ACQUISITION OF VACANT
LANDED PROPERTIES
[Criteria & Critical Aspects]
1.0 Introduction
1.1 Acquisition of vacant landed properties is a major investment decision made by property developers, companies, organizations and in some cases by individuals who may want to acquire lands to construct their own individually designed residential, commercial, industrial or factory buildings. The costs can be in tens or hundreds of millions of dollars. Thus the acquirer should study all aspects in great detail prior to any legal commitment to acquire any vacant lands especially if the vacant lands acquisition is to be financed through borrowings. A wrong decision can result in ruin for individuals if the acquisition is financed by borrowings as it is his personal liability. However wrong decisions made on behalf of companies, organizations, or Government agencies could result in major losses that would be borne by the shareholders and taxpayers respectively without adversely affecting the personal finances of the decision makers responsible for the losses.
1.2 Acquisition of vacant lands can be by way of purchase, barter, exchange, auction, joint-venture, illegal occupation or through fraudulent means. However, in this article reference will be made to vacant lands acquired through legal means.
1.3 The established companies normally have the relevant expertise or resources and financial means to acquire relevant expertise to make informed decisions pertaining to their acquisitions. However individuals are at greater risk as they are subject to several restrictions and are largely dependent on others for advice and expertise to ensure that the vacant lands to be acquired comply with the objectives of their acquisition.
2.0 Primary Aspects for Consideration
2.1 This article is designed to provide some important relevant criteria and critical aspects of which prospective acquirers should be aware of always and be borne in mind in any acquisition of such vacant lands. They should ask relevant questions and obtain complete answers which should be understood clearly and concisely including their financial and legal implications. The objective and purpose of the above aspects is explained in the following paragraphs.
[A] Type of Vacant Land
2.2 Acquirers should decide in advance the ultimate usage of the vacant land such as construction of individually custom designed residential buildings, or building such as commercial, industrial, business or plantation, agriculture or recreational, etc. Another aspect to be considered is whether the building to be constructed is for own usage, for development or investment; each type has financial implications that would differ.
2.3 It is common for small business owners to acquire vacant lands to be used to construct multi-storey buildings that serve multiple purposes where the upper floor is used for residential purpose, another floor used as office/store/staff residence and the ground floor used as a business such as restaurant, mini-market, laundries, hair dressing salons or other small business or parts rented out to obtain returns.
2.4 Large organizations normally acquire vacant lands that are used to construct custom designed buildings that could be totally for own usage or part of the constructed building to be rented out until needed for own use. Property developers and construction companies acquire vacant lands to develop them as townships or other commercial/industrial or multi-complexes with infrastructure facilities, etc that are to be subsequently sold. In these cases the vacant lands acquired are held as ‘stock’ pending their development at the right time for maximum returns and profits.
[B] Status of Land
2.5 The history of the status of vacant lands to be acquired should be investigated to ensure that it is suitable for the purpose for which it will be used. Some important aspects could include the following and actual cases are quoted.
[i] Hilly lands are subject to greater risk from landslides or earth slips that could be due to its own location or from development of adjoining lands. There are many cases of buildings constructed on hill sides that subsequently collapsed both locally and in foreign countries. The best known local example is of Highland Towers that collapsed in 1993 with fatalities that was subject to litigation and resulted in financial claims against the responsible parties.
[ii] Ex-Mining land and former dumpsites are also dangerous as any structure constructed could be subject to sinking in the near or distant future as has been reported to have occurred in a building constructed on the reclaimed former tin mining lands. An example is the Dayabumi Office Complex that was constructed on the site that was used in the early twentieth century as dumpsite for ash from railway steam locomotives and the risk had to be mitigated by additional, often expensive, expenditure for removing the old ash and replacing with good earth prior to construction of the building. Similar cases have been reported in developed countries where chemical/toxic materials dumpsites have adversely affected the water resources, resulting in the owners of surrounding properties being affected adversely both in financial and health terms.
2.6 All the above types of lands have financial implications due to high construction costs to prevent or mitigate the adverse effects from the risks and subsequent higher cost of repairs and other claims for loss of life and properties.
[C] Conditions Prescribed by State Land Authorities
[i] All lands are deemed to be owned by the Government that is represented by the State Land Authority [‘SLA’] who may grant ownership of the vacant land to individuals, agencies, commercial or other organizations. All grants are subject to conditions that are then prescribed in the ‘title deed’ that is the document that signifies ownership. Some of the more important conditions could be the following:
[ca] Category of Usage
[i] The lands could be classified as ‘Reserve’ land for specific purposes such as lands reserved for specific race [such as Malay Reserve or Native Lands], forest reserve, water catchments areas, road reserves, etc. In all these cases the ownership or use of these ‘reserve’ lands may not be changed without prior written approval of the SLA and payment of additional fees.
