Co-Development At Cost Methodology


Simply put, Co-development at cost is an elementary way of enabling smaller property investors in any of the various development categories the opportunity of co-investing in our pipeline of new prime property developments of an investment size that they ordinarily would not be able to execute on their own. The group of Co-developers each take varying sized investments in the development depending on their appetite and available funds.

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Frequently Asked Questions


Tax Related

The rental of Commercial Developments, such as offices and industrial units are vatable, while the rental received from residential developments is exempt from VAT. Further, if VAT is paid to a developer for a unit, which can be claimed back, then it is exempt from transfer duty. Therefore what is important is what the purchaser intends to do with the units purchased. Such as, if they were to on sell them or hold for long term leasing. This decision would determine if it would be advantageous to register for VAT or not. However, note that the purchaser may be obliged to be a VAT vendor in terms of the VAT act such as if they were in the business of buying and selling units as a trading entity or if the rentals of commercial units exceeded R1 million per annum. In these cases, the purchaser is legally required to charge VAT and be a registered VAT vendor.

The reason for the additional short term equity loan calculated at 15% (VAT) on the shareholder’s net of VAT equity contribution of 20%, 25% or 30% whatever the case may be, is to enable the Devco to pay VAT on the land acquisition and early construction costs expended as the Devco has to pay VAT on these items and it cannot drawdown on the bank’s development bond in order to pay the VAT portion of such transactions until such time as it can prove to the bank with an audited statement that the Devco has in fact fully expended its 20%, 25% or 30% equity. It is, however, important to know that this short term equity loan is paid back to shareholders approximately 3 or 4 months after the land purchase has been registered and the Devco has received its VAT refund. This is not a Vatable transaction but merely a short term loan to the Devco to enable it to spend its net of VAT shareholders equity.

The UDZ tax allowance was intended in order to stimulate development in areas where development is needed and can only be claimed if development takes place in these demarcated UDZ areas. Note that these tax benefits expire every five years and have thus far been renewed by the Government through the issuing of a Gazette approximately 6 months ahead of each expiry date. The future expiry dates are 31/03/2020 and 31/03/2025. The ability to claim these attractive tax benefits is not ring-fenced to the particular development but is available to the shareholder’s purchasing entity as the “First Purchaser” as defined by the Act. This tax benefit is of benefit to long term holders of property leased out for rental income and as a typical depreciation, it is repayable to SARS in the event that the property is subsequently sold. It is also not available to “Second Purchasers” who may purchase the property from you. In layman terms, the UDZ tax benefits can be described as an interest-free loan from SARS

Refer to the link here for a detailed analysis of the UDZ tax allowance.

The Capital Gains Tax (CGT) payable to SARS by anyone or any entity will, upon the sale of a property for a profit, be no different under Co-development. Where you are deemed to be a trader in property and where for example you bought 8 apartments on a Co-development basis and re-sold them all at completion, you would not have to pay CGT as you would be deemed to be a trader in property and would only have to pay normal personal or company tax as the case may be.

Sale & Leasing

Yes, you will be entitled to sell all or some of the units you have purchased in the development provided that you first take transfer of the apartments into your purchasing entities name, whereafter a simultaneous transfer will take place into the name of the second purchaser to whom you have sold the unit. The bank providing development finance for the project will still insist that you arrange with your own private bank to have a bond registered over all the units that you have purchased as occasionally a sale falls through and the banks, therefore, do not recognise your pre-sale/s.

FWJK will coordinate and assist the sales process by appointing a specific estate agent to set selling prices and market all shareholder’s apartments to ensure marketing and sales conformity and uniformity. However, if you have units remaining unsold at project completion, you are free to sell such units on your own 3 months prior to project completion and you may appoint your own estate agents during this time to market any unsold units. FWJK will also offer to market your unsold units for sale. You can decide exactly when you wish to offer your unit/s for sale over the full duration of the construction period.

