Relaxed and flexible foreign investment policies at the early stages of reform and opening up first-tier cities such as Beijing, Shanghai, Guangzhou and Shenzhen have attracted a substantial number of Hong Kong and Taiwan-funded enterprises. Their investments concentrate particularly on electronics, auto parts and garment processing industries. As many of them complete upgrades or relocate to lower-tier cities due to the rising production costs, industrial innovations and other reasons in the first-tier cities, they have an urgent need to dispose of or liquidate their factory buildings and land in these top metropolises.
Governments in the first-tier cities have also introduced upgrading and renovation policies for inner cities and old factory buildings, including city upgrades in Shanghai and Shenzhen, shantytown reconstructions in Beijing, and old town, factory building and village residence renovations in Guangzhou. This article explores the process and model through which Hong Kong and Taiwan-funded enterprises may achieve asset liquidation or appreciation by taking part in city upgrade projects with land and factory buildings under their control.
In sharp contrast to traditional real estate development, city upgrades do not involve the use of new land. As a process of redevelopment using existing land, it helps alleviate land resource scarcity in first-tier cities and provides Hong Kong and Taiwan-funded enterprises holding old factory building assets (original title holders) with access to a new approach, other than sales, to liquidating their assets or equities. For an original title holder that needs to acquire additional land to enable its industrial upgrade plans, acquiring land under a city upgrade agreement reduces land acquisition costs and helps avoid the uncertainty accompanying the procedure of “bid invitation, auction or listing for sale”. This section provides an overview of the basic processes of city upgrade with Shenzhen as an example.
Filing and approval of city upgrade unit proposal (proposal approval). Once its proposal is officially approved, a city upgrade project earns the entry ticket. The proposed project must meet statutory conditions relating to upgrade direction, proportions of lawfully used land, years of completion of buildings, willingness to accept the upgrade, and so on. The entity responsible for filing a city upgrade project, or filing entity, must prepare and submit the city upgrade unit proposal to the competent authority for approval in accordance with applicable regulations and guidelines.
Verification of land and building information. The filing entity should request the competent authority to verify and summarize information about land and buildings involved in the city upgrade project so as to identify title holders and their entitlements, avoid ownership disputes, and solve any historical problems that are not consistent with the prevailing land policies.
Preparation and approval of specific plan. Upon proposal approval, the filing entity must prepare a detailed specific plan for the city upgrade project based on existing statutory plans and submit it to the competent authority for approval. The specific plan aims to analyze present conditions of the unit to be upgraded, defining objectives and positioning of the plan, ensuring implementation of measures and interest alignment scheme, and providing a basis of planning and construction for the development to be carried out in the next step.
Signing demolition compensation agreement and confirming the project executor. The demolisher must sign a demolition compensation agreement with all original title holders covered by the city upgrade project. The agreement should contain a demolition, relocation and compensation scheme that specifies the compensation, e.g., cash compensation and/or replacement apartment(s), to which the original title holder signing the agreement is entitled. Once this step is completed, the demolisher must request the competent authority to confirm its capacity as the project executor so that it will be authorized to proceed with project development.
Demolition of buildings and cancellation of property ownership certificates. The executor (i.e., the demolisher) will proceed with demolition and cancellation of property ownership certificates on the strength of property ownership certificates and power of authorization to cancel certificates received from the original title holders.
Construction land approval and conclusion of land transfer contracts. After all buildings situated in the unit being upgraded are demolished and their property ownership certificates are cancelled, the project executor will apply for construction land, pay any additional land premiums, and sign the Contract on Transfer of the Right to Use State-owned Construction Land.
Generally speaking, an original title holder that intends to sell or redevelop its property by taking part in a city upgrade may consider the following models.
Compensation for demolition. It is a model whereby a third party acting as the executor of a city upgrade project signs a demolition compensation agreement with an original title holder that entitles the original title holder to cash compensation and/or replacement apartment(s). If replacement apartments are provided as compensation, the existing factory buildings will be demolished, new property will be erected on the same land, and the original title holder will be granted title to the new property as contractually agreed.
Equity acquisition. Adoptable either before or after proposal approval, it is a model where the existing shareholder of the original title holder indirectly sells the right to, or interest in, the development of a property or project by transferring its equity to a third party for a total cash consideration, or a consideration that combines cash with demotion compensation and/or shareholder loan, as appropriate to the circumstances. In addition, the original title holder may take part in the city upgrade project by way of contributing its stake in the project to the share capital of a joint venture jointly established by itself and the third party and/or any other parties concerned for running the project.
Asset acquisition. This is a model whereby the original title holder directly transfers its property to a third party. It is usually applied to cases where: (1) equity acquisition cannot be executed (e.g., there is an obstacle to carving out the asset held by the original title holder); or (2) the acquirer builds its stake in the city upgrade project by acquiring parts of the project until it takes control of it. Caution should be exercised in using this model, because asset acquisition entails a relatively high tax burden and some properties may be subject to transfer restrictions due to encumbrance or other ownership issues.
Yan Juntao is a partner and Liu Bowen is an associate at Zhong Lun Law Firm in Shenzhen
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