Saturday, April 18, 2009

Condo sub-division without tears

A look at the pitfalls and tax considerations when slicing and dicing apartment space

THE Urban Redevelopment Authority has said that when processing applications to sub-divide apartments, it is guided by whether sub-division will change the character of a development and diminish the amenities of other people living there, such as families.

The authority was responding to a follow-up report in The Business Times after the recent case of Grangeford condo, where a master tenant sub-divided 140 apartments into 600 smaller units with a layout resembling a dormitory.

URA told BT earlier this week this is not allowed because the site is zoned for residential use only, and that it and other government agencies will take enforcement action against any party responsible for any unauthorised use and for not complying with requirements.

Some industry observers say that owners of apartments in other developments have carried out similar sub-divisions, though on a much smaller scale than at Grangeford.

URA outlined three scenarios.

In the first scenario, which it has encountered over the past two to three years, there have been a few cases where a handful of apartments were converted into a larger number of mini-apartments.
'These are essentially smaller, but independent residential apartments with self-contained facilities like kitchen, living room and bathroom,' a URA spokeswoman said.

'Where the conversions were able to comply with planning requirements, URA followed up with the owners and they obtained approval from URA.

'For those that were not able to comply with planning and other technical requirements, URA followed up and took enforcement action.'

Such conversions require planning approval from URA and consent from the development's management corporation.

In the second scenario, apartments are split into a dormitory-style layout. The split units are essentially bedrooms, without their own kitchen, toilet or living room.

URA approval is needed for a change of use from residential to non-residential use - for instance dormitory or boarding house use. As a rule of thumb, URA will not approve such a conversion in a residential area, the spokeswoman said.

BT quizzed URA about a third scenario, in which an apartment is not sub-divided but is sub-let to several unrelated tenants. For example, several students might join forces to rent an apartment.

The URA spokeswoman said that sub-letting for residential use on a unit basis is allowed, but URA may have concerns if this is done on a large scale.

'It goes back to the fundamental considerations of whether such a sub-letting exercise will change the character of the development or cause disamenities to, say, families living there,' the spokeswoman explained.

Apartment sub-division is becoming an important topic, especially for developers who bought entire residential projects in Singapore's prime districts through collective sales during the property bull-run from 2006 to 2008 and have had to defer redeveloping these properties because of the massive slide in the value of high-end homes.

Developers also face the burden of footing the property tax bill, with the annual value (AV) of the property based on 5 per cent of the freehold market value of the land.

Following representations by developers last year, the Inland Revenue Authority of Singapore (IRAS) agreed in September to a different basis for assessing AV for en-bloc properties where developers have changed their intention by renting out apartments instead of redeveloping the site.

The property tax for such properties will be based on the estimated total annual rent that can be fetched by all the apartments in the development - provided at least 25 per cent of the apartments have been leased on tenancies of at least a year, and on an arm's length basis, to parties not related to the developer. Also, there must not be any provision in these tenancy agreements to evict tenants within the tenancy period.

Let's take the case of Grangeford. Assuming the 193 apartments fetch an average monthly rent of $4,000, the AV would be $9.3 million ($4,000 x 12 months x 193). Based on the 10 per cent property tax rate, the property tax bill would be $930,000.

This is much lower than if Grangeford's AV was assessed at 5 per cent of the estimated freehold market value of the land.

The site had a remaining lease of 66 years when Overseas Union Enterprise bought it in 2007 for $625 million. Let's assume the freehold value of the site today is about $520 million, taking into account lower property values. The AV would be 5 per cent of this, or $26 million, and at 10 per cent property tax rate, OUE's tax bill would be $2.6 million.

Given the credit crunch, developers are looking for creative ways to conserve cash. Hence, the advent of a master tenant willing to lease all or many apartments in an en-bloc development bought during better times is welcome news - as it allows the developer to qualify for the more favourable
AV formula if at least a quarter of the apartments are leased to the master tenant for minimum period of one year.

Given the tough market for the high-end residential sector, it would be an uphill battle for a developer to try to find tenants for individual apartments. Also, some tenants may want short-term leases of a few months, so that would not comply with the condition of a minimum one-year lease set by IRAS. A master tenant willing to sign a longer lease of one or two years solves this problem for developers.

These were probably some of the considerations that OUE weighed for Grangeford when it signed a two-year master lease with Ideal Accommodation for 170 apartments with effect from Jan 1, 2009. Of these 170 apartments, Ideal split 140 apartments into a total of 600 units. In the process, most of the units have been left with unventilated corridors and without access to rubbish chutes. The former kitchen and living room areas have been boarded up to create new units. Tenants of some units have to share toilets.

'Once a developer brings in a master tenant, there is the possibility that it may lose some control of the environment and ambience,' says DTZ executive director Ong Choon Fah.

'When the environment becomes different - a lot of en bloc properties that developers can't develop now are in prime locations and very desirable residential areas - it may create social issues. It's not just as far as families in apartments in the developments are concerned, but also families living in the surrounding area who may have the perception that the neighbourhood is no longer the same because of transient neighbours.'

Source: Business Times, 18 April 2009

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