Engineering News spoke to law firm Strauss Scher to find out what legal aspects potential developers must take into account when entering the market.
Director Julian Scher says that the risks of property development are often greater than they appear.
“This is not a game for the faint-hearted,” he warns.
The first area of concern for a potential developer is the status of the land at the time he or she wishes to start the process.
Rezoning the land requires submitting an application to the relevant authorities and dealing with town planners, local and provincial authorities and with any objections from members of the public.
Scher explains that this process has become more complicated than previously and can now take between 6 and 24 months.
And, at the end of the process, one might not obtain the rights.
The decision could be for a number of reasons, not least of which is that the developer may want to erect the wrong type of development for the area.
One way of ensuring that the process is followed properly is by surrounding oneself with a competent team.
“For example, professionals should be completely aware of the processes and timing implications,” he says, adding that a competent insurance broker must be used.
“Developers often only insure for the cost of rebuilding in the event of a building being damaged during construction, but they do not insure for loss of income, rent and interest payments.” Scher adds that an attorney specialising in property development will be alive to aspects such as cashflow and will, within the limits imposed by the process, deliver promptly.
In addition, one’s attorney should be aware of the tax implications of property transactions.
“If an individual is not fully aware of the tax implications and decides to develop a property he or she may find that the initial intention has changed from a capital investment to profit making,” says Scher.
This, he says, means that the developer may have to pay income tax on the difference between the initial purchase price of the land and the sale price.
The solution, he says, is to structure one’s affairs in such a manner that the profit is made by the appropriate profit-making entity and pay income tax on that.
“Sellers must be careful that they do not cross the proverbial rubicon and become developers,” says Scher.
He adds that more than 50% of tax disputes in court are argued on the point of revenue versus capital.
He also warns that a sectional-title development places a huge strain on cashflow, as it is illegal to take any of the proceeds of the units until all construction is complete and transfer is effected.
In conclusion, Scher says that developing is a full-time responsibility, as it involves intensive administration.
All the paperwork must be top-notch and filed in the correct place at the correct time.