BloggeRS: Eva Lai ‘Proposal for new Chinese investment rules – Is UK property investment still attractive?’

Reports suggest that China proposes to impose greater monitoring of large outbound investments and potentially block state-owned enterprises from purchasing overseas property with a value of more than US$1bn in a single transaction. Additionally, permission may be required for the transfer of funds over US$5m. The previous threshold was US$50m. It is likely that more scrutiny will be applied to deals with more rigorous due diligence and a thorough formal approval process for any substantial investments. It is suggested that if a Chinese company has the intention to acquire projects or directly invest in overseas property, they would need to get approval from a number of different government departments which might prove to be a lengthy process.

Will Chinese investors be put off by these proposed changes? It is likely that if the proposed changes are implemented, some investors will seek returns elsewhere due to the hurdles to overcome just to get the money out of China. The lower threshold for transfer of funds might also see the system overwhelmed as the number of requests for approval could soar. In the highly competitive London market the delays caused by the additional layers of bureaucracy might see Chinese investors miss out on prime opportunities if they don’t already have funds in non-RMB currency.

Are the proposed rules a reflection of the Chinese government’s view on international investment? Politically it seems that the Chinese government continues to encourage and allow Chinese companies to ‘go global’ and diversify their holdings. The US$1bn threshold is relatively high; many Chinese outbound property deals over the last couple of years were below this limit. It may be that we see investors adapt by opting to acquire a higher number of smaller deals each below the stipulated investment amount. What is certain is that should the restrictions be imposed, Chinese investors will undoubtedly take a more cautious approach to larger transactions.

At the moment UK property investment still remain attractive because of the significant currency discount on offer. Examples of recent Chinese deals in London:

  • Shun Tak Group acquisition of 7 and 8 St James’s Square in London for a reported £245.9m;
  • Hong Kong-listed Emperor Group’s acquisition of the Ampersand building for £260m;
  • A private Chinese investor acquired 88 Wood Street for £270m;
  • AGP Group acquired 20 Moorgate for £155m;
  • Chuang’s China Investments acquired 10 Fenchurch Street for £80m;
  • Beijing Capital Development Holding offering more than £200m for 30 Crown Place in the City of London; and
  • China Life acquired the Aldgate tower for £346m.

Chinese investors will continue to invest in overseas assets but will be more selective towards deals and closely scrutinise the underlying performance of potential acquisitions.

BloggeRS: Introducing Eva Lai ‘Mastering the art of “guanxi” for Chinese outbound investments’

As many of you are aware when doing business with Chinese investors you will need to come to terms with “Guanxi” – meaning relationships or connections outside the family. This is the core of Chinese society and culture. It is important for the Chinese to get to know the person with whom they wish to conduct business before business is conducted.

I have been working with Chinese clients for several years and have acted for numerous Chinese clients ranging from individual private clients, financial institutions, corporate clients and developers. Being one of the few Chinese nationals qualified as a UK property lawyer, my background, language skills and understanding of the culture allow me to successfully establish excellent guanxi with my clients. We work closely with our Asian offices in Beijing, Shanghai and Hong Kong to provide our clients with greater accessibility and ease communication due to time difference. We are committed to providing a full service to our clients to ensure their outbound investment in the UK goes as smoothly as possible.

Reed Smith has a broad range of experience working with Chinese clients over the years which covers all aspects of real estate transactions including:

  • assisting with finding target acquisitions;
  • working on large scale development projects;
  • dealing with related financing;
  • dealing with acquisitions and disposals;
  • dealing with assets management; and
  • advising on litigation and disputes.

We are a full service law firm offering advice on all areas of law relating to our client’s investment in the UK and also globally through our international network of offices. We are experienced in managing and bridging the cultural difference with our counterparties and our clients. Our lawyers are able to communicate in Mandarin and Cantonese and explain any English law concepts and draw comparisons with Chinese local laws, where necessary, as well as professional interpreters to translate complex legal documents.

