Structuring Larger Scale Property Developments For Success
By Danielle Hart and Daniel Walachowski. Marin Accountants
Our previous articles covered important considerations for inexperienced property developers, as well as discussing main residence considerations when developing your backyard. In the third article of this series, we now move onto discussing the pros and cons of taking on larger scale property developments.
Large scale property developments – i.e., those that are typically worth more than $10 million in development costs – present both lucrative opportunities and complex challenges for developers. The secret to success in these projects lies in adopting the right structuring approach for your development, as well as taking diligent control of your project’s holding costs and (particularly in Victoria) being aware of your land tax obligations.
Options for structuring your development
How you structure the entities involved in your large-scale development can significantly impact the project risk, its tax efficiency and your financing options. The common structures we see include special purpose vehicles (SPVs), joint ventures, and unit trusts.
SPVs are typically established as separate companies or trusts for each project. These limit your liability and make it easier to secure finance for your project and attract investors. Joint ventures can be useful when you are collaborating with landowners, builders, or capital partners, while unit trusts can be beneficial when you have unrelated passive investors.
Each of these options have their pros and cons, so careful legal and tax advice is essential when determining the development structure. Your long-term objectives, capital sources, and risk appetite will determine which structure you adopt, so it’s important to carefully consider these as well.
Don’t forget your Land Tax obligations
Land tax in Victoria is a major cost consideration for large landholdings, particularly those held for extended periods before development.
The State Government has increased its focus on land tax enforcement to discourage land banking and absentee ownership. The Government has recently introduced new rates and surcharges that impact developers directly such as The Windfall Gains Tax, which captures value increases from rezoning.
A critical Land Tax aspect that we often see overlooked by developers is ‘Grouping’. Property developers who run multiple developments at the same time can be grouped by the State Revenue Office, and this can often result in higher-than-expected land tax assessments.
Another consideration for developers is the new Vacant Residential Land Tax (VRLT), which applies when residential land is left vacant for more than six months in a calendar year. Although exemptions do exist for new developments, failing to meet the criteria can result in substantial additional costs.
The VRLT penalises owners for underutilised developable land, so you must actively progress your development approvals and demonstrate genuine planning investment to minimise the VRLT’s applicability to your project, as well as avoid higher tax rates or community opposition to your development. It’s important you plan for these costs while also optimising your site utilisation and structuring for flexibility.
Also consider holding costs for vacant land
Holding undeveloped land can create a financial burden. Beyond State Government land taxes, developers face council rates, insurance, maintenance, and often finance charges on acquisition loans. These costs can accumulate quickly, particularly if the planning or permit process is delayed. They can also significantly affect the timing and viability of your project.
Deductions for holding vacant land can also be limited, depending on the corporate structure and nature of the developer’s business. This places even greater importance on the structuring of the development from the start of the project.
To avoid these complications, we encourage developers to model these holding costs and taxes early in the project feasibility phase. To help reduce the holding period, you should explore strategies such as staged development, leasing parts of the land, or negotiating extended settlement terms.
What should you do next?
Successful large-scale developments hinge on strategic structuring, proactive tax planning, and diligent management of holding costs. All these aspects – along with ever-changing regulatory and tax obligations – means that you as a developer need to stay informed, stay alert and make sure you engage professional advisors early on, to preserve your margins and ensure your project is a success.
Please do not hesitate to contact us should you have any questions.
