Managing Payment Timing in Property Development Agreements
In property development deals, payment timing is crucial. Here's how parties can address it:
1. Negotiating Payment Timing: Parties must carefully negotiate payment timing, considering that the landowner might only profit upon eventual land sale while needing to make progress payments to the builder. This could potentially leave the landowner financially strained for an extended period.
2. Loan Arrangement Solution: One approach is for the builder to provide 'loans' to the landowner during development, with interest charged at commercial rates and property used as security. These loans, along with accrued interest, are repaid from land sale proceeds, ensuring the landowner receives upfront payment for land use without selling it.
3. Recognizing Income on Capital Account: Depending on agreement terms and landowner activities, the arrangement may enable the landowner to sell property as a mere realization of an asset on capital account. Factors like landholding nature, development involvement, and agreement specifics influence this. For instance, the builder might offer a fixed payment to the landowner for development rights, assuming all development risks and rewards.
4. Variations and Profit-Sharing: Agreements can be adjusted to involve the landowner more in development or modify profit-sharing arrangements. However, note that such variations may complicate arguments for sale recognition purely on capital account.
Careful structuring and clear agreements are essential for successful property development partnerships.
For personalised advice on property development agreements, reach out to Tax Ideas Accountants & Advisers at +61 2 8318 1545 or schedule an appointment through our live calendar.