Examples of our work include:

  • Acting for one of the largest Chinese developers for its development project in London. The project involves a high profile mixed use development including almost 500 residential apartments, commercial units and a hotel;
  • Acting for a joint venture company, a Chinese developer and a French property company, on a large scale redevelopment project worth €3.1 billion;
  • Acting for a Hong Kong listed company for its acquisition of a chain of hotels in the UK; and
  • Acting for a Hong Kong company to acquire a high value property asset in the heart of London at Fitzrovia.

Supreme Court Likes Reality in Business Rates

The disputed rates in Newbigin (Valuation Officer) (Respondent) v S J & J Monk (a firm) (Appellant) relate to building works in 2012 and the question was whether the rating list could give the building a £1 nominal value or whether it had to assume a market value based in an assumption of repair.

The Judgment

In determining whether or not a commercial building which is in the course of redevelopment has to be valued for the purposes of rating as if it were still a useable office, the Supreme Court decided that the principle of reality applied. It was not displaced by the assumption that the hereditament is in a state of reasonable repair (excluding any repairs which a reasonable landlord would consider uneconomic) set out in paragraph 2(1)(b) of Schedule 6 to the Local Government Finance Act 1988.

The Supreme Court regarded as “helpful” the intervention by the Rating Surveyors’ Association and the British Property Federation that, where works were being carried out to an existing building, the correct approach was to proceed in this order:-

(i)         to determine whether a property is capable of rateable occupation at all and thus whether it is a hereditament,

(ii)        if the property is a hereditament, to determine the mode or category of occupation and then

(iii)       to consider whether the property is in a state of reasonable repair for use consistent with that mode or category. Only at this third stage should the valuation officer apply the statutory assumption of paragraph 2(1)(b) if the reality is otherwise.

In addition, the Supreme Court pointed out that there is no basis for the argument that a building can be listed as being under reconstruction only once the works have proceeded so far that it is no longer economic to restore the hereditament to its former state by means of repair.

As a result, the fact that the premises in question were undergoing reconstruction on the date of assessment should be reflected in a reduction of the rateable value of the premises in the rating list to £1.

The Facts

The facts are important as there has to be an objective assessment. All other cases will turn on their particular facts as to the condition of the building.

In this case, at the relevant date for assessing the facts and applying the assumption referred to above, the premises were vacant and the building contractors had:-

(i)        removed the majority of the ceiling tiles and the suspended ceiling grid and light fittings and also 50% of the raised floor;

(ii)       removed the cooling system and the sanitary fittings and demolished the block walls of the lavatories and stripped out the electrical wiring;

(iii)      erected and plastered plasterboard partitions to form the outline of the proposed communal lavatories and erected and plastered a partition across the floor at the east side of the premises;

(iv)      completed first fix electrical installations to the lavatory area and altered the drainage to accommodate the new location for the lavatories.

This was part of a scheme of renovation and improvement of a three storey office building (which had been occupied by tenants as a single office suite) with a view to making it more adaptable for use as either three separate suites of offices or as a single suite in order to attract replacement tenants.

What can we take away from this case?

Where a property is subject to significant building works, ratepayers may be able to seek an amendment to the rating list so that rates will not have to be paid whilst the property is being redeveloped. However, what amounts to “significant” building works will still be a question of fact and degree in each case. Intention will not be relevant.

(US) There are two New York real estate transfer tax proposals to watch in Governor Cuomo’s proposed budget

New York Governor Andrew Cuomo introduced his FY 2018 budget proposal on January 17. The proposal includes several significant revenue-raisers, including a few that could impact the New York  real estate market.

