer should put this to the test. Don’t accept terms without knowing what they mean and always seek to negotiate them.

The old saying “if you don’t ask you don’t get” definitely applies in the new world of property finance.

Some practical lessons learned

The Mandatory Leasing Code

The Mandatory Leasing Code adopted throughout the country during 2020 had a number of consequences for property investors. In the context of their funding, the main consequences were:

rental income was reduced adversely affecting payment of interest on their loans,
interest cover ratios were breached, and
the value of the property declined causing breaches of loan to value (LVR) ratios.

This resulted in loans going into default and/or terms of loans being reviewed.

In addition, the impact on valuations made it difficult for valuers to provide valuations as high as was the case prior to the pandemic. This reduced LVR’s for new loans and required more capital to be invested in a project by the borrower.

Knowing this, borrowers now need to consider the level of capital they have available for projects. They should also consider what changes should be made in loan documents to minimise the above consequences if similar circumstances arose in the future.

We suggest you seek greater flexibility in relation to the operation of various loan covenants in circumstances such as those we experienced in 2020.

Development and construction industry reforms

As you are aware, substantial reforms to the development and construction industry were introduced in NSW in 2020 – see our February 2020, June 2020 and August 2020 Alerts for more details. Currently, these reforms are limited to the development of residential property (other than freestanding detached houses). They also extend to mixed-use developments incorporating residential property.

Failure to comply with these reforms can lead to hefty fines, disciplinary action and project delays. It can also result in potential liability for breach of the laws for up to 10 years after construction work is completed and personal liability for company directors and others for contraventions.

The above risks and consequences are likely to be considered by financiers when assessing applications for development funding. The additional risks may impact on the pricing of loans as well as the financial and non-financial covenants and undertakings contained in the loan documents.

To minimise the above consequences, developers and building and design practitioners may prefer to become involved in more non-residential projects going forward.

Those that continue to be involved in residential development will need to consider their internal processes and procedures to ensure compliance with the new regime. They will also need to consider the quality and track record of all consultants and builders involved in a project. While the quality and track record of such parties has always been a significant factor to be considered by financiers, the overlay of the reforms will make this even a higher priority for financiers.

We trust you find the above useful as a first step in improving your property funding outcomes in 2021.

Please feel free to contact me to have a complimentary 20-minute discussion to see how you these matters affect you, including your current and future finance arrangements.

Peter

Author of “The Ultimate Short Guide to Property and Development finance in Australia. There is much more to it than numbers”

Peter Faludi Consulting

Connect with me on LinkedIn

Subscribe to our Website

Call 0401 500 528

The post How to improve your property funding outcomes in 2021 appeared first on Peter Faludi Consulting.

The Property Boom – Things to watch in 2021

Peter Faludi — Mon, 07 Dec 2020 22:04:17 +0000

REAL ESTATE FINANCE AND INVESTMENT ALERT

December 2020

The Property Boom – Things to watch in 2021

As the year most of us would like to forget draws to a close, is the stage set for a great 2021?

While many of the regulatory changes made during the year were temporary, some will continue to impact the property market in 2021. In addition, the ongoing reform agenda will raise further questions for property investors as to how to carry on their business.

In this Alert, we discuss some of the 2020 legal changes (actual and proposed) which will impact property investors and developers in 2021 and beyond:

The Mandatory Leasing Code Hangover – what it means to investors
Development and construction industry reforms to increase costs and change the industry
Proposed NSW stamp duty law reforms may not be as good as they seem

The Mandatory Leasing Code Hangover – what it means to investors

Most states/territories have an express end date for the Mandatory Leasing Code relating to commercial and retail leases. In NSW, the Code applicable to retail and non-retail commercial premises ends on 31 December 2020 (although the Code for retail premises may be extended further until March 2021).

You should not assume that the Code will only operate during the COVID-19 period.

