Newsletter Q3 2017 UK

Newsletter Q3 2017

The maximum price system gives rise to problems when the price difference between a cooperative housing unit and a comparable owner-occupied dwelling exceeds a level explainable by differences in financing options and taxation.

The maximum price system is generally based on the provisions of the Danish Cooperative Housing Act governing the transfer of a unit in a cooperative housing society. The Act prescribes that the price of the unit cannot exceed a price reasonably justified by the value of the unit relative to the society’s assets, improvements made to the unit and the state of repair of the unit. The maximum price system gives rise to problems when the price difference between a cooperative housing unit and a comparable owner-occupied dwelling exceeds a level explainable by differences in financing options and taxation. A housing cooperative is free to use the purchase price, the cash market value as a rental property or the most recent official property valuation for a property valuation. If a housing cooperative opts for the approach providing the lowest value, the units become assets sold substantially below the actual market value. Such a situation would foster nepotism, with the friends and family of housing cooperative members having a first claim to units for sale, and may lead to demands for money under the table or demands on buyers to pay unreasonably high prices for furniture and equipment. The inherent imperfections of the maximum price system support the use of valuations made by real estate appraisers, as these would be more likely to ensure that current conditions in the investment and housing markets are factored into the valuation, but the valuation is subject to unacceptable uncertainty as a result of complex legislation. Valuations made by real estate appraisers must be based on the cash market value as a rental property. This means that the appraiser will need to take into consideration the legislation that the property would be comprised by had it been a rental property. Accordingly, the applicable legislation is determined by the year of construction of the property and whether it is situated in a regulated or unregulated municipality. These factors determine whether market rent can be charged or whether rent is to be Increased use of valuations made by real estate appraisers

determined in accordance with the utility value or cost-related rent.

If valued as a rental property subject to cost-related rent, the property will be valued substantially below the actual market value of the individual units combined. This is due to the fact that cost-related rent is generally much lower than the rent that a house- hunter would be ready to pay in a free market. However, the members of the cooperative housing society will have a direct financial interest in achieving the highest possible valuation price as it makes it possible for the unit owners to realise substantial tax-free gains. As a result, we often see an unhealthy scenario where the housing cooperative is incentivised to pick the real estate appraiser prepared to value the property at the highest amount – not the appraiser providing a correct value of the property as a rental property. Complex and antiquated legislation Most of the properties owned by private cooperative societies in Copenhagen, Frederiksberg and Aarhus were built before 31 December 1991 and comprise more than six units. As these three municipalities are regulated, most of the properties are to be valued on the basis of the provisions of the Danish Housing Regulation Act and in practice pursuant to extremely complex and antiquated legislation. Accordingly, a correct valuation of a property comprised by the provisions of the Housing Regulation Act on cost-related rent must comprise a determination of the rent that may lawfully be charged, improvements made to the property in

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