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The evolving Split Contract Model – Medium density in Greenfield development sites

By Nick Sparks, John Varos

• 17 December 2021 • 6 min read
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Historically, townhouses would make up a relatively small proportion of product in master planned greenfield development, with developers favouring a more traditional larger land lot delivery model. However, in recent years in the face of increasing land supply costs it has been common to see considerable portions of greenfield sites being dedicated to more compact medium density product. In particular, the split contract model has evolved and made a significant comeback recently.

Below we take you through some of the key trends and issues we have seen in recent medium density models.

There are two main delivery models to consider when structuring your medium density sites.

Traditional turnkeyThe developer contracts directly with its purchasers to deliver the land and built form product. The developer will enter into a building contract to deliver the build.
Split contractThe developer contracts with its purchasers for the land component only. The purchaser contracts directly with a builder(s) nominated by the developer. The land contracts and building contracts will be linked. The developer and builder will typically enter into a relationship deed to manage the turnkey component.

We will focus on the use of split contracts and the benefits to developers in adopting this approach.

Why adopt a Split Contract Model?

The separation of the land and build components allowed by the split contract model comes with some key advantages for the developer.

BenefitKey considerations
Settlement risk and delivery cost management

A traditional turnkey model results in the developer shouldering the entirety of the build and settlement risk, outlaying both civil costs to deliver the land and construction costs to deliver the build.

A split contract allows the developer to focus on delivery of the civil components only and reduces settlement risk to the same factors as that of a land only settlement.

Faster income realisationThe Split Model allows the income stream between land and build to be realised independently. This means the developer can trigger settlement of the land component once it has registered its plan of subdivision and need not wait for the build to reach completion.
Partnered approach and control over product deliveryThe partnered and shared risk approach with a builder will typically allow for:
  • input into the design, marketing and progress of sales (as you would typically have with a traditional turnkey model)
  • greater flexibility to adjust to market conditions and purchaser engagement with the particular townhouse product (i.e. if uptake was particularly slow)
  • opportunity to easily repeat successful delivery models in future development and/or new developments.

Putting the pieces together

Yes, there are definitely benefits, but as developer, there is of course some element of control lost when separating out the land and build components.

Documenting the model appropriately will ensure you cover any purchaser settlement concerns and that you engage with your builders in a way which gives both parties certainty over product and ensures a smooth delivery process. We set out some of the key items to consider below.

What to think aboutThe detail
Link the land and build
  1. Ideally the land contract will require a purchaser to enter into a building contract and limit any flexibility a purchaser has to vary or end the building contract without their being repercussions under the land contract.
    However, a conversation with your lawyer around this issue is required, as not all purchaser financiers will approve such provisions, and it may be the contract needs to contain less detail. Often less is more in that respect.

  2. The purchaser’s rights to on-sell or nominate will need to be carefully considered in the context of the related build contract.

These components ensure the developer has certainty over the product and critically that the nominated builder will be able to progress with construction in the manner originally envisaged. If these concepts are not considered, it can cause issues if a purchaser decides it wants to take its build in a different direction, contrary to your preferred design.

Relationship deeds with your builders

The document that sits in the background between the builder and developer is crucial to the success of the split contract model (particularly where you are not engaging with a related building arm).

There are various types of deeds that you might consider and this will largely be driven by the level of involvement you would like your builder to have in the process and the type of product you are delivering (i.e. adjoining townhomes or a stand-alone format).

In dealing with builders and settling on the model that is right for your development, it is important to consider:

  1. responsibility and cost sharing for the marketing and sale of lots
  2. design, planning approvals and build expectations
  3. allocation of lots and exclusivity requirements
  4. sale performance milestones, timeframes and incentives, including a minimum threshold of lots that must be sold before construction of dwellings commences
  5. dealings with purchasers and the process around variations, delays, defects, etc – there are brand management factors that are crucial here
  6. compliance with the specific greenfield development requirements, including requirements under the Small Lot Housing Code, restrictive covenants, planning permit conditions, design guidelines and owners corporation rules/requirements (typically in limited circumstances)
  7. either an agreed form of build contract for the dwellings, or certain key parameters that must be included in that build contract, along with obligations on the builder not to vary those key terms.
Finance – Getting your design and contract right so your customers can settle

Historically there was reluctance from some lenders to both consider split contracts as a ‘qualifying sale’ for developer funding and to provide funding to purchasers wishing to acquire property under a split contract model.

  1. we find the majority of lenders are now comfortable with the arrangement where townhomes are capable of stand-alone construction (i.e. no party walls and/or shared slabs), the contract documentation is prepared in a certain way, settlement obligations are clear and the valuation and price apportionment between land and build stack up
  2. where there are adjoining townhomes with party walls (i.e. only capable of being constructed in one line), the split contract will require greater scrutiny so as to explore how the lending risk can be reduced for purchasers, as there is less certainty regarding financiers attitude to funding this type of design.

If you would like to further explore how to integrate medium density product into your greenfield development or discuss the split contract models in greater detail, please don’t hesitate to contact any member of the development team.

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