[ii] Non-reserve lands may be granted to others for payment of fees and the ownership of these lands may be transferred for consideration and the transfer be registered with the SLA. The usage category could be for mixed development townships [that included residential, commercial, industrial, etc.] residential [such as individual houses, terraced, bungalows, multilevel buildings [apartments, condominiums], industrial, commercial, plantation, agriculture, recreational, etc. The prescribed usage conditions may only be changed with prior approval of the SLA that may be subject to payment of conversion fees as prescribed in the law if approved.
[cb] Duration of Ownership
[i] The duration of ownership of land can be stated as ‘freehold’ which is then owned in perpetuity. However, even these lands classified as in perpetuity can be confiscated for non payment of annual fees [quit rent] or where land is used for illegal purposes or compulsorily acquired for public purposes in which case compensation will be paid or for other reason as stated by the SLA.
[ii] Land that is classified as ‘leasehold’ has the period of ownership prescribed in the title deed. The common lease period could be for 10/30/60/99 years. However, application can be made for renewal/extension of the lease period for which a premium is normally charged. In earlier years the lease period was for as long as 999 years which could be deemed to be ‘freehold.’ It is important to note that any building/structure erected on a leasehold land will also revert to the SLA or the registered owner of the land on expiry of the leasehold period.
[iii] Malaysian Government owns vacant lands [throughout in West Malaysia and Singapore] for the benefit of the country’s Railway Administration that are leased to individuals or companies. Similarly, some registered owners of freehold land [in the State of Kelantan] had leased vacant lands to others for periods of 10 or 30 years. The lessees then constructed office/industrial/factory buildings, petrol stations, etc., the ownership of which reverted to the Malaysian Government or the respective individuals. These are some examples where the registered owners of land became instant millionaires when the lease periods expired.
[D] Reason for the Acquisition
[a] It is important to be clear as to the reason for the acquisition as there are several important aspects that should be considered prior to finalization of any acquisition, such as the following examples:
[i] Vacant lands to be used to construct residential buildings that should be marketable and suitable for family usage and provide easy access to amenities and other surrounding areas. The amenities would include public transport, educational, medical, shopping, mechanics, plumbers, electricians, etc and recreational/parks facilities and Government agencies.
[ii] Similarly lands acquired to construct commercial/Industrial buildings should be suitable for construction of types that are to be used for own usage or marketable if they are for investment purposes and should be able to provide reasonable returns for the value of the amount invested. Large land area acquisitions may be intended to be the creation of new townships that should be complete with essential infrastructure facilities.
[E] Timing of acquisition
[a] Acquirers should always look out for opportunities to acquire vacant lands when market is soft. This is referred to be a buyers’ market when acquirers are in a strong position to negotiate and arrive at lower prices. Prices of vacant lands generally rise when there is boom market that is also referred to as a sellers’ market. Sometimes it may be cheaper to lose the paid 10% deposit if the market has fallen and similar lands could be acquired at rates that may be even lower after discounting the forfeited deposit resulting in net gains.
[b] Opportunities to acquire attractive vacant lands at low rates also arise when existing owners are in a hurry to dispose of their holdings for whatever reason such as sudden need for ready funds for education, medical, migrating overseas for career advancement, over extension in the stock market that falls and the financial institutions make calls for further funds or some other reasons. In some cases companies with large land banks may dispose off part of their holdings to raise funds for other ventures that may be perceived to have better financial returns. This may happen when plantation lands in close proximity with urban areas may provide better returns if converted to residential/commercial/industrial usage.
[c] Auctions of repossessed properties can also be acquired at bargain prices but the acquirers must be aware of the many problems that may exist as full particulars of the lands to be auctioned may not be available easily and also the existence of cartels that specialize in bidding at auctions resulting in possible frauds.
[F] Location of the Vacant Lands
[a] The location of vacant lands is of critical importance as its usage, returns and present and future values can be determined by these and other aspects. The critical components would include size of the vacant land, the surrounding areas and population, accessibility to important facilities, availability of amenities & services including Government agencies. The amenities and facilities should be relevant and compatible with the objective of acquiring the vacant lands.
[b] Lands located along riversides or sea shores are susceptible to floods due to heavy rains or unusual high tides that may be caused by strong winds such as storms, typhoon or hurricanes. In present case of climatic changes such calamities are common all around the world.
[c] Land acquirers should scrutinize the master plans of the area to confirm that the land is not subject to any compulsory acquisition for public projects in the foreseeable future such as for future widening of roads, planned highway or any other planned acquisition.
[d] The condition of lands adjoining the lands to be acquired should also be investigated as they can have an impact on the usage and marketability of the constructed projects.