Yes, FWJK will prepare an Owner’s Handover Pack and where it sells your apartment it will arrange the handover to the purchaser and where an estate agent has sold your unit for you, the estate agent will arrange the handover. However, FWJK will coordinate the receipt of purchaser defects list and will arrange for the rectification of defects by the contractor including obtaining purchaser sign-off after rectification.

Generally, FWJK procures a sales commission structure agreement with estate agents who will charge around 3,5% on the net of the VAT selling price to which they will add 15% VAT. If FWJK secures your sale through its own buyer network, it will charge you a 2,5% sales administration fee plus 15% VAT as described above.

There is no transfer duty payable as the selling prices of the apartments includes VAT, which can be claimed back if you are a VAT vendor. All you will have to pay is the attorney’s conveyancing charges calculated on the selling prices at cost and if you register a bond as opposed to paying cash for the balance of the purchase price, you will have to pay your attorney’s bond registration fees. The calculation of these two sets of attorneys fees can be quickly and easily calculated by referring to the calculator on the website of Strauss Daly Attorneys.

Corporate Governance & Transparency

At the inaugural meeting of investors where a decision is taken to proceed with the project, a board of directors of the Development Company comprising 10 directors is elected of which only 2 directors will be FWJK representatives ensuring total transparency in the operation of the company. The Devco is therefore controlled by the investors themselves and not by FWJK. Secondly, FWJK co-invests in all projects it undertakes which gives shareholders the peace of mind knowing that FWJK has a financial interest in ensuring the success of the project

Obligations Of Shareholders

Firstly you will be called upon by the company’s attorneys to sign the Shareholders Agreement and the Contracts of Sale between the Company and your purchasing entity. Secondly, within a month to six weeks after the inaugural meeting, you will have to provide the bank providing the development bond to the Devco with a facility letter from your private bank confirming that they, in turn, will provide you with end bond finance equal to your balance outstanding. Thirdly, you will have to provide the Devco’s bank with details of your financial standing listing the entity or individual/s that actually own your purchasing entity. Fourthly, you will have to sign a limited surety with the Devco’s bank equal to your proportionate share of the development bond granted by such bank. Fifthly, you will be required to sign a cession of your shares and loan account in the Devco as security for the bank.

All of these shareholder obligations above are required in order to green-line you with the Devco’s bank so that the bank will permit FWJK to drawdown on the development bond to continue with the construction of the project. All of the foregoing obligations must be satisfied within a maximum period of 2 months after the Inaugural Meeting. Lastly, shareholders have to comply with the provisions and obligations set out in the Shareholders Agreement.

The Development Period Up To Project Completion

The Board of Directors of the Devco passes resolutions to instruct FWJK to proceed with the land or property acquisition as well as to appoint the professional consultants, contractors and subcontractors which will trigger the commencement of construction works on the purchased site.

FWJK will send out regular shareholder updates including progress photos, relevant news on costs, site progress and the like. In most instances, we have live footage available through on-site CCTV cameras which can be accessed by shareholders in order to remotely connect to the live feed in order to view progress on site. Finally, we have on-site braais every 6 months in order that shareholders can physically view the progress of the works as well as their individual purchased unit/s.

The first thing that happens is that FWJK and the Conveyancing Attorney will both confirm the date of occupation 30 days prior to the actual date of occupation. They will also call for the balance of the purchase price to be paid in cash or by bank guarantee issued by your private bank approximately 3 to 4 months prior to project completion. You will be contacted to meet a representative of FWJK on- site in order to be handed your keys and to facilitate the process of recording any defects and rectification thereof.

Yes, FWJK can assist but you will have to give us your layout requirements at least 9 months prior to completion so that our architects can prepare plans as well as a cost estimate for your approval and payment prior to works commencing on site. Alternatively, you can do your own fit out and have your own layout plans approved by the City Council and can gain access to the premises upon Practical Completion.

Yes, but the demand guarantee must be able to be called upon by the attorneys immediately after the Inaugural Meeting of the Shareholders approving project go-ahead.

Yes, you can instruct the Conveyancing Attorney to refund your equity contribution at any stage leading up to the Inaugural Meeting of the Shareholders, at which point you will be asked to vote whether or not you wish to proceed with the Co-development.

