Friday, 22 June 2018

Changes on Share Deal Regulations To Make Them Less Attractive

The controversial methods used by property companies to avoid property sales tax (stamp duty) have been a thorn in the side of the tax authorities in the German states as they are the recipients of the revenue from this tax. The current federal government has picked up the issue as it is regulated by federal law and was agreed as an action item in the coalition agreement. The finance ministers of the states (Bundesländer) have passed a reform model for the regulations for Share Deals in their last joint session on Thursday. Any change in this taxation has to be agreed on by both levels of government.

In the Share Deal model the parties involved use a loophole in the tax code selling shares in a property instead of the entire property. If the amount of shares sold is below 95% there is no property sales tax because in theory the property remains with the company owning it and the company has not fully changed ownership.


  • In the new model this quota is to be reduced to 90% in order to avoid property sales tax.

Another condition is, that the owner of  the remaining 5% plus, 10% plus in the new model,  has to remain in the company for a minimum of 5 years to avoid taxation.

  • In the new model the minimum holding time is planned to be extended to 10 years.

As the tax rates vary between 3.5% and 6.5% (overview of the states) of the purchase price in different states it poses the question if these changes are enough of a deterrent to not try to avoid this tax. The total amount lost to the states through this model is estimated at ca. 1 Billion Euro annually.

Stay tuned for updates.


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Tuesday, 19 June 2018

Cash in The Attic - Rooftop Developments in Berlin


The Urban Land Institute Leader Summit 2018 in Frankfurt in May touched on the subject of repurposing roof space in Berlin. Be it your classic attic rooftop development or installing completely new units on top of existing buildings:

In Brief: Repurposing Rooftop Space as Values Climb in Berlin
With property in high demand in Berlin—it had the largest year-over-year real estate price increase of any city in the world last year—it makes more sense than ever to look up for new opportunities. A number of developers have found success (or are hoping for a top return) from add-on projects atop existing structures in Germany’s capital.
For the full article and video: https://urbanland.uli.org/development-business/brief-repurposing-rooftop-space-values-climb-berlin/


This is especially interesting in "Mileuschutz" protected areas as there are no "luxury" limitations for the new apartments and the rent is not limited. You just cannot integrate existing apartments into the development. For more information on "Milieuschutz" see The Can Do and Can't Do Renovating Apartments in Certain Areas of Berlin in this blog.


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Thursday, 14 June 2018

IBB Housing Market Report 2017 for the Berlin and Greater Berlin region

The annual IBB Housing Market Report has a different angle at the market situation than the commercial reports produced by big property agents and banks. Here is how they characterise themselves:
"IBB is the business development bank of the Federal Land of Berlin. With its business support, it actively contributes towards developing Berlin as a hub for business and industry. Our staff working in housing and real estate promotion are the people to contact for all issues related to real-estate financing."
Their viewpoint is policy based and not biased to talking prices up for business purposes (also available in this blog). The main report is in German and a volume of 121 pages with very detailed data and information. There is an 8 page summary available with all key findings of the report addressing these topics:


Selected Data at a glance


  • Economic factors
  • Housing demand
  • Housing supply
  • Rents and housing market
  • More detailed data available in the German version of the full report

General situation and important trends


  • Berlin’s economy – growth once again above the national average
  • Trend in demand
  • Trend in supply
  • Market for detached and semi-detached homes
  • Market for freehold apartments
  • Market for rented apartments
  • Key topic: The “Berlin and greater Berlin” housing market region

Downloads:





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Monday, 11 June 2018

Expiring Energy Certificate (Energieausweis) can be very costly, even when renting out or selling only one apartment

Renting or selling an apartment or apartment block requires the presentation of a valid Energy Certificate at the time of viewing. Even an ad for the rental or sale requires certain information contained in the certificate. Otherwise fines and / or libel suits could follow.
If your building in Germany was completed after October 1, 2007 it was required to have an up-to-date Energy Certificate. These certificates are valid for 10 years and start running out this year. If the building is dated before 1966, Energy Certificates were required since January 2009, running out next year.

