Real estate as equity

By Raul J. Palabrica
Inquirer
11/09/07

MANILA, Philippines–Cynics and skeptics aside, it looks like the country is going through a mild construction boom.

The heavy inflow of cash remittances from overseas Filipino workers is fueling real estate development in Metro Manila and other highly urbanized cities and provinces.

Huge tracts of land that are unsuitable for agricultural purposes and which would otherwise be idle and unproductive, have become choice spots for low- and middle-income housing projects.


Developers are on the lookout for real property in densely populated areas that can be used as sites for high-rise residential or office condominium buildings.

For lot owners who do not want to sell their properties for one reason or another, but want to earn from them, enterprising developers offer joint venture arrangements.

Under this scheme, the owner and developer organize a real estate company with the former contributing his property as equity and the latter putting in the money to pay for the construction costs.

Consideration

The proceeds of the operation of the completed structure are shared by the parties in such proportion as they may agree upon.

For obvious reasons, money is the preferred consideration for shares of stocks in stock and non-stock corporations.

Materials with monetary value — such as land, cars and machines — can be used as payment for stocks as long as these items are necessary and beneficial for the accomplishment of the purposes of the corporation.

Thus, a corporation formed to engage in the sale and distribution of school supplies cannot use sugar land as consideration for its stocks. That kind of property is not essential to the operation of its business.

But if the corporation’s objective is the production and sale of candies and beverages, the sugar land is a valid consideration for its stocks. The extracts from sugarcane fit into the corporation’s product line.

For corporations engaged in real estate development, land is a very important resource.

When real property is contributed as equity, the principal issue to be resolved is what monetary value to give it for purposes of determining its sufficiency as consideration for the stocks it represents.

Its size and location is material in that assessment. Also useful in the evaluation is the zonal valuation rating by the regional office of the Bureau of Internal Revenue that covers the community where the property is located.

Valuation

The rule of the thumb is that the valuation by the board of directors of real property brought in as equity of a corporation is given full faith and credit by the Securities and Exchange Commission.

The SEC gives the assessment the presumption of accuracy and regularity. It does not, unless for justifiable reasons, question the manner by which it was arrived at.

After all, the directors are in the best position to determine the value of the assets they want to bring in to their fold to meet their corporate objectives.

If they fudge the figures, they’re fooling no one but themselves.

Worse, the company could find itself in serious trouble with the banks in the event it offers the property subject of bloated numbers as security for its fund borrowings.

Since property assessment is a highly specialized field, the SEC has accredited several appraiser companies to assist it in the resolution of assessment issues.

Although desirable, it is not necessary for corporations, except those whose stocks are traded in the stock exchange or are grantees of secondary licenses from the SEC, to engage the services of an accredited appraiser to get approval for the use of property as consideration for shares of stocks.

Examination

The protection of the public’s interest is the rationale behind the SEC’s requirement that real properties brought in as equity by listed companies and holders of secondary licenses be evaluated first by SEC-accredited appraisers.

These companies have a common denominator — they solicit funds directly from the public.

The listed companies do it through the sale of their stocks in the stock exchange.

Grantees of secondary licenses, such as pre-need companies and sellers of securities, raise funds through the sale of pre-need plans, bonds, preferred shares and other forms of corporate debts.

Before these companies are allowed to add real property to their capital stock, the SEC has to make sure the land in question is truthfully and fairly valuated.

If these companies go bankrupt (and this is a risk that cannot be ignored given the events of the recent past), the investing public can run after those properties.

The certification by SEC-accredited appraisers on the fair market value of real property offered to form part of the capital stock serves as a “good housekeeping seal.”

An accredited appraiser that compromises its integrity in the assessment of real property, e.g., giving a 10-hectare land deep in the Sierra Madre a valuation equal to that of a similarly sized property in Quezon City, could lose its accreditation.

And word about that discharge usually spreads quickly in the business grapevine with disastrous results.

For feedback, please write to rpalabrica@inquirer.com.ph