We review the imminent law change from a residential property developers’ viewpoint.
Sale of residential land in NZ to overseas persons
From 22 October 2018, the sale of residential land in New Zealand to an overseas person will require consent from the Overseas Investment Office unless an exemption applies. This blog is intended as a short summary only of the considerations for developers. For some, it will identify that sales to overseas buyers will not be an option post 22 October 2018. For others, it will mean there needs to be more detailed consideration of the need for an exemption certificate.
(This blog is not intended to explain the consent process for purchasers or define who an overseas person actually is. That is in a separate blog, coming next).
Developers who are currently completing the sell down of their residential units would have seen in the media discussion about the Overseas Investment Amendment Act 2018 (the OIA Amendment). Reports often refer to the fact that sales to overseas persons in large-scale developments will be permitted where they are developing 20 or more units. There is a bit more to it than that. Developers need to make sure they are across the detail. If the success of the development depends on the buyer pool including overseas persons, this is especially true.
Existing presales (even if conditional) will not be affected by the OIA Amendment and consent will not be required. That should apply right up to the date of the OIA Amendment commencing on 22 October 2018. There is a mechanism for parts of the new law to be brought in early which might mean an earlier date applies, but there does not seem to be any plan to do so at the moment.
Sales after 22 October 2018
Once the OIA Amendment commences, an overseas person can only buy residential land in NZ with consent, or if an exemption applies. We focus here on the exemptions for residential property developers to use, rather than looking at exemptions open to purchasers.
Dwellings in large apartment buildings purchased off the plans
Residential property developers may be able to apply for an exemption certificate. This will enable them to sell a percentage of the development to an overseas person. Without an exemption certificate from the Overseas Investment Office (OIO), sales to overseas persons are not permitted. Developers cannot assume that if they are developing 20 or more units then sales are permitted.
A transitional exemption certificate can be applied for now, before the OI Amendment commences. The period to obtain this transitional exemption runs only for 6 months, until 21 February 2019. The advantage of the transitional exemption certificate is it can apply to 100% of the presales and buyers can live in the units.
Once the OIA Amendment commences on 22 October 2018, it will be possible for developers to apply for an exemption certificate. This exemption certificate applies to a maximum of 60% of the units (confirmed in Regulations that support the OIA Amendment dated 6 September 2018).
To qualify for either exemption certificate:
- land must be residential and not otherwise sensitive land under the OI Act;
- land must be being used or intended to be used for multi-storey buildings of at least 20 residential dwellings.
For the transitional exemption certificate:
- ministers must be satisfied that at least 20 new residential dwellings will be or are likely to be completed within 5 years and;
- pre-sales must be entered into by the parties, in good faith in the ordinary course of business, for the acquisition of one or more of the new dwellings before the expiry of the five-year period.
Exemption certificates work only for a small number of developments
Exemption certificates are not an option for developers who are merely subdividing a greenfield or brownfield site and not building. They are also not an option for buildings that are not multi-storey e.g. terraced dwellings. These exemption certificates will be an option only for a small number of residential property developers.
Considerations for the grant of exemption certificates:
In considering whether to grant an exemption certificate, the minister can consider factors such as:
- whether the development has resource consent, building consent and other authorisations,
- the developer’s financial strength,
- the previous activity of the developer or its associates or individuals with control regarding the use of residential land and
- the previous record of the developer or its associates or those with control in complying with consent conditions or applying for consent conditions to be varied.
The OI Office has published a fee schedule. An exemption certificate application starts at $25,000 (that excludes professional fees).
Conditions will still apply:
The overseas person who purchases off the plan relying upon an exemption certificate will be subject to conditions and monitoring, including a prohibition on occupation.
The developer might also be subject to conditions and monitoring, all as stated in the relevant exemption certificates obtained.
Other considerations for developers
- There is also an exemption for hotel units acquired and leased back for hotel use. The sale of residential land to an overseas person does not require consent if it fits within this exemption category. There must be 20 or more hotel units for this to apply. That does not limit this exemption to high rise, so it is available for different types of development. Purchasers cannot occupy, reserve or use the unit for more than 30 days in each year. For the rest of the year, the unit must be managed and used for the general purposes of operating the hotel. When the lease back ends the purchaser must either grant a further lease or sell. A “hotel” is defined as premises used for temporary lodging for the public. Residential property developers might be interested in exploring this option further as this investment class could be appealing to overseas persons.
- Presale agreements routinely contemplate that NZ residency is confirmed by developer’s lawyers so as to meet bank criteria. We anticipate bank loan offers will quickly be updated to require presales to meet OIA Amendment requirements. Presale contracts might need updating prior to 22 October 2018 to ensure sales after this date remain bankable.
- Agents will also need to consider how they will manage these requirements, given they are on the front line. It will be simple enough if a purchaser is an individual with a NZ passport (or fits within other exemptions, for example, is an Australian). NZ residency is more complicated. For example, a resident class visa in a passport will not suffice. Company and trust purchasers will also require more assessment.
None of this makes it easy for residential property developers but this is of course nothing new.