bmt qs news 34 – Distressed Projects Part 2

Recapping

In the last edition of bmt qs news, part one in our series on distressed projects, we discussed the common precursors associated with a distressed project. Key indicators included construction progress slowing down; contractor’s overclaiming; empty sites - showing minimal activity in regards to progress; and simple influences such as inclement weather, material price rises and subcontractor availability. This edition of bmt qs news, the second and final part in our series, will discuss what goes into recovering a site from its distressed state, and how BMT & ASSOC can assist in the process.

What is a distressed site?

A distressed site is one that is demonstrating some or all of the key indicators as described previously. It is one that has not yet failed, but unless its issues are addressed as a matter of urgency it runs a significant risk of construction stopping completely. This could potentially delay the project indefinitely, jeopardising any established presales and adding considerable risk and cost to all participants.

How can BMT & ASSOC help recover a distressed site?

If BMT & ASSOC are the Quantity Surveying firm already working on the project, our internal auditing procedures have been designed to identify all the signs of a project experiencing difficulty or running a significant risk of cost and/or time overruns. Our reporting system enables us to identify issues at key problem signposts. When attempting to recover a site that is in trouble for any particular reason, several issues need consideration in order to determine the extent of the problem.

1. Establishing a Realistic Construction Budget for Completion

One of the key concerns for developers and financiers alike at this stage is "how much is it going to cost to get the project completed?" There are two key factors influencing this question;

a) What is the cost to complete the remaining trade works?
b) How much is currently outstanding to creditors?

While relatively simple questions, determining the above amounts can often involve BMT & ASSOC undertaking extensive investigations extending to discussions and meetings with builders, developers and creditors in order to establish an accurate figure and get a clear picture of the project’s financial position. This will allow the relevant parties to make an informed decision. It is also worth asking if there are any significant external factors worth considering.

2. What Compliance Issues Exist?

An important question! Something as simple as a single missed inspection or certificate has the potential to prevent the issuing of a final occupation certificate and the execution of any sales obtained on the project. Again BMT & ASSOC undertake an audit of all compliance requirements and ensure that relevant parties are aware of the project's position before moving forward.

3. How Long Is It Going To Take To Get the Project Completed?

As part of our auditing procedures, BMT & ASSOC review the remaining works and provide the client with forecast construction period to completion accompanied by a construction cash flow to assist in the decision making process.

As noted, all of the above issues are investigated and resolved as part of the BMT & ASSOC "Cost to Complete Report" specifically designed to identify the key issues relevant to financiers and developers in getting a project though to completion. BMT & ASSOC are specialists in providing these reports for all development types, Australia wide.

Should you require any more information on this, or any other BMT service, please do not hesitate to contact Directors Tom Plenty, Brendan Farrugia or Bradley Beer at the office.

Projects Under Construction

Location: Homebush West, NSW

Project type: 48 residential units
Approx. Construction Cost Per m2 (ex. GST): $1,320m/2

Location: Benowa, QLD

Project type: Health Care Facility
Approx. Construction Cost Per m2 (ex. GST): $1,620 m/2

Location: Coogee, NSW

Project type: 5 two storey units + penthouse
Approx. Construction Cost Per m2 (ex. GST): $2,015 m/2

Location: Croydon, VIC

Project type: 11 residential units
Approx. Construction Cost Per m2 (ex. GST): $1,690m/2

Tax Depreciation

What is tax depreciation?

As a building gets older and items within it wear out, they depreciate in value. The ATO allows property investors to claim a deduction related to the building and plant and equipment items contained within it. It can be claimed by any owner of an income producing property. This deduction reduces the investment property owner’s taxable income – they pay less tax!

Some tax depreciation examples

Fully furnished apartment, Parramatta NSW

• Purchase Price: $445,000
• First Year Depreciation: $16,000
• 40 Year Depreciation: $224,000

3 bedroom townhouse, Blacktown NSW

• Purchase Price: $320,000
• First Year Depreciation: $12,000
• 40 Year Depreciation: $213,000

1 bedroom apartment, Sydney NSW

• Purchase Price: $400,000
• First Year Depreciation: $13,500
• 40 Year Depreciation: $220,0000

BMT can provide tax depreciation estimates for any new development you may be building or selling – FREE OF CHARGE!

This will ensure that investors are easily able to determine their after-tax cash position if they were to purchase that particular property. Presenting a potential investor with a BMT Tax Depreciation estimate assists the buyer, results in a value added service and often helps with early sales.

Please contact BMT on 1300 728 726 for more information.

Depreciation calculations take into account both the plant & equipment allowance (Div 40) and the construction write off allowance (Div 43). They are issued as a guide only and should not be applied or acted upon.