Once the development is 100% sold, all investors are called to attend the Inaugural Meeting of the Shareholders at which forum the latest tendered costs will be presented and compared against previous budgets and all Investors are then called upon to vote on whether or not they wish to proceed with the co-development project.

In order to secure your investment, you will be required to pay an equity deposit contribution of typically between 20 – 30% of the nett purchase price, as the case may be plus VAT. This deposit will be paid into an interest-bearing trust account in your name held with the Attorneys of choice appointed on the specific Devco. Interest on your deposit shall accrue to you up to the date of the Inaugural Investors Meeting, after which the deposits held by the Attorneys are transferred into the Devco bank account.

Once your deposit is secured with Attorneys, you shall be required to immediately take steps to provide both the Attorneys and the development bond finance providers (ie: ABSA/Investec/Nedbank/etc), with a full end bond grant facility letter from your chosen private bank for the balance of the purchase price, typically 70 – 80% as the case may be, including 100% of the VAT on the total purchase price. The deposit to bond ratio (Gearing Ratio) will depend on the finance terms approved by the chosen Bank providing the Devco with the development bond. Once your own personal end bond is approved by the Devco development bond provider, you shall have no further payments to make until after transfer, when your end bond conditions will then take effect (unless of course there are additional fit-out requests prior to completion/transfer).

Typically, Co-development selling prices will be in the region of 20-30% under the market-related prices for similar property types, due to the fact that FWJK is a professional fee driven developer, as opposed to the traditional profit-driven developer. This in turn substantially increases your potential return on investment. Traditional developers will sell at market-related prices off plan, thereby immediately reducing the appreciation of your investment.

  • In a Devco scenario, you become a shareholder in the company with a share certificate and you have a voice in the company as a shareholder.
  • The Co-development process is completely transparent. Shareholders are provided with monthly updates on progress, as well as annual financials.
  • All aspects of the construction procurement involve competitive tendering and value engineering from the onset and throughout the development process. The aim is de-risk the development from a financial aspect and through value engineering, obtain the best value for money for all investors, which hopefully results in an overall saving.
  • You will have the ability to personally liaise with the development manager/team throughout the project who will assist you with an update, critical information, fit-outs, handovers and defect rectification.
  • We have a vested interest in ensuring the success of the development due to our own stockholding and investors can rest assured that our interests will be aligned with fellow Shareholders in terms of value engineering, cost control, project programme management and quality assurance.
  • A board of Directors is elected from the group of shareholders within each Co-development and those Directors can vote on and make decisions on behalf of the shareholders on how certain aspects of the development will best function. This is vastly different from purchasing from a traditional developer, whereby you will buy a certain product the way it is advertised and have little or no say in the process in between until you take occupation.

No, the development company is a short term vehicle designed to onboard shareholders, procure professional services, purchase the land, procure construction and construct and deliver a premium end product. Once the final accounts have been agreed, fees have been settled, taxes are finalised and the final auditing has been completed (by an independent registered auditing firm), the co-development company is then liquidated. The current Directors of the Devco will resign and your shareholding capacity is then transferred to you as an end owner and in terms of the Sectional Title Act. Liquidation will take place once all objectives have been met and the development company is in a position to liquidate, so the timeline will depend on what needs to be finalised post construction.

No, we don’t provide building management services. Towards completion of the development, we facilitate a building management tender, the results of which are presented to the Directors of the said Devco. Once the Directors are in agreement as to who the appointed building managers shall be, they will then take over and facilitate the formation of the future Body Corporate. The Trustees of the said Body Corporate will consist of nominated/voluntary members/shareholders from the Devco. Due to the fact that the Devco will be liquidated shortly thereafter, the latent defects liability period (5 years post Final Completion), is then ceded from the Devco to the future Body Corporate.

Part 1
Any savings made on the development will be confirmed upon the conclusion of final accounts and final audits. This potential remaining balance would then be distributed back to all of the shareholders by the auditors, in the form of a dividend payment. The apportionment of dividend payments shall be in accordance with the participation quota (PQ%) pertaining to all shareholders, up to 100% of the available funds.