For example:

NSW has legislated that notwithstanding the set end dates, negotiations under the Code which have not been completed by that date can still be completed after that date. How this will work practically is unclear,
Rents which have been deferred must generally be paid back over a period extending beyond lease expiry. If you are owed deferred rent, you may have difficulty recouping such rent once the lease expires.
You should not assume that the easing of restrictions and improvement in tenant turnover will necessarily allow you to require pre-COVID rents to be paid again.
You are obliged to offer extensions of leases for a term equal to the period of waiver or deferral of rent. The terms of the extension are to be negotiated but the basis on which such negotiation is to occur is not clear.

Once the Code no longer applies commercial and retail tenants may:

prefer shorter lease terms going forward. The AFR recently reported this becoming apparent in relation to retail tenancies, or
continue to push for rents tied to turnover with no set increases or base rent.

Such matters are likely to adversely affect the commercial and retail property markets.

If you would like to learn more about these matters please email me at peter@peterfaludiconsulting.com.au.

Development and construction industry reforms to increase costs and change the industry

As you are aware, substantial reforms to the development and construction industry were introduced in NSW in 2020.

These changes are here to stay and will increase the costs of residential and certain mixed use developments.

A draft of the new Design and Building Practitioners Regulation 2020 (released on 17 November 2020) is open for comment until 11 January 2021. Building and design practitioners only have until 1 July 2021 to become compliant with the new requirements.

As these rules are very detailed, there is little time to waste before seeking advice and adjusting to the new rules.

Failure to comply with these rules can lead to hefty fines, disciplinary action and project delays. It can also result in potential liability for breach for up to 10 years after construction work is completed and personal liability for company directors for contraventions.

To minimise such risks, developers and building and design practitioners may prefer to be more involved in non-residential projects going forward.

The NSW Government (in its recent Budget) committed to fund the Office of the Building Commissioner with a further $27m over 4 years to bolster the policing and enforcement of these reforms.

If you would like to learn more about these matters please email me at peter@peterfaludiconsulting.com.au.

Proposed NSW stamp duty law reforms may not be as good as they seem

The proposed changes to taxation of property in NSW (as suggested in the recent NSW Budget) may increase the affordability of property in NSW.

The flexibility offered by the proposal (to choose between paying lump sum transfer duty on a property’s purchase price/improved value or a yearly property tax calculated on the unimproved value) may encourage more purchasing activity.

However, the proposed scheme does currently have some issues which may limit the above benefits.

For example,

The decision of a buyer to opt-in to pay the yearly property tax should not have the effect of locking in that method of payment for all future purchasers. This may be a particular concern where property is acquired to be developed into separate lots,
If the threshold value, above which there will be no ability to choose the yearly property tax payment method, is too low it may significantly reduce the benefit of the reform,
How the yearly property tax is to be calculated on a mixed-use property on one title is unclear,
It is also unclear whether the current exemptions from land tax will apply to the new yearly property tax.
The question of whether the yearly property tax option would extend to foreign purchasers has not been specifically addressed.
Depending on how these matters are finally dealt with, the attractiveness of this initiative (and the benefits to the property market) may be substantially reduced.

The proposal is open for comments until 15 March 2021,

Please feel free to contact me to have a complimentary 20-minute discussion to see how these matters affect you, including your finance arrangements.

WISHING YOU A VERY HAPPY XMAS AND A HEALTHY, HAPPY AND PROSPEROUS 2021. YOU DESERVE IT

We are available to assist you on urgent matters during the Christmas/New Year period. Call me on 0401 500 528.

Kind regards,

Peter

Peter Faludi Consulting

Connect with me on LinkedIn

Subscribe to our Website

Call 0401 500 528

The post The Property Boom – Things to watch in 2021 appeared first on Peter Faludi Consulting.

Are you better off under new leasing changes?

Peter Faludi — Sun, 01 Nov 2020 00:57:50 +0000

REAL ESTATE FINANCE AND INVESTMENT ALERT

November 2020

New COVID-19 leasing changes – are you better off?

