Newsletter#3 – January 2019: “The elevation of buildings to self-finance energy renovations in co-ownership”

The elevation of condominiums, its specificities

Energy renovation concerns the entire real estate portfolio: single-family homes, single-family buildings and co-owned condominiums.

Through the sale of the roof and the subsequent elevation of the property, new lots can be built upon existing buildings. The revenue produced through the sale of the roof allows for the financing of the elevation, in what is known as the “hidden treasure of the buildings”.

It is in this environment that the elevation takes its full dimension, because of its urban values: city densification instead of urban sprawl, elevation allows for the financing of the energy renovation of buildings and their upgrading to standards, and the carbon footprint associated with it is smaller when compared with destruction/reconstruction operations.

But also through its values in condominium which is a specific framework: decrease of the expenses by the savings linked to increased efficiency and by the increase of the number of lots which widens the base of distribution, new BBC batches and a better comfort of life for the existing building, an increased legacy value, finally and especially perhaps, operations seeking the collective intelligence of the co-owners in a rather individualistic environment.

Mostly built in the 1950s and 1960s, the French real estate portfolio of condominiums has, of course, aged and new constraints came to increase the financial obligations: new objectives of energy performance and the maintenance of the elevators contributed to the awareness of the co-owners of the obligation to invest in their property.

On the other hand, governments that set targets for saving energy consumption face the reality of the amount of investments that the co-owners need to raise.

Individual owners know well that maintenance and renovation costs will fall entirely upon them and that they alone will assume the decision and the financing of any operation concerning their property. This perception of patrimonial responsibility is less sensitive in co-ownership, where it is necessary to receive a qualified majority of the co-owners. This adds an additional difficulty and will require special efforts of persuasion, from the property managers in co-ownership.

As the TRAINREBUILD project has shown, strengthening the ‘capacity’ of co-owners is key to empowering them to make the right investment decisions and to confidently engage in business relationships with professionals. Co-owners of buildings or apartments need to be provided with tools to assess the benefits of improved energy efficiency to homes, not only in terms of reducing energy bills, but also in terms of increasing property capital and rental value, improving comfort and health, tenant loyalty and reduced periods of rental unoccupancy. Strengthening the ‘capacities’ of local authorities is also necessary.

Co-owners of buildings or apartments need independent advice from energy advisers, who specialize in the construction sector. Local communities and landowner associations should be consulted on the training and accreditation of the experts to ensure that assessors will provide comprehensive and relevant information on the most effective technologies, the available financing instruments, the lists of certified building professionals and relevant laws regarding condominium elevation.

In addition, the self-financing of the renovation works by the co-owners runs up against the “wall of money”, that is to say, often the absence of equity among the co-owners, and the indebtedness limits, which can cause the building to be listed with the “condominiums in difficulty”, and to the energy poverty which itself is a problem for the occupants of the building – owners as well as tenants – and for the public authorities.

Moreover, it is more difficult for condominiums to be granted access to bank loans. This, on one hand, depends on the capability of the co-owners to give the asset itself in collateral to the bank and on the other hand for them to personally bear all the costs that don’t give a contribution on the improvement of the loan to value ratio for the bank (while they are needful to allow the project to be realized).

These objectives have also been weakened by promises of amortization of the investments through savings on consumption, which has proved to be impossible to achieve, even if such savings contribute to it.

In addition, national reliefs and subsidies for energy renovations are declining due to the withdrawal of member states seeking to reduce their public deficits.

Condominiums and new economic models

Initially, the principle is simple: the new lots built, resulting from the elevation, will be sold at market price. The construction of these lots will have cost the price of the work and the cost of the operator. The margin obtained goes to the building in co-ownership that uses it to finance its works.

As example in France, the Merlin building in Boulogne-Billancourt: 1.2 million works to be financed and an elevation that can bring to the building between 400 000 and 800 000€. Depending on the status of the owners, the economic models will be different.

A social landlord will not resell the dwellings created, but will be able to increase their real estate portfolio by benefiting from a free air property which they own. The elevation is then an accelerator in the housing creation mechanism. Their advantage is that they are also the only operational and financial decision-maker but, as we will see for condominiums, they will have to manage the project with their occupants/tenants.
Planète Surélévation, a French association of experts in the elevation of condominiums, has successively identified three channels to carry out a condominium elevation project.

The first one is to entrust the operation to a promoter. A condition for taking into account all the works to be executed including the renovation works of the condominium: is it the same architect? And soon the question arises of the art of building new on old. Initial experiences show us that a perfect knowledge of the original building is essential. In addition, we are in an inhabited environment, where co-owners are particularly sensitized. We now advocate for the completion, prior to any operation, of a preventive ruling to anticipate any possible disorder and to identify its origin. This intervention will also help reassure doubtful co-owners.

The second channel, which results from the application of the right of legal priority in France of the co-owners of the last floor, is that of the grouping of the purchasers of the future lots. They are the ones who will finance the operation and if they do not have the competence, they must get a project management assistant skilled for such operations. However, if this operation is done for the condominium under the same financial conditions, the buyers will benefit from the margin difference of the operator and will buy under preferential terms.

Finally, the third channel, the one that amplifies the “hidden treasure of the building”, will consist for the condominium to do the operation for itself. A royal way certainly, but it is the most difficult one and it is the one advocated by Planète Surélévation. Many steps have yet to be taken: the arrival of the Sale in the Future State of Completion in the co-owners’ syndicates, co-ownership amortization, taxation of the operations, bank loans that do not yet exist in a adapted format, a bonding system by a specialized financial institution that would allow operations to begin.

In the first two cases, we are well within the framework described above for the tax exemption of the sale of the building permit. On the other hand, when the syndicate of co-owners acts for itself, there is no more sale of the building permit and therefore no longer a tax advantage. We then suggest taxing the construction work at the same rates as the renovation work in co-ownership or 10%, and 5.5% for energy works. This would also be a means of simplification of management for a single construction/renovation project in co-ownership. When asked about this, the French Ministry of Finance told us that a European directive did not allow it.

Be that as it may, and before any decision is taken, the French association Planète Surélévation offers the Initial Elevation© Assessment. This methodology allows the condominium to be aware of all the components of its project: Do I have the administrative right to build? What are the required steps of the project: structure, circulation, access? What will be the savings of the project and, consequently, what will be, according to the various scenarios outlined above, the amount of the “right to build” or the amount of the sale that the condominium will be able to obtain? Another important point that was also dealt with in the Initial Elevation© Assessment report was, how to communicate and share this project with the co-owners?