  • Income Tax – Sourcing of Gain From Sale of Interests in Entities Holding Co-op Shares – Currently, if an individual who is not a New York resident sells shares in a cooperative housing corporation that holds New York real property, any resulting gain is treated as New York-source income, subject to New York personal income tax. However, current law is unclear as to whether a similar sourcing rule applies to gain from the sale of ownership interests in other legal entities where more than 50% of the entity’s assets consist of shares in a cooperative housing corporation that owns New York real estate. As a consequence, some nonresidents planning the sale of shares in a New York co-op will first contribute the shares to an entity, such as a partnership, and then sell the interests in the entity, taking the position that the resulting gain is not New York-source income. The proposal would end this sourcing play by expanding the definition of New York real property for personal income tax purposes to include ownership interests in entities that own shares of cooperative housing corporations that own co-op units located in New York.
  •  Real Estate Transfer Tax – Elimination of Partnership “Loophole” – Under current law, New York real estate transfer tax applies to transfers of a controlling interest in certain legal entities that hold an interest in New York real property. New York Tax Law § 1401(e). This provision does not prevent property owners from conveying a less than controlling interest in New York real property free of transfer tax by first contributing the property to a legal entity, and then selling a less than 50% interest in the legal entity to the intended transferee.   The proposal would close this “loophole” by expanding the definition of “conveyance” for purposes of the transfer tax to include all transfers of interests in partnerships, limited liability companies, S corporations and certain closely held C corporations, where New York real property constitutes 50% or more of the assets of the entity.  In addition, the proposal provides that “consideration” for such a transfer would be calculated by multiplying the fair market value of the New York real property owned by the entity by the percentage ownership interest in the entity conveyed. (For example, if 10% of the ownership interests in a partnership are transferred and the partnership owns New York real property with a fair market value of $1 million, under the proposal, the transfer would be treated as a conveyance subject to transfer tax for a consideration of $100,000.)
  • Real Estate Transfer Tax – Addition of General Anti-Avoidance Rule to “Mansion Tax” – Finally, the proposal would make it harder to avoid the 1% “mansion tax” imposed on transfers of residential real property with a consideration of $1 million or more, by authorizing the Department of Taxation and Finance (the “Department”) to impose the mansion tax on any conveyance “structured in a manner intended to avoid or evade the tax”.   For example, under current law, if a developer constructing a new residential building were to enter into separate contracts conveying the vacant land and the building, the developer could claim that that the mansion tax did not apply to the land transfer, because the land was vacant at the time of the conveyance. The legislation would authorize the Department to treat both contracts as conveyances to the mansion tax if the purposes of the separation of the contracts was to avoid or evade the tax.

We will provide additional updates in the blog as the budget proposal progresses.

Today’s guest blogger, Michael Jacobs is a member of Reed Smith’s State Tax Practice Group,  composed of lawyers across seven offices nationwide. The practice focuses on state and local audit defense and refund appeals (from the administrative level through the appellate courts), as well as planning and transactional matters involving income, franchise, unclaimed property, sales and use, and property tax issues.

 

(US) California Real Estate Rules to Watch in 2017

Welcome to 2017 and the first posting of the New Year on realestatelegalupdate.com.

In a Law360.com article published on January 2nd titled “California Real Estate Legislation and Regs to Watch in 2017,” Andrew McIntyre of Law360 addresses the challenges facing the California real estate market in the new year. Simon Adams of Reed Smith is quoted extensively in the article.

Here are some of the items on the 2017 legislative agenda:

  • Marijuana
  • Affordable Housing
  • Development and the California Environmental Quality Act (CEQA)
  • Property Taxes

Simon Adams  commented on the passage of Proposition 64, allowing the use of recreational marijuana. Several real estate companies are in the process of setting up dispensaries, but they still face concerns of state and federal regulations. “Landlords will continue to remain nervous about knowingly allowing such businesses in to their spaces.,” said Simon. “Even with lease covenants to indemnify the landlord for damages the potential conflict between the state laws and federal prosecution laws will create some reservation if the new presidential administration were to start to prosecute and confiscate buildings from owners.”

As with past years, California struggles with affordable housing. A push was made in 2016 to address the issue with little support in the state legislature. The issue will be again raised in 2017 through State Bill 35.

The California Environmental Quality Act (CEQA) has long been considered a focus for reform over the years, seen by developers as a major detriment to projects, adding years to a schedule. “CEQA will come under significant attack in 2017,” says Simon Adams. “The new administration in the White House is certain to be developer-friendly, seeing replacement of buildings on brown field sites as a way to create jobs, and the historic delays caused to such developments by CEQA are going to be a focus for many that object to the chilling effect it has had on progressing all forms of improvements,” he added.