Unresolved questions for property investors and tenants

On 23 October 2020, the NSW Government released the Retail and Other Commercial Leases (COVID-19) Regulation (No. 2) 2020 NSW, (Regulation No.2). This regulation extends (until 31 December 2020) and modifies the previous regulations introduced to implement the Commonwealth Mandatory Leasing Code. Regulation No. 2 became effective from 24 October 2020

The original Regulation (Regulation No.1) expired on 24 October 2020. It raised a number of questions for landlords and tenants (and their financiers). These included:

What happens to negotiated arrangements on expiry of Regulation No.1?
How can property investors protect their interests where tenants fail to provide information required to determine acceptable rent relief?
Can parties seek to negotiate further rent relief or other changes if their circumstances change during the “prescriber period”?
What happens if negotiations are not completed by the date of termination of the Regulation?

In this Alert, we consider

Has Regulation No.2 dealt with the above questions? and
Do the changes improve the position of property investors and their financiers’?

HAS REGULATION NO.2 DEALT WITH THE ABOVE QUESTIONS?

What happens to negotiated arrangements on expiry of Regulation No.1?

There is no clear answer to this.

Due to the change in the JobKeeper program from 28 September 2020, tenants now need to satisfy the eligibility tests contained in Regulation No.2 (which includes the satisfaction of the JobKeeper 1.0 and 2.0 requirements) to continue to be entitled to rent relief.

While tenants who continue to satisfy each of the tests will continue to be entitled to seek rent relief, the drafting is unclear in other circumstances. Will previously agreed rent relief (which extends beyond expiry of Regulation No.1) continue to apply if the both tests are not met? Do the JobKeeper 1.0 tests need to be met if rent relief is only sought for a period commencing on or after 24 October 2020?

How can property investors protect their interests where tenants fail to provide information required to determine acceptable rent relief?

This remains ambiguous.

Regulation No.2 requires both parties to commence their good faith negotiations within 14 days of either party requesting renegotiation of rent or other terms of impacted leases.

Landlords may be able to take “prescribed action” if tenants fail to commence such negotiations or provide evidence to demonstrate that the lessee is an impacted lessee (as defined). Unfortunately, there are no guidelines as to the nature of the evidence to be provided or the timeframes within which it must be provided. This can delay negotiations and adversely affect a landlord’s enforcement rights.

While landlords may have the right to take prescribed action in the above circumstances, Regulation No. 2 still contains a requirement for mediation to be undertaken to resolve a dispute before a landlord can take action for breach by a tenant.

As a result, property investors’ rights remain unclear.

Can parties seek to negotiate further rent relief or other changes if their circumstances change during the prescribed period?

Yes but (unless the parties otherwise agree) the further renegotiation can only relate to rent for a period in respect of which there has been no previous agreement to provide rent relief.

If parties have previously agreed to rent relief for a period, then notwithstanding their changed circumstances, there are no rights or obligations under the Regulation to further negotiate the rent for that period. The parties can, however, agree to do so.

What happens if negotiations are not completed by the date of termination of the Regulation?

Negotiations not completed by 31 December 2020 may be concluded after that date. It is unclear whether the parties would be bound by the requirements of Regulation No.2 in respect of such negotiations, as it will no longer be law at that time.

DO THE CHANGES IMPROVE THE POSITION OF PROPERTY INVESTORS AND THEIR FINANCIERS?

We have previously highlighted the financial and practical consequences of the Mandatory Leasing Code – see our May 2020 Alert.

It appears that Regulation No.2 has not clarified a number of questions raised in relation to Regulation No.1 and has raised some more questions. As a result, the financial and practical issues identified in our May 2020 Alert continue to be relevant.

Parties will continue to require expert advice on these matters.

Please feel free to contact me to have a complimentary 20-minute discussion to see how these matters affect you, including your finance arrangements.

