Build-to-own: The vertical alternative

Build-to-own: The vertical alternative

by Senen M. Quizon

The trend in residential property development in recent years has turned to the construction of high-density, high-rise vertical condominium structures, as evidenced by the wave of condominium developments that has been sprouting all over the metropolis.

This trend is expected to continue in the coming years as urban population rises and scarcity of available land for residential homes becomes more pronounced.

As demand continues to push prices of condominium properties upward, the emphasis on cost and quality becomes an increasingly important consideration for condominium unit buyers.
A tax-efficient and innovative way to condominium ownership which could provide the answer to this demand for high-quality and affordable commercial and residential condominiums is the Build-To-Own (BTO) scheme.

What is BTO?

Build-to-own is a co-ownership undertaking for the development of condominiums and other property projects which allows unit buyers to acquire a condominium unit at a significantly lower cost by directly engaging the services of a construction industry professional to develop the condominium property.

This reduces the cost of acquiring condominium properties since other non-project related cost are eliminated in the process.

Under the BTO system, each unit buyer contractually engages a construction industry professional (i.e., architectural firm, project engineer/builder, or contractor) as project proponent or organizer who provides the technical knowhow, manages and executes the development of the condominium project. For the services rendered, the project manager shall be paid a professional fee equivalent to a percentage of total construction funding contribution of each client.

A feature of the BTO which serves as a protection for condominium unit buyers is the establishment of a trust account into which unit buyers must make their deposit payments or contribute their funds.

Deposit payments made prior to the construction of the project earn interest for the unit buyers. The trust account will provide the funds which will be used exclusively to acquire the land (which will be under the name of the project organizer in its capacity as trustee for the duration of the project) on which to build the condominium. Disbursement of funds for the construction of the project is done through the system of construction progress-based billing in accordance with the depository and disbursing agreements with the trustee-bank.

As part of the terms of the trust agreement, the trustee executes, upon completion of the project, a deed which shall convey the condominium and parking units to the respective unit buyers and the common areas of the project to the condominium corporation to be established by the owner-trustees.

Not a joint venture

BTO arrangements are not specified under the Tax Code. In one of its earlier rulings (BIR Ruling No. DA-624-04, Dec. 10, 2004), the Bureau of Internal Revenue (BIR) characterized BTOs as a "joint venture" based on its interpretation of the relationship that exists between the parties. Later, after reviewing all of its rulings covering BTOs, the BIR held in DA-455-07 (August 17, 2007) that a BTO arrangement does not constitute a joint venture.

In arriving at the conclusion that a BTO is not similar to a joint venture, the BIR looked at the presence of the following elements to determine if the parties assumed their relationship to be one of a joint venture:

1. that each party to the venture must make a contribution, not necessarily of capital, but by way of services, skill, knowledge, material or money;
   
2. profits must be shared among the parties;
   
3. there must be a joint proprietary interest and right of mutual control over the subject matter of enterprise;
   
4. usually, there is a single business transaction; and
   
5. a clear intention to form that partnership or joint venture .
   

The BIR held that absent the intention to jointly participate in the conduct of the business, earn and share profits, and to exercise the right to exert mutual control a BTO does not take the nature of a joint venture.

It should be noted, however, that, as can be shown in various rulings issued on the BTO, in both instances where the BIR classified the BTO as a joint venture or a plain common ownership undertaking,  it has consistently ruled that the conveyance of condominium units including parking units without consideration to the unit buyers/owners under BTO is not subject to tax.

This follows the long-established rule that the conveyance of property from a joint venture to the co-venturer/s or trustee to the trustor/s without consideration does not give rise to a taxable event since the transfer is considered a mere return of capital.

Tax advantages

In an ordinary purchase made from real estate developers, condominium unit buyers shall pay the 12% Value Added Tax (VAT) and the Documentary Stamp Tax (DST) but not if the condominium property is acquired through a BTO arrangement.

As ruled by the BIR, the transfer of condominium units to the unit owners under BTO is not considered a sale but a mere conveyance of a property to its true owner. Hence, the conveyance of condominium units to the individual owner-trustees and common areas to the condominium corporation is not subject to Capital Gains Tax or creditable withholding tax, VAT and DST (except P15.00 DST on the conveyance).

Through a BTO, condominium unit buyers can enjoy the benefits of owning a condominium unit/property at a lower cost combined with the advantage of having a tax-efficient structure which will allow condominium unit buyers to save taxes which would otherwise be due if the condominium unit/property is purchased through a real estate developer/dealer.

Given the aforesaid benefits of utilizing a BTO, it is thus not surprising that it has become an increasingly popular mode for developing condominium properties and providing Filipino families the opportunity to own a home at affordable cost.

(The author is a tax manager at Punongbayan & Araullo, member of Grant Thornton International. For comments and inquiries, please e-mail the author or call 886-5511.)