[+] Why Project Delivery Agreements Are on the Rise

Once the province of the big end of town, mechanisms that allow property developers to achieve more efficient commercial outcomes and avoid double tax are becoming more popular across the property sector.

Structured land purchase terms that defer income tax for landowners and allow developers to stage and sequence projects according to variable market demand are attracting attention in an uncertain market.

“Project delivery agreements were normally only used for large-scale institutional projects, but we’re now seeing a range of developers consider these agreements as a way to get into a project and create commercial outcomes without necessarily purchasing the real asset for the purpose of redevelopment,” says Pierre Wakim, partner with big four accounting firm KPMG.

Structuring project delivery agreements

A common example is where a landowner has land without a development permit. The developer provides a land loan to the land owner to secure the development under the project delivery agreement, with the developer staging payments of the development rights fee or land loan to the land owner at different milestones.

One payment may be made on execution of the project delivery agreement. Another payment may be made when the development application is approved. Another payment could be made on financial close, which is when construction begins. The balance may be made at the waterfall, which is when the properties being developed are settled.

A project delivery agreement is at the core of the Yeerongpilly Green Riverside development on the Brisbane River, being developed by Consolidated Properties Group alongside the Queensland state government, which owns the land.

“Ownership of the land stays in government control under the project agreement. As the development partner, it’s our role to develop the land for the government over the best part of a decade,” explains James MacGinley, Consolidated Properties Group’s chief operating officer and head of residential.

▲ Consolidated Properties acquired 14ha of prime riverfront land under a project delivery agreement with the Queensland government.
▲ Consolidated Properties acquired 14ha of prime riverfront land under a project delivery agreement with the Queensland government.

The large size and premium position of the land parcel, 14-hectares on the Brisbane River, means the price to buy the land outright would have involved a very large capital commitment upfront.

Instead, under the agreement, Consolidated Properties Group makes a payment to the government at various milestones. This makes sense from a commercial perspective because it means there’s a substantial financial incentive for the developer to develop the land as quickly as possible.

The first stage of the residential development begins in October this year. “It feels like the project is really starting to accelerate and sales are going well,” says MacGinley. He says a close partnership between the parties to the agreement is essential to ensure the technical and practical sides of the project work seamlessly.

Sydney’s Barangaroo development is another example of a project that was developed under a project delivery agreement. Depending on how the commercial agreement is constructed, projects could be made more attractive under a project delivery agreement because they don’t attract stamp duty in some states, including NSW.

“With the right advice, a developer can enter into a project delivery agreement with a landowner in NSW more confident that they’re not going to attract adverse stamp duty concerns,” Wakim says.

“For example, they can develop land with the owner’s agreement, who then retains the title for the commercial retail premises to rent, while the developer builds the residential component and sells it for profit.

“This can achieve more opportunistic commercial and tax outcomes. The landowner can retain the newly-developed commercial retail premises—funded out of developer profits—without having to sell the property that triggers stamp duty and income tax events.

▲ Development giant Lendlease struck a project delivery agreement with the NSW government for Barangaroo.
▲ Development giant Lendlease struck a project delivery agreement with the NSW government for Barangaroo.

Alternatively, a landowner who owns the land wants to retain the retail portion of the development, while the developer wants to build 200 residential apartments on the land.

Under a more traditional structure, the developer will buy the land, the landowner will pay income tax on the sale and the developer will pay stamp duty.

After completing the project, the developer takes its share of profit and sells the retail component back to the landowner. This means stamp duty and capital gains tax is paid twice.

“It’s essential for the financiers backing the project to understand how this arrangement works and for the landowners to understand they are participating in some level of development risk,” Wakim says.

“This additional risk needs to be weighed up against the additional potential reward. For example, if a landowner entered into a straight sale agreement with a developer, they might only get $10 million for the property.

“But by contributing the property to the development, under a project delivery agreement, the developer might agree to pay the landowner $12 million.”

Peter Bardos, tax director at HLB Mann Judd Sydney, says there are a range of factors to consider when tax planning a development.

“It’s important to understand the huge range of variables which influence tax considerations,” he says.

“These include the intention of the parties involved—for example whether they develop to sell or hold long-term.

“How many parties are involved and their profile, for example their tax residence, are also important.

“You also need to think through the timeframe of the project. Chasing tax minimisation or concessions without considering these factors may result in impractical or uncommercial outcomes.”

Other variables that need to be considered include project finance, the project’s lifetime, whether it’s a commercial or residential development, the number of storeys and whether there are one or multiple parties engaging in the development are also important to take into account.

▲ Consolidated Properties PDA has created an $850m mixed-use masterplan 6km from Brisbane's CBD. Source: Consolidated Properties.
▲ Consolidated Properties PDA has created an $850m mixed-use masterplan 6km from Brisbane's CBD. Source: Consolidated Properties.

If there are multiple parties, whether they intend to take profit, take product or a combination of the two also matters.

The structure the development is held within also matters from a tax outcome perspective, says Jarrad Basnec, an accountant with DMCA Advisory.

“Each scenario will be different and there are advantages and disadvantages in any option,” Basnec says.

“For example, ownership in a trust structure will enable some benefits including potential asset protection, distribution of income to beneficiaries potentially minimising the overall tax rate, and access to the government’s 50 per cent capital gains tax discount, should that be relevant based on if the profits are capital or revenue in nature.”

However, Basnec says, a drawback in South Australia is increased land tax may be imposed depending on the type of trust structure.

“Another option is a company structure which offers the ability to access the capped company tax rate and allows flexibility to bring new or additional owners into the fold while offering potential asset protection,” he says.

One disadvantage of the company structure is the reduced access to the government’s 50 per cent capital gains tax discount, however, as most property developers will be operating on a revenue basis this is rarely the case.

New rules for developer contributions

Changes to the way development contributions are calculated announced in the recent NSW state budget are also occupying the minds of accountants and developers.

This will enable councils and the NSW government to specify land areas where an increase in value due to rezoning and or new government infrastructure has arisen.

“The purchaser or the developer will likely need to apply to the council for an assessment of the land value contribution prior to any sale or transfer of land. It will then most likely be local councils that will determine the charge payable in accordance with the regulations,” says Basnec.

“It is likely to result in increased costs for developers, especially where there is an attempt to rezone land to increase density,” he says.

“It is also likely to extend the development timeline by adding steps which include making applications to council to get land assessed, calculating and paying any applicable charges.”

As this shows, tax and accounting in property development is a specialised and complex area, made more so by constantly changing rules and regulations.

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Article originally posted at: https://www.theurbandeveloper.com/articles/project-delivery-agreements-development