Peter Faludi Consulting

Connect with me on LinkedIn

http://www.peterfaludiconsulting.com.au

Subscribe to our Website

Call 0401 500 528

Peter Faludi Consulting

The post Are you better off under new leasing changes? appeared first on Peter Faludi Consulting.

Helping Property Investors improve their position in Australian Property

Peter Faludi — Wed, 07 Oct 2020 09:14:24 +0000

In the competitive world of investing in Australian commercial property, property investors are constantly considering what can they do to be the preferred party to deal with in relation to a particular project.

What is important in winning a transaction for property investors – price is not enough!

In the case of a purchaser, the previous view was that by the offering a higher price this would guarantee its success in a transaction. Additional factors are now becoming increasingly important to the other parties to the transaction in deciding who to deal with.

This is due to the increasing complexity associated with real estate transactions (particularly ones involving foreign property investors) and the importance of being able to act quickly to take advantage of opportunities.

Non - price factors: How they can work against a property investor

As a result of the above, price of itself will not necessarily be enough to guarantee success. Other factors, that may be equally or more important to the other parties, include:

ease of dealing with a party;
a party's level of familiarity with the type of transaction to be entered into
availability of funding (including debt finance) for the party; and
whether FIRB approval is required for the party to complete the transaction.

These factors can each have a major impact on transaction costs and meeting deadlines.

In the case of foreign investors or local property investors involved in more complex transactions than those to which they are used to, these non-price factors are particularly relevant. They can work against the property investor in a tender, expression of interest or private treaty sale. In relation to ongoing arrangements such as joint venture, co-ownership or development transactions, these factors take on even greater significance. This is due to the extended period of time during which parties need to work together.

How can the property investor avoid the negative consequences

To overcome the above disadvantages, property investors should ensure that they understand the main issues relevant to the transaction as soon as possible.

Once the need to have such knowledge is accepted, the question is what do potential investors need to know and when and how should they get that knowledge.

What Makes Us Different?

The main focus of our consulting services is to:

minimise the cost and time associated with implementing a transaction; and
maximise the ability of investors to protect their interests when negotiating the initial documentation with the other parties to the transaction.

Real Life Examples

The difference between getting the right advice as soon as possible and not doing so is demonstrated in the following real life examples:

Prior to seeking our advice, a borrower executed a term sheet which contained a prohibition on it acquiring any other property or borrowing further funds. This was the basis in which the lender agreed to provide funding. Once we highlighted this to the borrower, it did not wish to proceed without the lender removing this restriction. The lender could not accommodate this request resulting in the loan (approximately $50m) not being provided.
A developer provided a short form of development management agreement to the investor which was to fund the development. Upon seeking our advice, we negotiated substantial changes to that document. This resulted in a saving of $5m for the investor on completion of the project.

By leveraging off the 30+ years of legal and transactional experience of our Founder, Peter Faludi, at cost-effective rates, we assist property investors understand the legal, documentation and structuring issues associated with property investment, development and finance in Australia.

This type of advice is generally not provided by other advisers at the very early stages of the transaction.

By addressing these issues at the very beginning of a transaction, the amount of renegotiation by advisers involved in implementing the transaction (due to the investor requesting changes) will be minimised. This results in the saving of costs and time.

What Difference Does It Make To Property Investors?

By utilising our services, investors gain control of matters and are better able to protect their interests at the vital early stage of discussions with other parties.

In addition to the cost and time savings mentioned above, the investor should be seen as a more savvy investor by Australian parties and therefore be more likely to be invited to participate in future transactions.

To assist investors’ gain the knowledge they need to have before embarking on a transaction, we have prepared a list of the TOP 10 ISSUES FOR PROPERTY INVESTORS IN AUSTRALIAN PROPERTY TO BE AWARE OF BEFORE ENTERING INTO DOCUMENTATION.

If you would like a copy of such list, please click on our Website at https://www.peterfaludiconsulting.com.au.

