Build-to-Rent short series | Subdivisional solutions

The Gadens Build-to-Rent short series will focus on emerging property and development issues that affect Build-to-rent (BTR) projects – covering planning, subdivision structuring, fund through models and management issues. Click through the following links to read each instalment. 

Build-to-Rent short series | Has the planning scheme caught up?

Subdivisional solutions

BTR Projects often seek to utilise a fund through model. In the second instalment of the Gadens Build-to-Rent short series we focus on some issues with respect to how potential owners of a BTR Project will utilise a fund through mechanism and how the fund through agreement may involve a subdivision of land.

Fund through models are popular for BTR Projects for a number of reasons including:

• a potential owner of a BTR Project may rely on a developer which is experienced in building and developing high rise apartment buildings;
• they enable a mixed use development of the property, with the BTR Project forming part of the overall mixed use development of the property; and
• it can provide stamp duty benefits for potential owners in a BTR Project if the land is transferred to the potential owner early in the development process.

The potential owner will have the choice of adopting a fund through model (where the potential owner funds the cost of the BTR Project by making regular payment claims) or a takeout model (where the developer funds the BTR Project and the potential owner pays a deposit and makes a final payment on practical completion).

The potential owner will pay stamp duty at the time of transfer on the value of the land when the land is vacant (or with negligible improvements) rather than on the value of the land and building (or buildings) when completion of the BTR Project has occurred.

Land transfer early in a project can be simply achieved if the land to be developed comprises solely of the BTR Project and does not require a preliminary subdivision or consolidation of land titles.

What if the BTR Project includes multiple uses?

However, what if the land to be developed will include other uses such as a separately titled retail or commercial area, or a separate component for affordable housing?

In this case, a preliminary land subdivision will be required which then provides the opportunity for the potential owner and developer to utilise a staged subdivision. It is not uncommon for a subterranean carpark and retail podium level precinct to be constructed first as part of the initial subdivision stage. The potential owner can then take title to a Staged Lot which will be used for the development of the BTR Project as distinct from other uses such as retail, commercial, or affordable housing components. The Staged Lot may also facilitate the use of air rights in the future subject to planning restrictions.

What is a Staged Lot?

In Victoria, a Staged Lot is created as part of staged subdivision of land under Section 37 of the Subdivision Act 1988 (Vic). (There are similar or equivalent provisions in other states and territories but there are differences and the comments below relate to Victoria only.)

Staged subdivisions are primarily used when a developer has a master plan for a development and wants to obtain planning approval for the land in the master plan but does not necessarily want to develop all the land straight away.

A staged subdivision provides flexibility with respect to developing part of land in the master plan in the future in different phases without again having to obtain separate planning approval for each individual stage.

The subsequent subdivision of a Staged Lot may amend the master plan or a plan for an earlier stage by:

1. adding to the membership of an existing owners corporation;
2. adding to existing common property
3. changing lot entitlement or liability of existing lots; or
4. showing land on the master plan or earlier stage as land benefited by an easement or restriction created over land in the plan for the subsequent stage.

The subsequent subdivision of a Staged Lot may be submitted for certification at the local council and lodged for registration at the Registrar of Titles by the owner of the land in the master plan, and, if an owners corporation is created on the master plan or a plan for an earlier stage, the unanimous resolution of the owners corporation is not required with respect to the subdivision of the Staged Lot.

A BTR Project will not ordinarily comprise of a building subdivision into separate lots with an owners corporation created with respect to managing the common property within the building.

It is not necessary to subdivide the individual apartments into separate lots but developers may want to consider maintaining some flexibility with respect to their development by taking preliminary steps in preparing a plan of subdivision which would incorporate a more conventional Build to Sell development if in the future if there is a requirement to end the BTR component of the development.

Can BTR apartments be converted to Build to Sell apartments? 

Changing from a BTR Project to a Build to Sell Project needs to be considered carefully because any tax concessions granted for the BTR Project may be recouped. For example, in Victoria some BTR Projects are eligible for a 50% land tax concession for up to 30 years on the unimproved value of the land used solely for a BTR Project. A BTR Project can also be exempt from the absentee owner surcharge in respect of that land during that time. To qualify for such concessions, the eligibility criteria set out by the State Revenue Office must be met including that the development must be held in a unified ownership structure and managed by a single management entity.

The BTR Project must maintain the eligibility criteria for a continuous period of 15 years and if there is a change in circumstances that results in the land or part of it not meeting the eligibility criteria, a special land tax liability will be triggered to recoup the financial advantage provided to the land by way of the tax concessions. The State Revenue Office has confirmed that subdivision of land, on its own, will not impact the tax concessions.

If you found this insight article useful and you would like to subscribe to the Gadens BTR Short Series click here.

Authored by:

Tony Greenaway, Partner
Andrea Towson, Partner
Brihony Boan, Partner