27 March 2007

Sales proceeds formula; Distribution

Update on 6 Jan 2007:
As eloquently argued in a Straits Times Forum Letter published on 5 Jan 2008, there is another school of thought that postulates distribution of collective sales proceeds should be based only on area because "condo units are sold by area and not by share value" and "especially when the INTRINSIC VALUE of each square foot is computed as an aggregate of area, premium for high floor level, unit design, open view and so on". The writer went on to say that share value "is a guide for conservancy charges calculation".

Based on the statutes, I believe the Forum letter writer's statement about share value being a guide for conservancy changes calculation is erroneous! The Land Titles (Strata) Act, Section 13(1) states that "... the common property shall be held by the subsidiary proprietors as tenants-in-common proportional to their respective share value and for the same term and tenure as their respective lots are held by them" and "The Registrar on issuing a subsidiary strata certificate of title for a lot shall certify therein the subsidiary proprietor's share in the common property, but no subsidiary strata certificate of title shall be issued for the common property". Similarly, the Building Maintenance and Strata Management Act of 2004, Section 62(1) states that "the share value of a lot as shown in a schedule of strata units shall determine — ... (b) the quantum of the undivided share of the subsidiary proprietor of that lot in the common property comprised in that strata title plan". These statutory provisions underpin my explanation on "share values" in the subject-topic page of this blog.

As for the "INTRINSIC VALUE" mentioned by the Forum letter writer, I believe this "intrinsic value" comprises two elements:

(A) Core Value - based on the strata-title-area of the unit owned by the subsidiary proprietors which is factual and is categorically stated on the title document (ie, the Subsidiary Certificate of Title); and

(B) Consumption Value - based on the state of affairs affecting each unit at the point of purchase and "consumed" (ie, enjoyed) by the occupants during the tenure of their residency at that unit.

The Core Value of strata-title-area MUST necessarily be a key component for apportionment not only because it is factual and objective but because it underpins the very basis of the collective sale in terms of the land footprint.

The Consumption Value is a facetious basis and is worthless because a collective sale results in wholesale demolition/ redevelopment of the estate (unless it is a conservation project involving en bloc A&A (Alteration and Amendment) works). Hence, any open vistas or preferred sun-facings, etc, are no longer relevant in a collective sale. Also, at the point of purchase at, say, the soft launch, the top floor unit at Level 10 may have a great lakeview but at the point of collective sale, that same unit may now be overlooking a neighbouring estate's garbage centre or is now overshadowed by a new condo at an adjoining site of 35 storeys! What is a good design generally at one point in time may be not so great design at the point of collective sale as real estate/demographic trends change over time. The Consumption Value of each unit remains pertinent only in an individual sale-and-purchase (eg, in a resale transaction), but certainly NOT in a collective sale!

IN ADDITION TO THIS BLOG PAGE, SEE MY OTHER COMMENTS on Apportionment Method, Para B-4.3 (scroll to picture of South Korean flag) and Para C-4.2 (scroll to picture of thorny hedgehog) UNDER "AFTER THE 2007 LAW, WHAT'S NEXT" IN THIS BLOG SITE.


Update on 13 Jun 2007 and post-Oct 2007:
These days, even the price of condensed milk cannot hold for 12 months. Yet our present en bloc law keeps the Collective Sale Agreement alive on life support for up to 12 months by which time the Reserve Price and condensed milk price would both be totally irrelevant. This is yet another aberration under the law - what can I say???

Add to that 12-month period, the likely ADDITIONAL 6-12 months for completion of the collective sale going through Strata Title Board's approval process if owner consensus did not hit 100%. This means owners could potentially wait for up to 2 years or more before they get the bulk of the collective sales proceeds to commit for a replacement unit. In any case, you should NOT sign the Collective Sale Agreement if you are against such sale - SEE MY OTHER COMMENTS on The Position of the Dissenter UNDER "SHARE VALUES; SALES COMMITTEE" IN THIS BLOG SITE.

As en bloc frenzies typically occur during property market upturns, by the time you (particularly as an Owner-Occupier with only one property to your name) lay your hands on the bulk of the actual collective sales proceeds some 12-42 months (!!!) from the time you were committed to the Reserve Price for such sale (firstly, the collective sale process under the law could take up to 24 months and, secondly, the cash settlement process could take another 6-24 months from the time that the Sales Committee binds you to a sale and purchase transaction with a Developer-Buyer, depending on how smooth or litigious the enforced collective sale process goes so long as you do not have 100%), you don't need a fortune teller to tell you that your sorry future is the stark reality of being a Squatter, Refugee, Downgrader or Downsizer for possibly the rest of your life! ... unless MinLaw changes the present law ...

For Owner-Occupiers with only one property to their name and who therefore need to buy a replacement unit - More surprises are in store as you will soon realize the maze and the web of financing intricacies and hurdles that you have to navigate around/under/over/through. Some hurdles are simply insurmountable because of bridging issues, time lags, banking constraints, CPF operational procedures, etc.

Sooooo ... unless you happen to have "petty cash" of a million bucks or so ready at hand for the 20% deposit for a new private residential property ... and are quite prepared to possibly end up with two properties if the en bloc should fail for some reason ... you would NOT be able to lock-in your market risk exposure by buying a replacement unit at the time the Sales Committee locked-in the en bloc deal on your behalf with the Developer-Buyer. By the time you lay your trembling hands on the bulk of the collective sales proceeds within the abovementioned 12-42 month window, who knows what the property market will be at that future time??? Que sera, sera, whatever will be, will be - are we some pathetic born losers or what??? Those Owner-Occupiers who happy-happy signed the Collective Sales Agreement WITHOUT sussing-out the ins-and-outs of the financial trail may be in for a rude shock ... by which time, the 5-day "cooling-off period" allowed under the amended law for you to back-out of a signed agreement would have long passed ... and you are stuck, stark naked in the face of a red-hot property market ripe for en bloc orgies!


