[Real Estate Insider]

'Trust method reconstruction' project speeds up...but trust fees are a burden

(Photo) A view of the Yeouido pilot apartment, completed in 1971. /Reporter Lee Seung-jae

[Hankyung Business by Byung-hwa Kim] The stalled Yeouido pilot apartment reconstruction project has picked up steam. All eyes are on the new trump card, the 'trust method.'

The Yeouido pilot apartment is an old apartment, 40 years old since it was built in 1971. It was the first apartment building in Yeouido, with 24 buildings and 1790 units. In 2008, a promotion committee was established to promote the reconstruction project, but the project fell through due to the real estate recession.

On November 19, 2016, eight years later, Yeouido Pilot Apartment selected Korea Asset Trust as a preliminary trustee for the reconstruction. The company said it would pursue the reconstruction project through the trust method rather than the existing cooperative method.

The trust method of reconstruction means that a real estate trust that has the consent of more than 75 percent of all owners will act as the implementer and lead the project, bearing the costs. The Yeouido pilot apartment is also scheduled to sign a formal trust agreement early next year with 75% of residents' consent."

"It is significant that the first trust-based reconstruction project for a large apartment complex of more than 1,000 units in Seoul has begun," said an official from Korea Asset Trust. "If the Yeouido pilot apartment gains momentum in the trust-based reconstruction project, it will have a significant impact on other reconstruction complexes in Seoul and the metropolitan area, including Yeouido.

◆ Quickly moving forward...emerging as a solution provider

The 'trust method' of reconstruction began in March when the Urban and Residential Environment Maintenance Act was amended and implemented, allowing trusts to participate as the sole implementer of reconstruction projects. The government said the reason for the amendment was to "strengthen transparency and improve efficiency of reconstruction projects through trusts that serve as public support."

Unlike general cooperative reconstruction projects, trust-based reconstruction does not require the establishment of a promotion committee or a cooperative. This makes the project faster. Considering the time required to establish a promotion committee and an association, it is analyzed that the project period can be shortened by one to three years. This is why many reconstruction complexes that have been slow to move forward are showing interest in the trust method.

In fact, Hansung Apartment in Yongsan-gu, Seoul, has recently accelerated its reconstruction project through the trust method. The land and other owners of Hansung Apartments selected Korea Trust as the project implementer in late September and are preparing to select a general contractor. In addition, the 'Shinbanpo Palace' apartment in Seocho-gu, Seoul, held a briefing on the trust method reconstruction project in late October and is preparing to select a trust company.

The 'excess profit recapture system', which was revived in 2018, is contributing to the popularity of trust-based reconstruction. The excess profit clawback system requires associations to pay up to 50 percent of the excess profits from rebuilding if they exceed an average of 30 million won per unit.

It was introduced in 2006 to curb real estate speculation, but it has been criticized for depressing the real estate market, so a moratorium began in 2013 and was extended once until the end of 2017.

After the moratorium ends, the excess profits will have to be taxed and the reconstruction revenue may decrease. The share of excess profits will be higher for rehabilitated units with higher sales prices. To avoid paying back the excess profits, it is necessary to apply for receivership by the end of 2017."

According to an analysis by Korea Asset Trust, if the Yeouido pilot apartment project is reconstructed under the trust method, the process will be as follows: "Safety diagnosis in November 2016, change of maintenance area in February 2017, designation of project implementer in March 2017, selection of contractor in April 2017, approval of project implementation in August 2017, and application for receivership in December 2017.

The trust method can narrowly avoid the return of excess profits:

◆ Trust fee vs professionalism

Experts agree that even if the return of excess profits is not avoided, the attempt to use the trust method is meaningful. There is a positive outlook that reconstruction led by trusts can be more transparent and efficient, as the government hopes.

One of the reasons why the once "goose that lays the golden egg" has turned into an "ugly duckling" is the problem of financing the project by the association. The association must finance the cost of the project. Usually, they borrow money from the construction company selected as the general contractor and receive support from small partners such as design firms before the general contractor is selected.

Without support, they can't move forward with the project, and with support, they're beholden to the company that lent them the money. The trust method, which pays for the business at the trust's expense, greatly relieves worries about costs.

The expertise of the trustees is also an essential part. An association established by general residents is bound to lack expertise in maintenance projects such as reconstruction and redevelopment. This lack of expertise has led to various incidents and accidents. If a trust company that is experienced in reconstruction projects is in charge of the project, it can be expected that the project will be more stable and transparent.

The problem is the rejection of trust fees. Trust fees are typically 3-4% of the construction cost. It can be a burden to landowners as it adds costs that were unnecessary in the existing cooperative method.

"It may be beneficial to have a professional move the project forward quickly, even if it costs a fee, rather than having a non-professional association lose money," said Byun Sun-bo, a lawyer specializing in reconstruction at Hanbyul Law Firm. "If the Yeouido pilot apartment reconstruction project, which took the first step, goes smoothly, the 'trust method' will emerge as a new reconstruction trend."

kbh@hankyung.com