Property taxes have been kept low since the passage of Proposition 13 in 1978. Now, there are efforts to consider a ‘split-roll’ proposal, allowing property taxes to rise only on commercial properties, while maintaining assessed values on residence to a 2% annual ceiling. Adams, though, doesn’t expect to see change on Prop. 13 in 2017, in part due to current economic conditions in the state. “The economy of California continues to do well … which will continue meaning that there will be no appetite for legislators to look for funding and address potential changes to adjust this taxation. Many home owners are predicted to be paying less for housing as interest rates rise,” Adams said.

The full text of the Law360 article can be found here.

The Modern Slavery Act 2015: Effects on the Property Industry one year on

Modern Slavery is broadly a term covering slavery, forced labour, servitude and human trafficking. It has been described as “the great human rights issue of our time” by Theresa May.

The Modern Slavery Act 2015 was introduced as part of an effort to tackle the issue by imposing a requirement on every large business carrying on any part of its business in the UK (including companies registered abroad but which engage in commercial activities in the UK) having a total annual turnover of £36m or more to produce a slavery and human trafficking statement for each financial year of the organisation. ‘Turnover’ means the turnover of that organisation and the turnover of any of its subsidiaries. Groups can make one statement but may have to post this on several websites depending on how complex their business is.

The Modern Slavery Act statements must set out what companies are doing to identify and mitigate risks of modern slavery taking place within their company and in their supply chains.

For more details on the corporate reporting requirements under the Modern Slavery Act, please refer to the October 2015 blog posted by our Employment team.

A large number of Real Estate companies are affected by the reporting requirements:

  • Investors using companies incorporated outside the UK that own UK investment properties having a turnover of at least £36 million will have to comply (taking subsidiaries into account for the turnover calculation).
  • Landlords and their asset managers need to think which of their contracts (or sub-contracts) might be sensitive and the examples we can think of will be cleaning companies or the employment of agency staff.
  • Even where a managing agent does not itself have an obligation to report because of the size of its business, it may receive requests for information regarding its anti-slavery practices.
  • Tenants must also be aware that landlords form part of their supply chains on the basis that landlords supply them with services so may require information each year and may request ongoing compliance covenants in their leases
  • There is a lot of publicity already about the need for the construction sector to be aware of the strong risks of exploitation of labour which exist in their supply chains.

A year has passed since the Act came into force and the reporting has been criticised in some areas for not going far enough towards tackling modern slavery.

Our Employment team’s most recent post reports that companies tended to explain their structures and policies covering modern slavery well, but failed to adequately describe the practical measures being taken to assess their effectiveness. Examples of statements published by Real Estate companies corroborate this.

It was also found that contractor relationships are a key omission from statements. For the Real Estate sector, and particularly in the context of the contractor and sub-contractor relationships mentioned above, these clearly will be key points to be addressed.

The negative conclusions coming from the research into these initial company reports are not unexpected given that most companies are still attempting to find the most effective ways of reporting and many lack sufficient resources to conduct due diligence and to support supplier improvements to tackle the issue.

Be aware that changes to the legislation to make it stricter are already pending and Real Estate companies will need to ensure that they are adequately aware of their increasing obligations.

 

 

 

 

(US) With new laws, it just got easier to demolish blighted properties in Pennsylvania

Blighted residential and commercial properties are a major impediment to rehabilitation and redevelopment efforts in cities and towns throughout Pennsylvania. However, late in the 2016 legislative term, the Pennsylvania House and Senate enacted new laws that will change the rehabilitation and redevelopment landscape.

On November 4th, 2016 Governor Tom Wolf signed into law Senate Bill 486, amending the Recorder of Deeds Fee Law. The bill, introduced by Senator David Argall (R, West Chester), is a response to the difficulty many Pennsylvania counties face in dealing with blighted properties. These troubled buildings often affect the value of surrounding properties and, in some instances, are health and safety hazards.

The new law authorizes each county to charge a fee, up to fifteen dollars ($15), for each deed and mortgage recorded. The funds generated by this fee will be used solely for the demolition of blighted properties within the county where the deed and mortgage was recorded.

