Land use fees a fair deal?

Many housing development projects are delayed and a number of real estate companies face significant losses if the state calculates land use fees based on market land prices pursuant to Decree No. 69/2009/ND-CP dated August 13, 2009.

Is the method of calculating land use fees based on market land prices under Decree 69 a valid new method or is it contrary to the Land Law and other legislation? Duane Morris Vietnam LLC’s Huynh Vu Yen Thao and Giles Cooper examine the issue.

Pursuant to the Land Law dated November 26, 2003 issued by the National Assembly (the “Land Law”), the “land price” is an amount charged for a given parcel of land as stipulated by the state or agreed upon in private land use rights transactions.

A land price is arrived at via (i) determination by a provincial/municipal people’s committee; (ii) auction or tendering of land use rights or projects using land and (iii) agreement by land users and relevant persons when transferring, leasing, subleasing land use rights or contributing capital in the form of land use rights (Articles 4.23 and 55 of the Land Law).

As such, essentially two different types of land prices simultaneously exist (i) stipulated land prices provided by the state and (ii) market land prices agreed between parties to a relevant transaction.

Stipulated land prices set by the state are announced by relevant people’s committees on January 1 of each year (Article 56.4 of the Land Law). Such stipulated land prices are used as the basis for calculation of land use fees and land rental when an investor is allocated land by the state or leases land from the state without going through any bidding/auction procedures for land or projects using land.

Article 2.1 of Decree No. 188/2004/ND-CP dated November 16, 2004 regarding method of evaluation of land prices and price framework for different types of land as amended and supplemented by Decree No. 123/2007/ND-CP dated July 27, 2007 (“Decree 188”) also appears to provide clearly that land prices determined by the provincial/municipal people’s committee are to be used as the basis for calculation of land use fees and land rentals when land is allocated or leased without going through any bidding/auction procedures for land or projects using land.

For each type of land in urban and rural areas as classified in Article 13 of the Land Law, the government provides minimum and maximum land prices. For instance, in respect of urban residential land in special urban areas such as Hanoi and Ho Chi Minh City, the minimum land price currently provided by the government is VND1,500,000/m2, and the maximum is VND67,500,000/m2.

Then, on January 1 each year, based on the government’s land price framework and actual status of land transactions in respective localities, people’s committees issue a table of prices for specific types of land which may be no more than 20 per cent above the maximum land price and no less than 20 per cent below the minimum land price provided for such type of land by the government (Article 6.2 of Decree 188).

To illustrate this, we can look at an example of the Ho Chi Minh City People’s Committee which issued Decision No. 102/2009/QD-UBND on December 24, 2009 promulgating regulations on prices of different types of land in Ho Chi Minh City. Land in three streets in the heart of the city (Dong Khoi, Le Loi and Nguyen Hue in District 1) are allocated the highest possible land price, 120 per cent of the maximum land price provided by the government (i.e. VND81,000,000/m2).

Against this backdrop, Decree 69 took effect on October 1, 2009 providing new provisions on stipulated land prices. It provides that stipulated land prices are now not applicable for calculation of land use fees in all circumstances.

Specifically, pursuant to Article 11.1 of Decree 69, when the state allocates land with payable land use fees without going through bidding/auction process, leases land, or approves compensation/relocation plans for withdrawal of land by the state, and the stipulated land price provided by the relevant provincial/municipal people’s committee at the time of such land allocation, lease, withdrawal is not close to the “actual price for transfer of land use rights in the market in normal conditions” (i.e. the market land price), then the provincial/municipal people’s committee may base on such actual price for transfer of land use rights in the market for re-determination of the stipulated land price.

Land prices that are re-determined in accordance with this new regulation are not limited by the rules on minimum and maximum changes to the government’s land price framework stipulated under Decree 188 (Article 11.2 of Decree 69). In effect, this appears to give people’s committees an open-ended discretionary right to override the provisions on minimum and maximum land prices set out in Decree 88 and invalidate stipulated land prices previously issued by the people’s committee under the Land Law.

Arguably, such regulation is not brand new. Going back to Decree No. 198/2004/ND-CP dated December 3, 2004 of the government regarding collection of land use fees as amended and supplemented by Decree No. 17/2006/ND-CP dated January 27, 2006 (“Decree 198”), “land price for calculation of collection of land use fee” is defined as land price subject to the land use purpose of the allocated land as stipulated and announced by the provincial/municipal people’s committee.