Von Eigentum vom Autor - Eigener Energiepass - Autor Dirkes1,
CC BY-SA 3.0, https://de.wikipedia.org/w/index.php?curid=2832021

There is no requirement to renew the certificate if you are not re-renting or selling. Owners associations with owners predominantly using their apartments themselves will be reluctant to spend the money for a new certificate if they personally don’t need it.

An example: You are expecting to rent your apartment in January 2019 because you know it will become vacant. This year’s owners meeting did not have a new certificate on the agenda because the property manager was not paying attention to the issue, so there is not budget item for it. Even if it is considered “normal management” which does not even need a vote, it needs to be budgeted. So a discussion with the management company and the co-owners might be advised.

As there are different types of certificates we recommend professional consultation if in doubt.


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Thursday, 7 June 2018

Why Would I Divide My Apartment Block Into Separate Units, Condos?

Yesterday's post created many responses regarding the question: Why would or should I divide my property into separate units?

At the outset I would like to stress two big words: IT DEPENDS or as we like to say "How Long Is A Piece Of String".

List of possible reasons:


  • sharing out a property between investment partners wanting to go separate ways
  • sharing out a property between heirs wanting to go separate ways
  • selling off a property in single units at a higher price per m² in single units
  • increasing value for potential buyers
  • increasing LTV for mortgaging as banks like divided properties very much
  • ...

Areas of Concern


  • Many of the angles have tax implications totally destroying the intent, for international investors possibly a double taxation issue.
  • Is your property in an area where the division might be blocked by local authorities for fear of "gentrification" or is it already in a protected area.
  • What is your investment goal?
One of the key variables in deciding on a strategy for your property is the time horizon you have set for yourselves. If you are looking for the long game, blocked areas are still feasible for a division, as long as you don't plan to sell within the next 7 years. So one investor's concern is no problem to the next.

One item everybody shares in this process is the cost as it does not depend on the intent, this is what yesterday's post was about. Developing a strategy for your property or portfolio based on the intentions of the owner(s) and the individual properties is one of the specialties required. So the main question is:

How Long Is A Piece Of String?

Which summarizes strategy if not approached deliberately. Are you an investor wanting annual income from your investment or are you investing in value gain and see what happened after 10 years? Both strategies are valid but need different approaches.

If you are interested in a cost estimate for dividing a 20 apartment "average" building have a look at yesterdays post on this block.
If you want a cost estimate for your specific situation please contact an expert.





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Tuesday, 5 June 2018

How much does it cost to split my apartment block into condos?

Many owners of apartment buildings in Germany are contemplating a title split for their property. There are various reasons why property owners might want to divide a property into separate legal units and this is not limited to apartment buildings. However, the purpose of this article is to cast a light on the steps involved and their cost based on an “average” building in an average location.

Profile of our “average” building:


  • The rental area is 1,660 m².
  • There are 20 apartments.
  • The monthly rent is 6.00 €/m² resulting in an annual rent of 115,000 €.
  • The fair market value is 115,000 € annual rent x multiplier 25 = ca 2.9 MM €
  • The gross floor space is 2,000 m² (including ca. 17% construction and traffic area).

As-Built Measurements

The single largest cost is producing exact plans and measurements if not readily available. This will mostly be the case with pre-war buildings. The first step would be checking the archives, including the local council’s archives for building permits. If plans and measurements are not available there is no way of getting around having a surveyor take every measurement of the building and drawing up new plans. There are different cost models for this type of work; a widely used one refers to the actual measured gross floor space.

Photo by Lorenzo Cafaro from Pexels

In the case of our “average” building, this could be 6.00 €/m² gross floor space = 12,000 € plus VAT = 14,280 €.
As all apartments need to be accessed by the surveyor there is a great coordination requirement with the tenants by the property manager which he might well want to charge for but this is not included in this calculation.



The next cost items are incurred in any case, independent of the origin of the plans and measurements.

Plans and Certification

A set of plans including the land surveyor plan of the plot have to be prepared according to specifically defined requirements issued by the local council. The cost for the production and submission of the application for the certification of the partition plan (ger. Abgeschlossenheitsbescheinigung) will in our example be about 2,000 €.
The charges levied by the local council for issuing the certificate for the partition plan depends on the level of complication, for our “average” building I am estimating 10 € per unit = 2,000 €.

Declaration of Division

The declaration of division (ger.Teilungserklärung) is a notarized document based on the plans as certified by the local council which also includes statutes of the owners association. It refers in most parts to the code of the Wohnungseigentumsgesetz (WEG). An English translation of the code is available here: https://www.gesetze-im-internet.de/englisch_woeigg/index.html
The draft of the declaration of division should be done by an experienced lawyer/notary in conjunction with someone knowing the strategy for the property. e.g. planned rooftop development, expansion of an existing building or a separate new building on the plot, parking lot spaces, garages etc..

The fee scale for the notary (assuming he produces the draft) is based on the fair market value of the property, in the case of our “average” building it would be ca. 6,200 € incl. VAT and sundries.
The execution of the title split in the register is also value based and would be 2,450 € in our example case.

Project Management

I strongly suggest engaging a project manager experienced in this field to manage the process if you are not in the position to confidently deliver the task yourself. Poor concepts for the declaration of division can create big problems, are costly to rectify and in some cases irreparable once only one unit is sold to an external owner. ANY change to the Declaration of Division or the statutes needs 100% votes. A new co-owner might demand payments to agree to the changes. Even if changes can still be made, it will produce further, unnecessary cost.
In the case of our “average” building the project management cost is estimated at 3,800 € incl. VAT.

Cost Summary


Notary
6,200.00
Based on value incl. VAT and sundries
Register
2,450.00
Based on value
As built measurements and plans
14,280.00
6 € per m² gross floor space
Producing split plans for the property register
2,000.00
Time fee and reproduction and submission of application at local authorities
Certified Partition Plan by local authorities
2,000.00
Ca. 100 € per unit, depending on the level of complication
Property Management for access coordination with tenants
?
Depends on contract and relationship with the property manager
Management of the project
3,800.00
Estimated 4 days at a daily rate 800.00 plus VAT
Estimated total cost
30,730.00
 With new measurements and plans

Conclusions

The cost of the conversion of your apartment block into a condo building is roughly 1 % of the value. This is not a formula for the estimation just the outcome for our “average” building but it provides an idea of scale to “plug in” your preliminary business plan. As mentioned at the outset, the motivation for the process and the timescale are central elements to the decision.
Further considerations
There are areas in big cities in Germany where title splits are blocked to prevent “gentrification”. However, this block can be avoided when the strategy for the property is long term. More information about the legal block: http://germanproperties.blogspot.com/2018/03/thinking-about-dividing-apartmentblock.html. Please contact me if you are interested in long-term strategies as the level of detail would go far beyond this article.

Glossary

Here are further terms describing the process of dividing a property into individual, legally tradeable independent units

  • declaration of division
  • declaration of apportionment and the apportionment plan
  • statement of partition
  • title split
  • Teilungserklärung (ger.)




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Friday, 1 June 2018

Leipzig is Planning to Identify 4 Areas for "Milieuschutz" - Gentrification Protection

The city of Leipzig is planning to identify four areas for protection restricting certain activities by landlords, like title split or luxury modernisation. The application of federal law  is called "Städtebauliches Erhaltungsgebiet" or "Milieuschutz". The consequences are described in detail in this article on this blog: The Can Do and Can't Do Renovating Apartments in Certain Areas of Berlin
It applies to Leipzig as well.

Von Frank Vincentz - Eigenes Werk, CC BY-SA 3.0, https://commons.wikimedia.org/w/index.php?curid=53288072


For more background information in German: http://www.lvz.de/Leipzig/Lokales/Leipzig-will-Milieuschutz-gegen-steigende-Mieten-einfuehren


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