You are ready to start your first property development, but what legal structure do you need to follow?
'Having a Dev-Co helps to protect you from risk in the development process.'
Development structure
The basic development company structure is typically set up around a unique type of development company called a Special Purpose Vehicle, or ‘SPV’ for short.
What is an 'SPV'?
This is a registered company through which the development transactions can be performed. In South Africa, this company will be a private company, known as a Proprietary Limited Company which is abbreviated as a Pty (Ltd). By establishing a new company, all parties to the project can be assured of a clean start free of pre-existing debts, tax liabilities or underlying problems that may exist in the past. On commencement of a project, parties sign a development agreement and contribute their respective proportion of equity towards the project in exchange for shares in the SPV.
Why use an 'SPV'?
The purpose of this company is solely focused on the development of a property, after which it can be closed (deregistered) or liquidated. If the outcome of the development is to hold the property over a long period of time, it is a good idea to sell the interest from the Development Company (Dev-co) to a Holding Company (Hold-co).
The ownership of the Development SPV should be clearly established before the development can take place. This means that a shareholder’s agreement must be signed between parties, and clear development objectives be put in place. A shareholder’s agreement clearly sets out the rights, roles and responsibilities of each shareholder, and also defines a common objective of the development. As a property developer, you can have many ‘SPV’s, with different shareholding in each company.
Equity and Funding
When structuring a new development, one option to raise additional equity is to attract a development partner. This partner should ideally take on an equity finance position in your property development. By increasing the amount of equity available to the project, it allows you to enter larger transactions without overextending your available resources. You can learn more about how to set up a development partnership by applying to join the program here.
Expenses
During a development, the SPV is responsible for expenses such as holding costs, rates and taxes, interest, municipal costs (services contributions), utility expenses and professional fees. As the developer in charge of managing costs, it is vital to keep expenses to a minimum. There may even be an opportunity to use your property skills to offset expenses that you can carry out in your personal capacity.
Fees
In exchange for your efforts, you can charge consulting fees to the development company. These fees should be invoiced from a separate company such as a Management Company (Man-co), and are tax deductible.
Development Finance
Once your project has been property planned, finance can be raised for the development through the SPV. For the purposes of raising finance, a portion of equity is required relative to the total loan amount. The ratio of equity to loan is referred to as leverage or gearing. The ownership of the development property should be in the SPV. The land value and capital contributed by shareholders make up the total equity in the project.
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