Many properties are beyond repair, requiring total removal of the building before the property can be repurposed. Advocates of this legislation believe that lack of funding is the central obstacle to rehabilitating blighted properties and neighborhoods. This law will substantially increase the funding available for demolition. The PA Department of Revenue estimates that the fees would have generated $14 million in 2013 and almost $12 million last year.[1]

Critics of the bill believe that homeowners and homebuyers should not be the primary source of funds for demolishing these blighted properties, but rather the entire affected community should contribute to blight remediation.[2] Some counties impose an even greater burden on homeowners and buyers. For example, the city of Reading, in Berks County, applies a four percent (4%) local realty transfer tax, in addition to the one percent (1%) state realty transfer tax.

Senate Bill 486 was the second of two bills signed into law by the Governor on consecutive days that address the problem of blighted properties. On November 3rd, Governor Wolf also signed House Bill 1437, which amended the act of December 20, 2000 (P.L.724, No.99), known as the Municipal Code and Ordinance Compliance Act, giving property owners only one year after the purchase date to remedy code violations. The prior law gave property owners eighteen (18) months. Failure to make the necessary changes could result in the demolition of the property that is in violation of the code at the purchaser’s expense.

Of course, these changes are not a complete cure to the difficulties surrounding the rehabilitation of blighted properties. Ownership determination, liens and overall community redevelopment planning still present significant challenges in the rehabilitation and redevelopment arena. Still, both bills are positive steps in efforts to correct years of delays in the process of redeveloping blighted homes and neighborhoods.

No Pennsylvania county has yet to impose the recording fee authorized by Senate Bill 486. Look for a follow-up blog as counties begin to adopt this fee.

 

[1] Emily Previti, Pa. Counties on Track to get Millions for Blight Demolition, Keystone Crossroads (Nov. 1, 2016), http://crossroads.newsworks.org/index.php/local/keystone-crossroads/98412-pa-counties-on-track-to-get-100m-for-blight-demolition.

[2] Kim Shindle, PAR Urges Legislators to Stop Adding Fees to Real Estate Transaction, JustListed PA Association of Realtors (Aug. 5, 2016),  https://www.parjustlisted.com/par-urges-legislators-stop-adding-fees-real-estate-transaction/.

So is this the time for developers to think big and build big?

On Monday 28 November 2016 the City of London’s Planning and Transport Committee approved (19 votes in favour, 2 against) a resolution to grant permission for the development known as 1 Undershaft which at 73 storeys will be the tallest building in the City of London (that is 304.94m or a little over 1,000ft for the imperial brigade).

So is this the time for developers to think big and build big?

The proposed development is (self-evidently) a “tall building”. It will deliver a gross floor area of 154,100m2 (GEA), including 131,937m2 of office space and a 2,930m2 public viewing gallery on Levels 71 and 72.  The Undershaft scheme appears to have many similarities with another recently debated “tall building”, the Pinnacle.  Like the Pinnacle, if the benefits of a scheme and the delivery of objectives in line with planning policy guidelines can be demonstrated, planning permission is more likely to follow.  See our previous post on the Pinnacle.

The City of London commented that “the proposal accords to the development plan as a whole”. Further 1 Undershaft will deliver 7% of the additional office floor space sought in the London Local Plan, which aims to increase City employment by 35.6% by 2036, and is also in line with “strategic objective 1 in The City of London Local Plan 2015” which is “to maintain the City’s position as the world’s leading international financial and business centre”.  1 Undershaft may eventually house up to 10,000 workers.

This Decision could further be seen as a rubber stamping of the Government’s comments that “London is open for business”. Chris Hayward, the chairman of the City Planning Committee, said: “This development shows the high levels of investor confidence in London’s status as a global city following our decision to leave the European Union.”

We now expect a period of negotiation to begin between the landowner/developer and affected neighbouring land owners whose rights to light may be infringed by the development of 1 Undershaft. These discussions will be set against the new powers that can be used to extinguish neighbours’ rights to light under s203 of the Housing and Planning Act 2016.  When the Pinnacle was in difficulties with rights to light the City used s237 Town & Country Planning Act powers to extinguish such rights.

We therefore wait to see how this matter unfolds and whether this may be a “test case” for the new legislation.

