Property law: Hard times for developers
Clients no longer flock into developers' sales agencies, as they used to. The number of apartments offered for sale now exceeds demand, and developers' profit margins are decreasing. Commercial real estate development firms, in particular those of a small to medium size, are facing a serious crisis.
Rising costs
Unstable conditions for foreign real estate markets, in particular the breakdown of the American mortgage lending market, have negatively influenced the condition of Polish commercial real estate developers. The costs of construction materials and employment are rising. The Polish Monetary Policy Council contributed to the crisis by increasing money market interest rates four times in 2007. As a result, the real costs of mortgage loans have also risen, and mortgage loans are becoming less and less available for the average joe.
Commercial real estate developers, in order to increase sales of apartments, are offering promotions such as garages or basements included in the apartment's price, finishing of the apartment or discounts of up to 10 percent. However, they still lack buyers, and as a result, the developers lack the financial means necessary to complete, or even to commence other investments. The lack of buyers threatens the developers' solvency, since the money gained from the clients is used to finance future investments. This lack of clients also results in a lack of financial means, which is compounded further since banks, in light of the current condition of the real estate market, are not eager to grant loans to entrepreneurs from the housing sector.
Know the risks
As they search for means for financing construction investments, commercial real estate developers are selling real estate together with construction permits, and frequently with already commenced investments. The parties most interested in this type of offer are large commercial real estate developers, investment funds and, ever more popularly in the market, private equity funds.
However, the process of buying such investments is inseparably linked with numerous risks, in particular those connected with legal provisions and with taxes.
Those firms which consider buying property which includes already commenced developments should particularly focus on a thorough, careful due diligence report of the real estate that they intend to acquire. A comprehensive analysis of the legal, financial, and technical conditions of the real estate is essential in order to estimate the investment's risks and finally to enable the investor to make the correct decision.
Compensation claims
Attractively located real estate often has a complicated history of ownership, sometimes including expropriation and nationalization processes in the post-war years, and this is connected with the risk of claims for compensation or vindication which may be raised by former owners. Nor should potential claims arising from neighborhood relations - such as claims for demarcation - be disregarded. Examination of files from the Land and Mortgage Register as well as geodetic drawings of the real estate enable the potential buyer to estimate the legal condition of the real estate and to assess potential risks. The professional should also pay attention to rights encumbering the real estate, in particular servitudes, third party rights and notices on enforcement proceedings. It should be remembered that the mortgage entered into the Land and Mortgage Register encumbers the real estate, even if the owner has changed, and therefore the creditor, whose right is secured by a mortgage, has the right to carry out enforcement proceedings against the real estate even if the owner does not have any debt towards said creditor. A professional and comprehensive due diligence report minimizes the investment risks and furthermore, may constitute grounds for the bank financing the investment to grant a loan.
Tax obligations
When one acquires a property connected with the seller's commercial activity, for example a plot of real estate on which construction has already begun, it should be remembered that Polish tax law provides for the liability of third parties for tax obligations of a seller who carries out business. In accordance with the provisions of the Polish Tax Ordinance Act, the acquirer is liable for tax owed by the seller stemming from the seller's business activity before the date of acquisition.
However, the liability of the entity that acquires the real estate is limited, so the acquirer is liable for the tax dues of the seller only up to the value of the real estate. Therefore, before buying a piece of real estate, an investor should order the examination of a contractor's tax condition in order to minimize the risk of tax liability.
Acquisition of real estate, which includes commenced construction development, is undoubtedly a complicated transaction from a formal and legal point of view. However, if the transaction is performed in a professional manner, it may turn out to be a strategically beneficial decision for a buyer expecting profits from long-term investments.
Katarzyna Komisaruk is a lawyer at Windmill Gšsiewski & Roman; katarzyna.komisaruk@rwgr.pl