[G] Funding Resources - Individuals
[a] Generally individuals acquire vacant lands to construct residential/commercial building for own use. Acquirers should ensure that they have access to sufficient funds or funding sources to finance the acquisition. There are several aspects that should be considered in all financing aspects the more important of which are listed below:
[i] In the event of funding with borrowing finances there should be reasonable assurance of continued income available for the duration of the borrowings to avoid default in settlement of loan to ensure foreclosure and loss of the land and funds invested. This does not apply to Government/Agencies employees who have reasonably assured employment until the mandatory retirement age with prospects of increased income due to revisions of salaries/allowances and promotions. Financing should be with minimal borrowings and for shortest repayment period.
[ii] Financial institutions and others who provide funding prescribe terms and condition that are designed to protect their own interest and not that of the borrowers. These terms and conditions may also have financial implications that are not easily understood by borrowers and are rarely explained fully in an easy to understand language. While the borrowers can inquire, it is generally difficult to understand them or to estimate their financial or legal implications. It is best that borrowers obtain professional advice to be able to be aware of the possible adverse implications of these terms and conditions.
[iii] There are several types of unavoidable charges that can be substantial and must be paid up-front by the borrower of the property to be acquired such as valuation, processing, insurance premium, etc., before the loan monies are released. All these up-front payments are not refundable in full if the loan is rejected or withdrawn. Further there are conditions that may result in increased repayment installment amounts in the event the changes in economy. Borrowers should provide for these possible contingencies that may result in increased repayment installments.
[iv] Financial institutions generally use low interest rates for the first few years as a marketing ploy or strategy that acts as bait for borrowers to take loans. These initial low rates may be subject to upward revision in the event the borrower wishes to settle the loan in full within the low interest period. The object of the financier is that loan should be for long periods and not for short periods.
[v] Interest rates may vary in the event of variances in the Base Lending Rates [BLR] that is prescribed by the country’s financial regulatory authorities such as Central Banks. These BLR may vary but increases are transferred to the borrowers with immediate effect whereas decreases may be delayed. Further there are greater chances of increase in BLR than any decrease. These and other charges include quit rent, assessment rates, insurance premiums, cost of replacing of services such as plumbing, electrical wiring, repairs, maintenance, or repainting that may also increase. There also can be unforeseen substantial costs that may arise from floods, fire, damage by inconsiderate tenants, or thieves where some of which may not be covered by insurance policies. It may be of interest to know that the financial impact of one percent increase in rate is estimated at RM60.00 per month for every RM100,000.00 of loan amount for the duration of the loan.
[H] Funding Resources - Companies
[a] Companies generally acquire large areas of vacant lands involving tens or hundreds of millions of dollars. The acquisition can be done through various methods of financing, such as: internal funds, borrowings from financial institutions on fixed or variable periods with fixed rates of interest, bank overdraft facilities, or exchange of equity between a company that acquires the land and the owner of the vacant land. This results in the seller becoming a shareholder in the acquiring company. The shares can be ordinary shares, preference shares, with or without guaranteed dividends and terms
and conditions. Similarly the acquiring company may also issue bonds, warrants, or other types of finance documents.
[b] It must be remembered by all borrowers that they should ensure that funding is available prior to signing any legal document as deposits paid are not refundable and are forfeited if the acquirer defaults. However, in soft markets when land prices are on the downtrends it may again be cheaper to lose the deposit and cut costs than to continue with the acquisition at the earlier agreed purchase price.
[c] Small developers may also acquire lands from individuals without making any kind of cash or other type of payments but agree to transfer some of the buildings to be constructed and then transfer ownership of the agreed number of buildings to the land owner as full settlement. In such cases it is important for land owners to investigate the past record and reputation of the developer to ensure that the project will be successfully completed and not abandoned.
[I] Marketability of Constructed Buildings on Acquired Vacant Lands
[a] Another important aspect that should be considered by acquirers is the marketability of the completed buildings after the acquired vacant lands are developed. They should always compute the economic viability of the acquisition of any vacant lands. They should compare the total cost of acquisition and development costs with the sales proceeds of the completed buildings to ensure that the rate of return on the investment is as intended. This aspect is important as the cost of holding unused vacant lands and unsold completed building can be financially disastrous due to drain on finances. Marketability of buildings to be constructed would depend on closeness and access to the many essential facilities and amenities such as work place, schools, supermarkets, religious places, medical facilities, or recreational facilities.
[J] Reputation of Seller or his Agent
[b] The reputation of a seller or his agent and documents pertaining to ownership should be of particular importance. The reason is that there have been cases where acquirers have acquired vacant lands valued in tens of millions with title deeds and other documents that were forged and ownership transferred fraudulently. Subsequent legal action by the original registered owners gave majority legal decision that rejected his claim of ownership and the acquirer of the vacant land retained legal ownership with the reason that he acted in good faith.