Part 2
Cost overruns in a Co-development are very unlikely as each development has both construction and project contingencies in place. However, there is always a risk element in construction and development and in the unlikely event of this transpiring, the total cost overrun would be apportioned in accordance with the participation quota (PQ%) pertaining to all shareholders.

Liquidation has been found to be the safest of the two options when considering closing down the Devco, due to the protection that it offers the shareholders. Once a company has been formally liquidated, no further claims or late bills can be considered against the shareholders of the Devco. De-registration, on the other hand, can be overturned in the wake of a late-filed claim or unknown/unpaid bill (ie: rates account or SARS claim). In this scenario, the shareholders would be exposed and would be required to address such claims of whatever nature.

The first thing you must remember is that you can change your mind and withdraw your interest at any time up to and including the day of the Inaugural Meeting where a vote of Co-developers will be taken on whether or not to proceed with the development. All you have to do is to inform the attorneys for the company that you wish to withdraw your deposit and no reasons need to be given and they will refund you your deposit plus accrued interest thereon. You will initially sign a Memorandum of Agreement which will identify your chosen investment, be it an office suite, mini factory or apartment/s together with the price thereof and the deposit required. It will also confirm that you can withdraw your deposit and interest at any time as aforesaid. Once the document is signed by both parties, you will then place your deposit in full in the trust account of the company’s attorney and you must provide them with FICA documentation so that you can earn interest on your deposit. You will then be required to provide your financial information to the bank providing development finance in order to be green lined by the bank as a qualified co-developer.

You will initially sign a Memorandum of Agreement which will identify your chosen investment, be it an office suite, mini factory or apartment/s together with the price thereof and the deposit required. It will also confirm that you can withdraw your deposit and interest at any time as aforesaid. Once the document is signed by both parties, you will then place your deposit in full in the trust account of the company’s attorney and you must provide them with FICA documentation so that you can earn interest on your deposit. You will then be required to provide your financial information to the bank providing development finance in order to be green lined by the bank as a qualified co-developer. Note that you can change your mind and withdraw your interest at any time up to and including the day of the Inaugural Meeting where a vote of Co-developers will be taken on whether or not to proceed with the development. All you have to do is to inform the attorneys for the company that you want to withdraw your deposit and no reasons need to be given and they will refund you your deposit plus accrued interest thereon.

You only have to sign a limited surety to the value of your share of the development bond. You will be released from this surety by the bank as soon as the building is complete and all the registration of transfers of the Sectional Title Sections have taken place and the bank has been repaid in full for the bond drawn down to complete the development.

This is only called for by the attorneys acting for the bank providing development bond finance approximately 3 to 4 months prior to occupation and transfer. The sectional title plans must first have been approved by the Surveyor General. All you have to do is to provide the Devco’s bank with a facility letter from your bank confirming that they will provide you with a guarantee for the balance of the purchase price when called upon to do so.

There is no problem at all. You will first take transfer of the apartments into your name as there will be a sales contract in place between the Devco and your entity and if you subsequently on sell your apartments, SARS insists that the first sale must proceed followed instantaneously by the second sale. The bank providing development bond finance will still require you to get your private bank to give you a bond even though there is an approved in principle second sale in place. The second sales can occasionally be cancelled just before transfer for various reasons and the Devco’s bank is not prepared to take this chance of being exposed financially due to a sale falling through at the last moment.

Your obligations as a shareholder in the Devco are clearly set out in the Shareholders Agreement, a copy of which you will be provided with at the outset when you are given the Memorandum of Agreement to sign. The most important duty you have as a shareholder is to timeously comply with all requests including financial obligations requested of you by the attorneys or the bank such as timeously arranging your end bond finance, punctually providing your financial information and end bond facility letter or signing documents when called upon to do so by the bank or by the attorneys. This will ensure that the processes run smoothly and this will enable us to drawdown on the development bond in order to commence with the development and continue smoothly through the development process in an efficient manner to the financial benefit of all shareholders.