However, if at the time of land allocation, such price is not close to the actual price for transfer of land use right in the market in normal conditions, (analogous to the market land price), then the provincial/municipal people’s committee may determine the land price accordingly.

Nevertheless, to date, provincial/municipal people’s committees have tended towards still basing on land prices issued at the beginning of each year for calculation of land use fees. With Decree 69 being more express on this issue, it opens the door further to the risk of opaque land pricing mechanisms and thus uncertainty for investors, especially those in project planning stages.

How does the new regulation on calculation of land use fees affect residential housing investors and developers?

In reality, residential housing investors and developers have little choice but to base on the stipulated land prices issued by the provincial/municipal people’s committee at the beginning of each year to estimate their investment costs, and decide on house sales prices upon calculation of all investment costs including land compensation and clearance costs, construction costs, land use fees or land rental payable to the state and marketing and advertisement costs.

Problems will occur where investors/developers cannot know their costs in advance as they cannot be assured of the actual land use fees or land rentals payable until such land is actually allocated or leased and the relevant people’s committee has, or has not, exercised its discretion to re-adjust the price according to market values. Such process will involve a professional price evaluator providing a land evaluation for a given parcel of land, and the Department of Finance considering such land evaluation and calculating the proposed land use fee for the relevant provincial/municipal people’s committee’s final approval.

A number of residential housing investors and developers have complained vocally that their housing projects have been delayed due to the land price determination process becoming too complicated and uncertain. Furthermore, land use fees calculated in accordance with Decree 69 might be, if the relevant provincial/municipal people’s committee elects to re-adjust, much higher than that calculated in accordance with the previous legislation (barring Decree 198) based on the stipulated land prices set by the provincial/municipal People’s Committee at the beginning of each year, which is normally less than 50 per cent of the actual market land price.

A clear and present consequence of the discretionary right to re-adjust the basis of calculation of land use fees is that the total investment costs for housing projects will increase and, as a result, house sales prices will also increase.

The apparent legislative green light to such new method of calculation of land use fees is already causing troubles for housing developers. A well-known local real estate company is reportedly in danger of losing its foreign partner in a large urban zone development project, as the two parties had already agreed on the investment costs for the project based on the stipulated land prices. If the land use fees payable to the state will now be re-adjusted, the feasibility of the entire project is understood to be jeopardised.

Other developers have complained that the new method of calculation of land use fees based on market land price will result in developers electing to proceed with smaller-scale projects than they otherwise might. It is particularly expected that the change might threaten investments in large new urban areas.

Others have pointed out that if the re-adjusted fees are payable (and only knowable) at the time such fees or rent is due, it may potentially take into account infrastructure already built on the land by the developer immediately following completion of land compensation and clearance.

Some property developers will face even more serious difficulties if they have already completed land compensation and clearance and sold houses, and must now pay land use fees higher than those calculated at the time of entering into house sale and purchase agreements with the buyers. This can happen where land use fees are not paid at the commencement of a project, for example where a foreign investor develops a project on leased land and subsequently sells parcels to domestic owners.

A simpler and more certain method of calculating land use fees and rental must be adopted to mitigate complications and risks posed by calculation of land use fees based on market land prices determined through three discrete steps (evaluation by a professional evaluator, consideration of Department of Finance, and final approval of the relevant People’s Committee).

An appropriate middle ground would be to continue to base on the stipulated land prices provided by the provincial/municipal People’s Committee at the beginning of each year but permit the People’s Committees to stipulate such land prices based on the actual price for transfer of land use right in the market in normal conditions from the outset.

In doing so, the 20 per cent cap and collar limits on the maximum land prices provided by the government ought to be abolished. In addition, full and proper consideration must be given to those developers who already completed land clearance and compensation procedures prior to the effective date of Decree 69 to ensure that they pay reasonable land use fees.

Duane Morris Vietnam LLC is a full-service US law firm operating in Hanoi and Ho Chi Minh City. This article is provided as information only and should not be relied on as legal advice. For more information, please contact: Mr. Giles Cooper, Partner, at GTCooper@duanemorris.com or Ms. Huynh Vu Yen Thao, Senior Associate, at tvyhuynh@duanemorris.com

Tags: Vietnam land use fees, vietnam real estate market

Posted by VBN on Jul 26 2010. Filed under Real Estate. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry