Service charges for mixed-use projects not calculated correctly

Although some developers are running building services as a "profit centre", calculation and apportioning of service charges for a mixed-use development is a relatively new science in UAE and many are still getting to grips with the correct way of doing it, says a legal expert.

"If developers have tried to for example, levy charges on residential owners that should rightfully be paid by commercial owners then that would be improper, but it is difficult to know how commonly this occurred. Whatever a developer does, it should be justified," Brent Baldwin, Associate, Hadef & Partners, told Emirates 24|7.

Asked if residents of mixed-use developments are being overcharged, Baldwin says it is very difficult to know the exact number of developments where people are being overcharged and exactly what 'being overcharged' really means or relates to.

"Many residents would be likely to claim they are being overcharged because they feel they can find service providers who will offer services at a cheaper price. But it can be difficult to accurately assess this until the alternative provider has been given a full opportunity to formally bid for the service and has been provided with a full and detailed knowledge of the development."

Service charges levied on projects have been a major issue with Real Estate Regulatory Agency having taken a tough stance by making it mandatory for developers to take its permission prior to collecting such charges.

In June,  Harbor Real Estate reported that service charges in Dubai have not declined this year compared to 2009. The real estate consultancy, which undertook a comprehensive study of 77 apartment buildings, found the largest increases in service charges in the Views and Greens projects with an average increase of Dh1.15 per square foot. However, service charges in the Marina and Downtown areas remained unchanged.

Developers, Baldwin says, have been genuinely trying to run their developments as efficiently as possible, but with owners now running the show personally may find it difficult to lower service charges without affecting the quality of the development.

"Some owners in mixed use developments may feel they are being overcharged compared to developments that are solely residential or commercial, but the increased cost in mixed-use developments can arise because those types of developments require higher quality services or have more extensive facilities, which ofcourse owners will have to pay for."

Baldwin says the Jointly Owned Properties Law can assist many owners who feel they are being overcharged in a number of ways, but a fully formed Owners' Association (OA) should operate transparently enough for owners to be provided with a full understanding of where their money is going and if they have concerns, to discuss it with other owners in order to make a change.

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'50% of developers have not paid service fees'

The Strata Law which governs owners' associations (OA) and service charges continues to rake up more issues than solve them. The latest development is the charge that developers, whether master or sub, are not disclosing if they are paying their share of service charge for the upkeep of the completed building where OA has not yet been established.

In fact, several strata law experts that this website spoke to alleged that the default rate among developers is as high as 50 per cent on service charge payments.

Until a property unit is registered in the buyer's name, the developer is supposed to pay a monthly service charge for the unsold or yet-not registered units in a building.

In September, the Real Estate Regulatory Agency issued a circular stating: "A master developer or sub developer must pay the service charge for the units not yet registered in the name of buyer, where the buyer has paid the full selling price of the unit and even though there are other demands or obligations outstanding."

Graham Yeates, Head of Strata Management, Cluttons, said: "The outstanding service charges are considerable, but collections improve with the formation of the interim owners' association board, as all owners are part of a team working for the good of the project. Early estimates put the arrears at around 30 to 40 per cent, but vigilance with the collection procedures assists recovery and so the liquidity improves."

Brent Baldwin, an associate with Hadef & Partners estimates default numbers to be over 50 per cent.

"In some rare developments service charges are fully paid up, but in others there may be defaults of well over 50 per cent.  At the moment, however, it is more a case of developers subsidising owners who have not paid service charges because the developer wants to keep the common area facilities running for the benefit of all.  Once an owner's association (OA) is up and running, the OA will be responsible for running the common facilities and developers will be required to pay service charges for units they still own, until they can sell them."

Kent O'Brien, CEO, Strata Global, said in some cases the default rate will remain at 100 per cent until disclosed by an audit report.
"It is difficult to say at this time inasmuch as the accounts and collection of service charges are being kept close to their chest in the reregulation period. In situations where the developer will not disclose the full aged debtors list then warning bells should be ringing if the developer holds units in the development. This practice should be caught in the audit if done correctly."

According to Yeates, developers must pay for unsold properties once the project has been handed over and the service charges are determined.
Once the property is registered with the Land Department, the new owner becomes responsible on a pro-rata basis for the unexpired portion of these service charges.

"The developer is responsible for costs up to that point of registration, but make no mistake - in many circumstances, the developer is certainly paying service charges in full or part for as-yet-unsold units, because the bills have to be paid," Yeates added.

In some cases where registration has been delayed, but handover has alreadyoccurred, Baldwin says developers will be contractually entitled to charge service charges from the date of handover.

"I suspect many developers will now be caught out if they haven't registered an OA. The requirement to register an OA before service charges can be collected is really an incentive to fully comply with the Jointly Owned Property Law," he added.

Strata law will make developers pay for lies
Developers will be liable to pay compensation to purchasers if the disclosure statement, which becomes mandatory from January 13, 2011, is incomplete or inaccurate in a material way, according to the Strata regulation.

"It is important that the interim disclosure statement and disclosure statement are prepared properly and accurately, as the developer is deemed to have warranted the information contained in the statements and the developer will be liable to pay the purchaser compensation if the disclosure statement is incomplete or inaccurate in a material way," Clyde and Co said in its latest real estate update.

"Failure to attach an interim disclosure statement, or from January 13, 2011, failure to attach a full disclosure statement to a contract for sale of a unit will result in issues with enforceability of the contract," the legal consultancy said.

Article (5) sub-clause 3 of the Direction for General Regulation Concerning Jointly Owned Properties says: "The developer is deemed to have warranted the information in a statement given under sub-clause (1) of article (4) and ifwithin two years of the date on which the unit is transferred from the developer any of that information is found to be inaccurate or incomplete in a material way the developer will be liable to the consumer to whom the unit is transferred for damages, whether the consumer purchased from the developer or another consumer."

Since the introduction of Strata regulations in Dubai earlier this year, an extensive disclosure is required pursuant to the directions when selling units in Jointly Owned Property (JOP) especially for "off plan" sales. Interim provisions currently in force provide that an interim disclosure statement must be attached to any contract for the sale of a unit within a JOP where the title to the unit has not been issued by the Land Department of Dubai and the seller is the developer.

The interim disclosure statement must include extensive detail of the project and the unit as prescribed by the directions. The interim disclosure provisions will expire on January 13, 2011, from which date a full disclosure statement must be attached to any contract for sale. The disclosure statement must include a copy of the proposed JOP Declaration for the project as well as extensive detail of the project and the unit as prescribed by the directions.

High service charges eating into rental yields

Dubai property owners are caught in the twin-grip of declining rentals and unsustainably high service fees being charged by developers, pushing their return on real estate investment further down.

Maintenance fees at some locations, including for Downtown Dubai and the Burj Khalifa tower in particular, are as high as 45 per cent of the annual rentals, further adding to the woes of investors who have seen valuations of some of their properties decline by almost 50 per cent over the past couple of years.

For instance, service charges for the current year in Burj Khalifa has been established at Dh52.77 per sq ft for residential units.

This website recently broke the news about Studio apartments in Burj Khalifa now renting out at Dh80,000 per year.
Based on the average size of studio apartments in the tower (553 sq ft), the service charge works out to more than Dh29,000 per year, or over 36 per cent of the rental yield.

Rental yield is even lower for an average one-bedroom apartment in the tallest tower in the world, with a one-bed apartment of size 986 sq ft renting out for Dh120,000 while the service charge works out to more than Dh52,000, or over 43 per cent of the annual rent.

Service charges as a percentage of the annual yield have ballooned as rents continue to decline, forcing investors to frequently recalculate their RoI.

Industry experts blame a lack of initial transparency over the cost of maintaining a building and speculator frenzy for these woes. "The high fees were set in a hot market and buyers simply had to take it or leave it.Many of the people that bought did not intend to live in the properties - they were planning to sell before ever paying a fee and therefore did not care what the fee was," Kosta Giannopoulos, Manager Residential Sales and Leasing, Better Homes, told Emirates 24|7.

According to a survey done late last year by Dubai-based real estate broker Harbor Real Estate, the average annual service charges for buildings acrossDubai are Dh16 per square foot.

"The highest service charges recorded were in and around Downtown Burj Dubai at about Dh22 per sq ft, while the lowest were in the Greens at Dh11 per sq ft," Harbor Managing Director Mohanad Alwadiya had then said.

"Investors and owner-occupiers alike are starting to evaluate very carefully the impact of service charges on the financial performance of their property and their own personal wealth," he added.

While rentals have continued to decline since, the maintenance fees charged by developers hasn't, forcing yield further down.

"Downward pressure on leases continues across virtually all areas of [Dubai]," consultancy CB Richard Ellis said in its latest Dubai MarketView report. CBRE said average rental rates for one, two and three bedroom apartments across the 12 locations it surveyed "have dipped by an average 13 per cent on a quarterly basis, whilst on an annual basis they have declined by 18 per cent."

According to CBRE data, "[t]he biggest drop has been for one bedroom units with a 20 per cent decline. This can be attributed to the relocation of tenants to bigger unit types as lease rates have fallen away and become more affordable."

The high service charges, nonetheless, are justified from the developers' point of view in case a building is unique and requires high maintenance, such as the Burj Khalifa. "The service charges will differ greatly depending on the building or development - this is because the common areas differ so much," said Better Homes' Giannopoulos.
Nevertheless, there are other reasons why charges remain high. "I think there are a number of reasons why service fees are high," she added.

"Some communities have lavish common areas that cost a lot to maintain," she said. Another reason is that, earlier, "developers had a monopoly on service provision and so could charge whatever they wanted (it also didn't help that the owners were not able to see audited accounts of what the money was being spent on)."

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