[The Federal Court decision of 2001 in the case of Boonson Boonyanit vs Adorna Properties was a landmark case that gave ownership to the acquirers. There have been many other similar cases since then. Please refer to the ‘Property’ section in the NST where articles referring to this aspect are reported every Monday. The author is En Salleh Buang who writes on ‘Columns – Land Matters’ and is acknowledged with thanks]
3.0 Professional Services
3.1 Acquirers of vacant lands should ensure that their interests are safeguarded. They should obtain the services of professionals with expertise that is relevant to the acquisition process. The main categories of professionals would include the following:
Estate Agents and Valuers
[a] The person who initiates the acquisition process should appoint an estate agent or broker to represent him. The appointment should be subject of clear instruction as to the authority of the appointed agent. Care should be taken to scrutinize the standard appointment agreement format prior to signing.
[b] Acquirers should also obtain an independent, fair, and current valuation of the property proposed to be acquired. This will ensure that the price being negotiated is fair and reasonable.
Legal Practitioners
[c] The appointment of legal professionals, known as solicitors or attorneys, is of utmost importance due to the legal implications of a wrongly worded legal document that is referred to as Sales and Purchase Agreement [S&PA]. It is the responsibility of the legal professional to ensure that the interest of the client is protected. However, the acquirer should scrutinize the terms and conditions of the SP&A and understand its implications that it protects his interests. Here again the appointed person should be registered and be member of the regulatory authority. Also the fees and other claims would be as prescribed by the relevant legislations that should be referred to prior to appointment to ensure that the rates take into account the latest amendments.
4.0 Registration of Acquired Property
4.1 Acquirers of vacant lands must ensure that the mandatory prescribed fees are paid. Further action should be taken to ensure that the acquired landed property is registered with the relevant authorities such as the relevant State Land Agencies and the Local Authorities. Companies should account the acquisition of the lands as an asset or in its accounts.
5.0 Other Aspects
5.1 Acquirers of vacant lands will incur holding costs until such time the lands are developed and the constructed buildings are utilized or sold. Every effort should be made to minimize these holding costs wherever possible. The type of holding costs would include the following:
[a] Finance costs
[b] Maintenance, Safety and Security measures to prevent accidents and health hazards
[c] Insurance policies against possible risks and claims arising there from
[d] Utility costs that they are disconnected for the vacant periods
[e] Statutory payments such Quit Rent on all lands whether vacant or developed
5.3 It is common knowledge that vacant lands are susceptible to illegal occupation by locals or foreigners. The procedure to evict them is time consuming and expensive and could create social problems as they may be backed by self-serving politicians, civil servants and NGO who may come to their rescue in the name of humanity and social justice. The owner of the vacant lands may also have little protection from the relevant authorities who perceive the illegal occupation as a civil matter that should be resolved by the legal system which again, is time and cost consuming.
5.4 Vacant lands are also haven for breeding of mosquitoes and other health hazards that give rise to diseases to the residents of surrounding areas. Thus the vacant land owner is not only subject to high costs to prevent the problem but may also be subject to penalties from relevant local authorities in the event of the measures not being effective for whatever reason. There have been cases where deep pools are formed after heavy rainfalls which pools are used as swimming pools by children including those who may not be good swimmers resulting in death by drowning. This is another risk that is faced by owners of vacant lands that are yet to be developed.
6.0 Conclusion
6.1 It is important that acquirers of vacant land especially those acquired as land bank to be held for development at a later stage should ensure the following aspects:
[a] Determine in advance the proposed usage of the vacant land being acquired
[b] Determine the status of land vis-à-vis the financial implications and future risks
[c] Conditions Prescribed by State Land Authorities – Usage Category & Duration
[d] Reason for the Acquisition - Own usage or for stock for development and sale
[e] Timing of acquisition - Financial Implications of buyers’ vis-à-vis sellers’ market
[f] Location of the vacant lands - Accessibility-Facilities-Returns-Risks
[g] Funding resources - Individuals and Companies
[h] Marketability of developed structures
[i] Holding costs of undeveloped land or unsold buildings/facilities
[j] Reputation of Seller or his Agent – Frauds
6.2 Acquirers of vacant lands should ensure that they have sufficient financial resources at the beginning and during the duration of the loan period prior to commitment to purchase any vacant lands. The holding costs of vacant lands should be considered especially if the lands are acquired as land banks for future use and not to be developed over long periods. Further they should ensure minimizing of other costs as far as practicable. Other important aspects as stated above should be studied in arriving at a decision to acquire the type of vacant lands, its location, condition, usage and other aspects as stated above. Every effort should be made to minimize these holding costs wherever possible.
6.3 Above are some aspects that acquirers of vacant lands should always bear in mind to ensure that the funds committed are the lowest, bring the desired objectives or financial results that are comparable with returns if the funds were invested in other spheres and minimum holding costs.
E-mail: gursharan38@gmail.com sharwant38@yahoo.com
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