Update on 30 May 2007:
This page should be read in conjunction with MY OTHER COMMENTS UNDER "SHARE VALUES; SALES COMMITTEE".

A rocket scientist it does NOT take to derive a mathematical basis of apportionment.

1. Objective versus subjective basis - At the time of purchase, you pay for every sq cm of space. Every month, you pay for every share value as approved by the Commissioner of Buildings (COB). Every cent you pay is based on facts and law – all very objective. Now, based on a collective sale forced down your throat if you are amongst the dissenters, you are obliged to accept the apportionment based solely on share value or some dreamed-up weightage decided by the self-appointed unregulated Sales Committee as at present or possibly by the Majority Owners in future. Suddenly your privately-owned property has been communalized and how much you’d get after the collective sale is now decided subjectively?

2. Mathematical formula for distribution of collective sales proceeds - As Singapore prides herself on transparency and certainty in our laws and policies, I’d like to propose that the Gahmen should mandate a mathematically-based apportionment method involving (A) ratios as a 1st cut and (B) precise strata-title area and share values as a 2nd cut.

(a) Ratio: A surveyor's report would establish the ratio of common property (say, 10,000 sq m) vis-a-vis aggregate strata-title area of all units in the estate (say, 30,000 sq m) to derive a ratio of, say, 1:3. The total collective sales proceeds (say, $100mn) should then be divided into 4 portions (1 + 3).

(b) Share value: One portion (ie, $25mn) should be divided by the total number of share-values to derive the value of each share-value and each owner should then get the precise dollar amount for each share-value that he holds.

(c) Strata title area: The remaining three portions (ie, $75mn) should likewise be divided by the aggregate strata-title area to derive the value of each strata-title sq m and each owner should then get the precise dollar amount for each sq m that he owns.

Similar ratio principles could be applied to mixed-development estates where market valuation, share values and unit sizes are all factored-in in the apportionment method based on the professional opinions of independent real estate appraisors and quantity surveyors.

3. Owner-occupiers who are time-disadvantaged after heeding Gahmen policies - In Singapore, we already have many forms of affirmative discriminatory policies (eg, household income must be below a certain amount to qualify for HDB public flats, quantum of CPF withdrawals is lower for subsequent property purchases, tax perks for women to have children at a younger age, more Edusave funds, New Shares or Progress Package payments for those who have sacrificed or served our country or who are disadvantaged, such as NSmen, senior citizens, poorer financial status, etc). They serve to temper or balance out inherent inequities in the larger communal interests and to cultivate certain societal mores.

En bloc sales typically escalate only when the property market is bullish and property prices are on the uptrend. Right after a collective sale, these owner-occupiers have to buy a replacement roof at that point in time (unlike investor-owners who can wait out the property boom cycle). Assuming that all units are identical in size and all owners receive an equal amount of collective sales proceeds, it looks fair-and-square on the surface BUT the same dollar amount received by an owner-occupier is of significantly reduced time-value compared to the same dollar amount in the hands of an investor-owner. Hence, owner-occupiers who have only one property are seriously time-disadvantaged even though they have faithfully heeded the policies of our Gahmen and Central Provident Fund (CPF) Board to NOT over-commit in real estate investments. The Gahmen must find some way to redress this inherent inequity in the apportionment or distribution of collective sales proceeds ... just as they have devised so many ingenious ways to re-distribute the puffed-up government coffers after the 7% GST hike to the disadvantaged!

Those of us who heeded Gahmen policies are now being punished ruthlessly in the property market if the en bloc succeeds. If I didn't listen to the Gahmen and went ahead with at least two property purchases, then I need not fret endlessly about this en bloc fever, worrying over something so basic as a decent roof over my head in this so-called First World Global City! Maybe the Gahmen is sending us another message, eh? Without a mandatory unit exchange, the owner-occupiers will end up as Squatter, Refugee, Downgrader, Downsizer. SEE MY OTHER COMMENTS UNDER "ONE-FOR-ONE EXCHANGE" IN THIS BLOG-SITE.

4. Decency in humanity values: Beggar-Thy-Neighbour (BTN)? - In contrast: The investor-owners and other owners who have additional properties or other standby accommodation alternatives are cashing-out their property investment by forcing this group of owner-occupiers to surrender their only roof - all because they want to gain the so-called "premium" from a collective sale. Let's NOT forget that there is nothing to stop these investor-occupiers and other owners from selling their apartments individually if they need the cashflow or want to relocate due to changed family circumstances or other personal reasons. What more when you hear accounts of Management Corporation members who withhold expenditure for essential maintenance, deliberately allowing the estate to deteriorate as part of the pressure tactics, neighbours indulging in rumour-mongering, devising scare tactics a la "Ah Long" style, giving dirty looks or passing spiteful comments in distinctly loud overtones ... [Actually, in our inimitable Hokkien-Malay-English patois, BTN also stands for “Buay Tahan Neighbour” – whichever angle you are coming from … majority consenter or minority dissenter … we just hate each other’s guts in our own neighbourly fashion, don’t we)?

Essentially, it is a "Beggar Thy Neighbour" mentality translated into ugly action - and yet many of us are purportedly of some major religious faith, each striving to live by our declared values - be it Buddhism, Christianity, Islam or Hinduism. At another level of humanity, may I respectfully appeal to each of us that - en bloc fever or not AND regardless of whatever agnostic/ atheistic/ religious belief - this calls for a pause to do some introspective reflection ...