I welcome your feedback at peter@peterfaludiconsulting.com.au

Regards

Peter Faludi

Director

The post Helping Property Investors improve their position in Australian Property appeared first on Peter Faludi Consulting.

The new world is not all about COVID 19 Property investors and developers beware

Peter Faludi — Wed, 05 Aug 2020 21:38:37 +0000

REAL ESTATE FINANCE and INVESTMENT ALERT

August 2020

Commentary on the economic impact of COVID 19, including its impact on the property market, has been widespread. The pace of legislative reform associated with COVID 19 has been unprecedented.

Our experience with legislative reform is that other than for the more established and well-funded participants in an industry impacted by the reform, most participants are not fully aware of the impact on their business until it is too late or increasingly costly to adjust their affairs to minimise the consequences of the reform.

In this Alert, we discuss some aspects of recent non-COVID 19 reforms (some of which we have previously reported on (see most recently our June 2020 Alert) which are likely to catch property investors and developers unaware. These are:

The unknown scope of the NSW Building Industry Reforms;
The personal liability of directors and managers of companies in the building industry for breaches of the NSW Building Reforms; and
Some significant potential financial costs for investors in property in NSW.

THE UNKNOWN SCOPE OF THE NSW BUILDING INDUSTRY REFORMS

As reported in our June 2020 Alert, in early June the NSW Government passed the Design and Building Practitioners Act 2020 (NSW) (DBPA) and the Residential Apartment Buildings (Compliance and Enforcement Powers) Act 2020 (NSW)(RABA).

Start dates

The new additional statutory duty of care contained in the DBPA became effective on assent to the legislation while the other provisions of the DBPA start on 1 July 2021.

The RABA commences on 1 September 2020.

Unfortunately, as you will see below, in the absence of regulations there can be no certainty in relation to the scope and application of a number of key aspects of each Act. At the time of writing this Alert, no regulations have been released for either Act.

Who is subject to the DBPA?

The DBPA imposes obligations on:

Design Practitioners
Principal Design Practitioners
Building Practitioners
Professional Engineers, and
Specialise Practitioners,

each as defined or referred to in the DBPA.

Regulations can prescribe additional parties to be Building Practitioners and can also exclude parties from being regarded as Building Practitioners.

All parties involved in a project should determine if they fall within any of the above categories to ascertain whether the DBPA applies to them. Given the nature of the definitions and the ability of regulations to add persons to, or exclude persons from, the definition of Building Practitioners, parties involved in building work should not assume that they are excluded from the scope of the Act.

What sort of work is subject to the DBPA?

The main activity to which obligations relate under the DBPA is “building work”. Building work means:

“work involved in, or involved in coordinating or supervising work involved in, one or more of the following:

the construction of a building of a class or type prescribed by regulations;
the making of alterations or additions to a building of that class or type,
the repair, renovation or protective treatment of a building of that class or type”.

The regulations can prescribe additional work as being building work for the purposes of the Act and can exclude work from being building work.

The new statutory duty of care contained in the DBPA (see our June 2020 Alert) is already in effect and applies to construction work, which includes building work and also extends to:

“the preparation of regulated designs and other designs for building work;
the manufacture or supply of building product used for building work; and
supervising, coordinating, project managing or otherwise having substantive control over any of” the above type of work.

The breadth of the meaning of building work, and the potential for other work to be included by regulation or for exclusions to apply, creates uncertainty as to the scope of the DBPA. Parties who are to be involved in a project will need to do their homework to determine whether or not the project is subject to the Act.

In the case of the new duty of care, parties will need to do their homework in relation to current and past projects as soon as possible due to the retrospective operation of the duty.

Who is subject to the RABA?

The RABA imposes obligations on Developers.

Developers are defined in the Act to mean:

“the person who contracted or arranged for, or facilitated or otherwise caused (whether directly or indirectly) the building work to be carried out,
if the building work is the erection or construction of a building or part of a building – the owner of the land on which the building work is carried out at the time the building work is carried out,
the principal contractor for the building work within the meaning of the Environmental Planning and Assessment Act 1979,
in relation to building work for a strata scheme – the developer of the strata scheme within the meaning of the Strata Schemes Management Act 2015,
any other person prescribed by the regulations”.