Remember, developers, if you can think big and justify that the benefits of the scheme outweigh the burdens and rights deprived, the sky might just be the limit…

(UK) Welsh Residential Private Rented Sector – Key New Regulations in Force

As we mentioned in an earlier post Regulations for dealing with private rented housing in Wales are increasing. From 23 November 2016 all properties need to be registered and anybody undertaking, letting or management work has to go further and be licensed.

FOR FURTHER DETAILS CONTINUE READING

1. Registration by all landlords

  • Why register? The Welsh Government is creating a centralised comprehensive register of the private rented sector. All properties must be registered.
  • Who has to register? All landlords operating in Wales have been required registered with the relevant authority for nearly a year.
  • What is the deadline for registration? The final deadline is 23 November 2016.
  • How do you register? Cardiff County Council administers the registration process for the whole of Wales through a new service called ‘Rent Smart Wales’. Applications to register can be made online.
  • How long will the registration last? 5 years and then it will need to be renewed. There is an ongoing requirement to keep the information on the register up to date, so if contact details or personal circumstances change the register must be updated.

2. Licensing – landlords and agents

  • Why? The intention behind the prosed licensing system is that it will enable landlords and agents who undertake letting and management tasks to be better informed of their obligations in view of the compulsory training they will be required to undertake in order to become licensed.
  • Who? All landlords and agents who carry out defined letting and management activities/work at a rental property in Wales are required to be licensed with the relevant licensing authority. To get a licence the applicants and their staff will be required to undertake approved training and to adhere to a Code of Practice.
  • What if the landlord does not carry out letting and management activities? If a landlord decides not to carry out any letting or management activities at its properties because it employs an agent to do this work, it will not need a licence but the management or lettings activities at those properties must then only be carried out by an agent who is licensed. Regardless of this however that landlord must still register itself and its properties with Rent Smart Wales. The obligations to register and be licensed are entirely separate.
  • What if the landlord shares the letting and management activities with an agent? Where letting/management activities are shared with a licensed agent, then that landlord must also be licensed.
  • How to apply for a licence? Cardiff County Council administers the licensing process. The applicant must be deemed ‘fit and proper’ (which defined in section 20 of the Act) and be appropriately trained before a licence will be granted. There is also an ongoing requirement on a licence holder to keep the information held by the licensing authority up to date similar to the register.
  • Will there be conditions on the licence? – Cardiff County Council will place conditions on the licence, one of which will be the requirement that the licence holder must comply with a Welsh Minister approved Code of Practice setting out letting and management standards in relation to rental properties. Other conditions may also be imposed as the licensing authority may feel appropriate
  • Can the licences be revoked? Licences can be revoked if a licence holder breaches a licence condition or is no longer ‘fit and proper’.
  • How long will the licence remain valid? Again 5 years after which date it will need to be renewed.      
  • Do I need a licence for each property? No. The licences are awarded to the person who applies. Therefore if a landlord has 20 properties they only need obtain a single licence. Similarly, a person acting on behalf of a landlord will apply for a single licence regardless of how many properties they act in relation to.

3. What Happens if these Regulations are Ignored

There are a range of penalties that can be enforced either by the licensing authority or a local authority should someone not comply with the provisions. These include Rent Repayment Orders, Fixed Penalty Notices, Rent Stopping Orders and summary convictions (with fines).

Investors with portfolios should check compliance by their professional agents.

 

 

(US) A parking garage today, but what about tomorrow?

In a recent Law360.com article written by Andrew McIntyre, the author addresses three issues in converting parking to accommodate the growing need for E-commerce delivery space and the future effects of driverless vehicles:

  • Zoning
  • Market unpredictability
  • Cost

The article discusses the efforts some developers are making to build flexibility into today’s parking space construction to allow repurposing of these assets in the future.

One of the hurdles facing developers are zoning codes that are centered on today’s parking requirements. Zoning regulations often trail changing market trends by years, if not decades. “Lots of zoning ordinances require more parking than is necessary,” says Dusty Elias Kirk of Reed Smith’s Global Real Estate Practice Group. “Zoning ordinances have not changed…They haven’t gotten there yet.”

A complete discussion of the three issues can be found here.

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