It’s building momentum… it’s Build-To-Rent!

This article defines Build-to-Rent, the three stages of a standard Build-to-Rent project lifecycle, and the key considerations for each stage, which should be considered to position your BTR project for success.

What is Built-to-Rent?

Build-to-Rent (BTR) refers to a housing model whereby developers (often with support from financiers) build and retain housing units to rent to tenants, instead of selling them to prospective purchasers.

There are three common categories of BTR housing:

• Student living e.g., university accommodation
• Co-living e.g., boarding houses
• Multi-family living e.g., residential apartment complexes

Understanding the BTR project lifecycle, and the key considerations for each stage of the lifecycle, is critical to preparing and delivering a successful BTR project, as set out below.

Stages of the BTR Lifecycle

Stage 1: Planning

The planning stage is focused on defining your BTR project and how you will deliver it. It is a critical stage for you to identify and mitigate risks and optimise and realise opportunities associated with your BTR project, which could affect the success of your BTR project.

Key considerations during this stage include:

• Site identification: Undertake thorough due diligence on the site on which you plan to build your BTR project. Pay particular attention to site constraints, conditions and planning requirements that could prevent you from completing your BTR project on time, in budget or at all.
• Site acquisition: Consider which legal entity will purchase the site, including whether you should establish a special purpose entity for the purchase for asset separation and protection purposes and to optimise tax benefits (particularly for joint ventures between two or more companies), noting that tax benefits tend to require the whole parcel of land to be owned by a single entity. If the entity is a foreign corporation, you should consider the need to obtain Foreign Investment Review Board approval. You should also review the contract to purchase the site to ensure that there are no unexpected risks.
• Project scope: Consider the project and the requirements for the project thoroughly. For example, the mix of units (i.e. residential and commercial/retail units), amenities (i.e. gym, pool, rooftop terrace, BBQ area), and options for ancillary income (i.e. hair and nail salon, childcare, dog walking or grooming facilities, yoga classes, and social functions and events). Based on your considerations, prepare a detailed and comprehensive project requirements document, which can be provided to your builders and subcontractors, to ensure the project as built meets your needs.
• Project structuring: Consider whether your project will consist of one lot, or be stratum subdivided into numerous lots (vertically and/or horizontally), and whether a strata plan will be registered over the lot or any of the lot(s). This may be affected by two key matters. First, your eligibility to claim tax benefits for BTR projects which are affected by non-residential parts of BTR projects. Second, the prohibitions on registering a strata plan dependent on the site zoning being relied upon for the development approval of your BTR project. Consider any additional documents that you need to prepare where there is a subdivision, such as easements, building management statements and strata management statements.

Stage 2: Delivery

The delivery stage is focused on bringing your BTR project to life, which contains a myriad of risks associated with development of projects generally, which can be mitigated through considering upfront consideration of those risks, to ensure that your BTR project is delivered on time, in budget and in full.

Key considerations during this stage include:

• Designer selection: Consider which designers (such as architects, engineers, and the like) you will need to engage to construct the BTR project, and engage them early. Your designers will need to be “registered design practitioners” under the Design and Building Practitioners Act 2020 (NSW) to prepare “regulated designs”. For optimal efficacy and efficiency, consider engaging a “principal design practitioner” (such as an architect) under the Design and Building Practitioners Act 2020 (NSW) who is responsible for coordinating all of your designers’ “regulated designs” to minimise or avoid unnecessary variations to those designs later.
• Builder selection: Consider whether you will engage a builder to build the BTR project, or build it yourself (including by establishing a construction business, which has become increasingly common). Your builder will need to be licensed to carry out “residential building work” under Home Building Act 1989 (NSW) and be a “registered building practitioner” under Design and Building Practitioners Act 2020 (NSW). If you are engaging a builder, prepare a comprehensive Request for Tender with a comprehensive Construction Contract containing appropriate obligations on the builder for the design and construction of the BTR project, and dealing with the scope and requirements. Due to the long-term nature of a BTR project, you should ensure the builder provides appropriate warranties from its subcontractors and suppliers, which also mitigates the risk to you of the builder’s insolvency.
• HBCF insurance: Consider whether your builder will need to take out Home Building Compensation Fund insurance to build your BTR project, which can increase the sunk cost of your build.
• Strata Building Bond & Inspection Scheme: If your BTR project will be strata subdivided, consider whether you need to lodge a Strata Building Bond prior to obtaining your Occupation Certificate under the Strata Building Bond & Inspection Scheme. Otherwise, the Strata Building Bond & Inspection Scheme will not usually apply.
• Compliance: There is an enhanced culture of compliance on residential projects, including on BTR projects. This enhancement is predominantly led by government regulation and oversight through the establishment of special building commissions with enhanced powers and through enhanced duties on project participants such as developers and builders (i.e. in NSW, the Residential Apartment Buildings (Compliance and Enforcement Powers) Act 2020 and the Design and Building Practitioners Act 2020). Carefully consider the use of modern methods of construction (such as pre-fabricated buildings and build components) as they are set to receive an increased compliance focus, which creates a level of uncertainty and risk.
• Project management: Consider engaging a dedicated and experienced project management team that can assist you to proactively manage risks and opportunities associated with your BTR project. By proactively managing risks and opportunities, you can minimise delays and optimise the benefits to you, for example through avoiding delays associated with the NSW Planning Portal and authorities, and enforcing mechanisms in the contract with your builder.
• Security of payment adjudication: Be aware that payment disputes are common in the residential construction industry, including on BTR projects, which are often resolved initially through the rapid security of payment regime in your state and territory. If you receive a payment claim from a project participant (such as a builder or designer), you must respond to it within a strict timeframe clearly setting the amount you are proposing to pay for the claim and, to the extent you propose to pay less than the claimed amount, exhaustive reasons as to why you are paying less. If you fail to do so, you will be deemed liable for the entirety of the payment claim, even if you may have had valid reasons for not paying the entire amount claimed.

Stage 3: Operation

The operation phase is focused on realising the benefits of your BTR project through renting the units to tenants, and enhancing your income through ancillary income, and through the reduction in operating costs.

Key considerations during this stage include:

• Renting the units: Consider the form of rental agreement that you will enter into with tenants, which may need to follow the standard residential tenancies agreement in your state or territory, but be adjusted for the bespoke requirements for your BTR project. Consider also your obligations to offer the units at a reduced rent or to certain social groups, which are often requirement in order to access and maintain tax benefits associated with your BTR project.
• Active management: Consider whether you will manage the maintenance and operation of BTR project yourself. If so, consider whether you will manage it through the same legal entity who owns the site or through a special purpose vehicle constituted for the management of the BTR project for asset protection and separate purposes. Also consider establishing a panel of facilities and maintenance providers who can support the maintenance and operation of the BTR project, including the standing contractual arrangements with those providers, to allow them to be engaged efficiently as and when needed.
• Passive management: Consider whether you will engage a third party to manage and operate the BTR project. If so, prepare a Request for Tender with a comprehensive Management Agreement containing appropriate obligations on the manager for the maintenance and operation of the BTR project, which also deal with matters that affect the commercial viability of the BTR project, i.e. the optimisation of available warranties from your builder and its subcontractors and suppliers.
• Technology: There is a rising number of available technologies to create efficiency and efficacy in the operation and management of BTR projects, which can significantly reduce costs, enhance tenant satisfaction and maintain competitiveness. Consider the available technologies at the time you begin managing your BTR project, but also on an ongoing basis as and when they become available.