All parties involved in a project will need to determine if they fall within the meaning of “developer” to ascertain whether the RABA applies to them. Given the broad (and uncertain) scope of the definitions, and the ability of regulations to add persons to the definition of developer, parties involved in residential building work should not assume that they are not developers for the purposes of the Act.

What sort of work is subject to the RABA?

The RABA makes it clear that it only applies to building work in relation to residential apartment buildings. This is defined as being “a class 2 building within the meaning of the Building Code of Australia and includes any building containing a part that is classified as a class 2 component but does not include any building or part of a building” excluded by regulations under the RABA.

Regulations can also extend the provisions of the RABA to other classes of buildings.

Although a Class 2 building is referred to in the Building Code as being “apartment buildings…typically multi-unit residential buildings”, it also includes a building containing 2 or more sole occupancy units each being a separate dwelling. As a result, it can extend to smaller developments than the name of the Act and the term “residential apartment building” implies.

It is unclear whether a mixed-use development, which includes a residential component, would be treated as being a residential apartment building for the purposes of the RABA. This may not be the case where the construction of the non-residential stratum is separate from the residential stratum.

The powers of the Secretary of the Department of Customer Services under the Act (which may be delegated to the new Building Commissioner) can be exercised in relation to residential apartment buildings completed within the period of 10 years before the exercise of the power. Subject to the operation of the transitional provisions, it appears that powers (such as carrying out investigations and issuing rectifications orders) will be available to the Secretary or Building Commissioner for previously completed residential apartment buildings up to 10 years old.

PERSONAL LIABILITY OF DIRECTORS OF COMPANIES IN THE BUILDING INDUSTRY FOR BREACHES OF THE NSW BUILDING REFORMS

It is common for construction projects to be undertaken by special purpose vehicles (SPV’s) established by the sponsors of the project. Generally being companies or unit trusts, they provide a number of benefits including a layer of protection to the ultimate owners of the project in respect of various claims and liabilities associated with the project.

Under each of the DBPA and RABA, liability for a contravention of the Act or regulations by a corporate entity is imposed on both the company, its directors and other persons who are concerned in the management of the entity if the director or other person “knowingly authorised or permitted the contravention”,

This raises risks to directors and managers of companies associated with residential construction projects and reduces the benefits associated with the use of SPV’s.

SOME SIGNIFICANT POTENTIAL FINANCIAL COSTS FOR INVESTORS IN PROPERTY IN NSW

On 24 June 2020, the NSW Parliament passed a number of changes to stamp duty and land tax laws in NSW which will have a major impact on property investors. Some of the more significant ones are discussed below.

Discretionary Trusts

Discretionary trusts, and in some cases unit trusts in which a discretionary trust is a unit holder or companies which have a discretionary trust as a shareholder, which own or acquire an interest in residential related property may be subject to significant increases in transfer duty and land taxes if the terms of the relevant discretionary trust deeds are not amended by 31 December 2020.

The effect of the changes is that unless the trust deed of a discretionary trust specifically provides that:

no foreign person can be a “potential beneficiary”, and
the terms of the trust cannot be amended to allow a foreign person to become a potential beneficiary in the future,

the trustee will be regarded as being a foreign trustee. It will, therefore, be liable for surcharge purchaser duty (as payable by foreign purchasers) on acquisitions of interests in residential related property in NSW and be subject to the land tax surcharge payable by foreign purchasers in relation to such property owned by the trust. The surcharge purchaser duty is 8% in addition to the normal transfer duty payable. The land tax surcharge is an additional 2% on top of the normal land tax rate.

