The announcement of a deferral scheme for developers to pay Lease Variation Charge has attempted yet again to make the LVC more palatable while at the same time making no real change to project outcomes or housing affordability.
The controversial Lease Variation Charge (LVC) has been the subject of much discussion since it replaced the Change of Use Charge (CUC) in 1 July 2011.
It is suggested that the Planning and Development Act 2007 (the Act) provides developers with an opportunity to align major costs with development cash flows. However, the deferral does not relieve developers of the requirement to put up equity in order to access bank funding for a development, and adds the cost of interest to the Total Development Cost which detracts from the bottom line.
What is LVC?
A result of the ACT’s Crown leasehold system, the LVC arises when a landowner seeks to apply to the Territory for permission to alter how a property, that is held for a specific purpose, is used.
Instances where the LVC may apply include:
- subdivisions of a residential block;
- redevelopment of commercial buildings for residential purposes; or
- urban regeneration projects.
The LVC is intended to capture a percentage of the increase in value resulting from the variation. This charge is levied on top of rates, land tax, GST and stamp duty that also apply to the property.
The replacement of the CUC with the LVC, in some circumstances, dramatically increased the tax payable to the ACT Government upon the variation of a Crown lease.
The New Deferral Proposal
The Planning and Development (Lease Variation Charge Deferred Payment Scheme) Amendment Bill 2018 provides developers with an opportunity to defer the payment of LVC until later in the project. The proposed section 279AC(1) suggests that the payment of the LVC could be made as a condition precedent to the issue of a Certificate of Occupancy and Use for a new building.
Remember to Account for Interest
The proposed section 279AC(2) permits the ACT Revenue Office to charge interest on the deferred LVC.
If intending to defer LVC, developers should include this interest cost in the project feasibility and cash flow forecast for any project, to ensure the Profit & Risk of the project and cash flow planning remain accurate.
What About Review Rights?
The proposed section 497 allows for developers to defer the payment of LVC, pending the determination of a review application of an LVC determination. Louise Morris, Director of Property and Construction at Chamberlains, warns that developers should be aware of the temptation to defer their LVC, in anticipation of obtaining a more favourable assessment under the review mechanism.
“It may be tempting to enter into a deferral arrangement and nevertheless proceed with a development based on the developer’s ideal LVC outcome, rather than a likely or actual decision from the ACT Revenue Office.” says Louise.
To ensure long-term success, developers should be minded to consider, anticipate and price-in risk to every project. That risk can then be mitigated by achieving certainty through documentation, processes, professional advice and, ultimately, progressing the development in time. “As a developer, it is important to identify and plan for risk when developing any project scheme and feasibility,” adds Louise. “In this regulatory climate, betting on a nil or highly favourable LVC outcome on a project that is only just bankable is asking for trouble.”
Project Finance Will Be Affected
Michael Bysouth, of Deden, works with developers to assess and access the best project funding for a particular development. Michael observes that, while the change eases cash flow, developers looking to defer LVC payments a potentially simply exchanging one form of equity for another.
“Major financial institutions will likely view the total amount of deferred Lease Variation Charge as an additional and separate liability to fund,” says Michael. “For developers deferring their LVC, this will have the likely effect of reducing LVRs on project funding, requiring the developer to put up more equity to get the deal funded.”
“We have yet to see how financiers will react,” adds Michael, “but we may also see presales conditions increase at least in second tier lenders.”