Legal Insights

Specialist disability accommodation – an alternative to traditional investor stock

John Varos

• 22 April 2020 • 6 min read

With the removal of stamp duty concessions, a tighter credit market after the banking Royal Commission and less foreign buyers, the investor pool of apartment purchasers had decreased in recent times. Developers are responding by placing a greater reliance on securing owner occupier sales or diversifying their apartment stock to meet the needs of alternative markets.

Alternatives markets could include incorporating a hotel, serviced apartments, or even adopting a build to rent model. A further income stream we have seen is the bulk sale of apartments to single investor groups, to either lease out (perhaps on Air BnB or through traditional rentals) or, more recently, to operate Specialist Disability Accommodation (SDA) residences.

SDA is a new form of government incentivised housing introduced as part of the national reforms to the disability sector. The scheme is essentially focused on taking members of the community with lower physical care needs out of care facilities and integrating them into the community. This initiative not only improves the quality of life for the residents who have access to SDA, but also provides opportunities for:

entities providing residents with access to SDA housing opportunities whether through rental or private ownership (provider); and

developers who may seek to partner with a provider to incorporate and deliver SDA residences within their development, with the return being a socially responsible initiative along with income from the bulk sale of an agreed number of apartments.

The commercial drivers in SDA deals

An understanding of some of the commercial drivers which are in play from a providers point of view can assist developers to guide negotiations, address the key concerns of the provider and appropriately balance risk.

Drivers	What to consider
Government incentive	The majority of providers will seek to hold onto apartments and use them as stock for long term leasing. Providers receive government incentive for housing SDA eligible residents, depending on the level of accessibility in the build, number of bedrooms, and availability of on-site care (incentives).
Bulk sales	Providers are typically looking to bulk buy apartments in developments as it will allow for: Multiple SDA residences to be serviced by a localised carer. One apartment in the deal will typically be reserved as an office/ carer apartment. Operating costs are lower, the incentives are maximised for the provider and SDA residents are the benefit of full time care. There are density restrictions imposed by law which cap bulk sales of SDA residences.
Specialised Fit-Outs	To qualify for incentives apartments needs to be built to a certain accessibility standard, with specifications that support individuals with high physical support needs (this could include roof hoists, safety railing, wider doorways and soundproofing, etc) (bespoke build) The need for a bespoke build lends itself to a provider partnering with a developer producing off the plan apartments. This allows for cost efficiencies by tailoring builds upfront and throughout development rather than retro fit existing stock.

Bespoke build requirements

Certainty around the bespoke build is of critical importance to a provider as it impacts directly upon the incentive. The bespoke build will likely require modifications to the standard fit-out which are costly and may significantly change the appearance and functionality of apartments.

Whilst the developer may need to be flexible in delivery of the bespoke build, the risk should be shared with the provider. Careful consideration of the contract of sale terms is required. Based on what we are seeing in the market, some key do’s and don’ts include:

DO: Agree the scope of the modification work with the provider up front and a compensation regime. The more detailed scope the better, and if it is possible to cost that scope with the developer’s builder before contracts are exchanged then that is a preferred approach to reduce uncertainty.
DO: Agree a regime to deal with variations and additional work which may be required by the provider.
DO: Ensure you have appropriate flexibility in your construction contracts and consultancy agreements to allow for the provider’s bespoke build scope and requirements.

DON’T: Commit to producing a bespoke build that will guarantee a

certain standard of SDA functionality at settlement. The requirements to

satisfy certain SDA standards of accessibility builds are continually

evolving and this type of arrangement would shift the compliance and

variation risk of the build being assessed as SDA compliant onto the

developer. If such an arrangement is being considered, developers should

consider pricing the risk accordingly and try to build in flexibility to deal

with any change in SDA functionality standards and definitions. When

working through these Do’s and Don’ts developers should consider the

implications of building in these risk management mechanisms into a

contract of sale or whether they should be addressed via an alternative

arrangement.

Disclosure requirements – contract of sale

If you are considering implementing SDA residences into your development or would like the flexibility to do so, the disclosure, flexibility and allowances which are built into sales contracts are essential. Key takeaways include:

Building in flexibility for the type of product to be incorporated into the development and disclosed to other purchasers in the development, to minimise any risk that other purchasers object to the proposed SDA scheme.
Providers may require signage, additional accessibility requirements on common property, designated SDA only common areas, etc. The impact on common property and owners corporation requirements should be considered and addressed appropriately both in the contract and again upon owners corporation set up. Turning your mind to these matters early will provide you with the flexibility to incorporate SDA at any stage of the development with minimal impact to the balance of your development and existing pre-sales.

Settlement risks

As providers tend to favour the purchase of multiple apartments, settlement risks are compounded. Whilst there are a number of factors which should be considered in this regard, we draw attention below to some critical considerations:

Risk	What to consider
Limited re-Sale market	Where a sale to provider fails to complete, there will likely be a smaller resale market for the Bespoke Build This could impact developers with either delays in securing a new purchaser or the developer undertaking considerable rectification work to bring apartments back to a typical fitout which would appeal to a greater number of purchasers. As a result, a developer should consider obtaining security that it can draw on in those circumstances towards its loss.
Interdependence	SDA providers may seek a bulk deal, but it is important to provide that the transaction is either documented under one contract or, if multiple contracts, that those multiple contracts are interdependent.