The term residential related property is not limited to existing dwellings and includes:

a parcel of land where there are one or more dwellings on the land or a parcel of land on which there is a building under construction that, when completed, will constitute one or more dwellings, and
a parcel of vacant land zoned or otherwise designated for use for residential or principally for residential purposes.

In order to avoid the above consequences, the Office of State Revenue has given parties affected by the changes until 31 December 2020 to amend their trust deeds so as to exclude foreign persons from being beneficiaries.

Investors or developers which have an investment in residential property or are considering acquiring an interest in such property (see above comments on the meaning of residential related property) using a discretionary trust or a unit trust in which a discretionary trust is a unitholder or a company which has a discretionary trust as a shareholder, may be affected by these changes. For those investments, consideration should be given to amending the discretionary trust deeds as mentioned above no later than 31 December 2020.

If an existing discretionary trust already has any foreign beneficiaries, the relevant parties should get advice as to what can be done to remove such beneficiaries or transfer their interest to non-foreign persons in order to minimise the above consequences.

Note: On 29 July 2020 the NSW Government introduced draft legislation intended to facilitate built-to-rent (BTR) projects. Part of the proposed reforms is to reduce the land tax applicable to such projects and to remove the application of surcharge purchaser duty and the land tax surcharge payable by foreign purchasers in respect of such projects.

We assume this would also apply if a discretionary trust was involved in such project however as the legislation has not been passed this is yet to be confirmed.

Calculation of landholder duty

The threshold, above which landholder transfer duty was payable when a purchaser acquired a 50% or greater interest in a private company or a private unit trust which owned land in NSW worth more than $2m, was previously calculated on the unimproved value of the land. If the property had an unimproved value below this amount, no duty would be payable on the acquisition of shares/units in the land-owning company or trust.

From 24 June 2020, the threshold is calculated on the unencumbered value of land owned in New South Wales, which includes the improvements constructed on the land. This greatly increases the number of transactions to which landholder duty will apply thereby adding to the transaction costs to be incurred by the purchaser.

Rescission of put and call options followed by a new contract with a new purchaser now subject to duty

Investors/developers often enter into put and call options with landowners to secure land prior to entering into a contract to purchase. This can be done for various purposes, including obtaining FIRB approval for the purchase (in the case of foreign purchasers) or development approval for the proposed project (in the case of developers).

One effect of doing so is to delay the time from which transfer duty is payable on the purchase until the option is exercised and a contract for sale entered into.

In circumstances where the purchaser cannot obtain the approvals it seeks, it may wish to rescind/terminate the option. If such termination occurred and the vendor then entered into a contract to sell to a third party, no duty was previously payable by the original proposed purchaser.

The Duties Act 1997 has now been changed so that if there is an arrangement under which the vendor agrees to sell the property to a third party and the initial proposed purchaser is released from the option, the arrangement will be treated as if the initial purchaser assigned the call option to the third party. This will result in the initial purchaser being liable for transfer duty on the value of the property, in the same manner as if the call option had been assigned to the actual purchaser.

As a result, investors/developers need to carefully consider how they can secure a property, while seeking any approvals they need to proceed, without triggering these new provisions. Getting this wrong will prove to be very costly.

The property industry has been significantly affected by COVID 19. The Stage 4 Victorian lockdown has highlighted this even more. Given this, the timing of the introduction of the above legislation (which is not related to COVID 19), other than the proposed concessions for BTR projects, is unfortunate as they each place additional costs and stress on an industry which is already considering how to move forward in the new world we live in (and will continue to live in for many years to come).

These legislative changes will also impact on the ability of developers and investors to obtain finance and the terms of such finance.

A new world indeed.

Please feel free to contact us to discuss any of the above or any loan facilities, current or future, in respect of which we may assist you in negotiating changes to fairly account for your financial circumstances and navigating the increasingly complex provisions found in such documents to so we can achieve better commercial outcomes in your finance arrangements.

Peter Faludi Consulting

Connect with me on LinkedIn

Subscribe to our Website

Call 0401 500 528