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Selling without Licensed to Sell (LTS)

Jennee Grace U. Rubrico
October 30, 2007

EARLIER THIS MONTH, the Housing and Land Use Regulatory Board (HLURB) told Century Properties, Inc., one of the oldest property developers in the country, to stop selling its Gramercy Residences @Century City project in Makati.

The company’s application for a selling permit remained pending, the HLURB declared, and it scored the developer for coming out with advertisements for the project in July and September.

Century Properties officials countered that the advertisements the regulator referred to were actually press releases that came out in newspapers, and said the practice of selling while a license application remained pending was actually an industry-wide practice.

"Due to the extended length of time in filling and getting approval for permits in the Philippines, a majority of reputable Philippine developers start pre-selling their projects without a license to sell," Century Properties Chief Operating Officer Jose Victor Antonio said in a statement sent to BusinessWorld when the notice of violation was released to media.

"The problem is not unique to Century Properties, it affect[s] all major developers," he said.

HLURB officials all but confirmed this, with the agency’s Executive Officer and Commissioner Romulo Q. Fabul saying the notice of violation sent to Century Properties was but one of 149 the regulator had issued since the start of the year, said. The list includes practically all of the major property developers, he said.

"You cannot sell without [a] license to sell. It is a reasonable assurance that the papers are in order and the developer’s warranty, approved plan, ownership and capacity to develop are in place," he said.

Under Presidential Decree 957 or the Subdivision and Condominium Buyer’s Protective Decree — the law that governs the HLURB — property developers cannot sell subdivision lots or condominium units unless they have obtained the requisite licenses.

"Those who violate advertising without license, we notify all of them and issue cease and desist orders. They should not sell until they get the license to sell," Mr. Fabul said.

He declined to provide the list of companies that had been issued notices of violations, saying it was "not updated." Noting that he was a "small fry", Mr. Fabul added that divulging the names of the erring firms "would not be good for the real estate sector, which is a pump-primer of the economy."

"We tell the developers that we are partners — we are all after buyer satisfaction," he said.

The regulator, he said, preferred to give things a "positive spin" by posting a list of projects that have already secured licenses on its Web site.

And while the list also has to be updated — as of press time, the site only identifies projects that got approvals as of August 2007 — Mr. Fabul said buyers can always call the HLURB to find out whether the projects are already licensed.

The license to sell, he said, is a way to protect the public from fly-by-night developers. He and property sector analysts said buyers who patronize reputable developers are basically not at risk.

Analysts said property developers would rather advertise ahead of the issuance of their licenses to sell and pay the fine of up to P20,000 than wait for as much as nine months. Doing otherwise, they said, allow the competition to capture their market.

"It is a common experience among developers that the processing time for the issuance of ECC (environmental compliance certificate), building permits, development permits and conversion usually takes several months and, in some instances, even years, depending on the issues that may arise concerning the project," Megaworld Corp. Vice-President for Legal Affairs Gary de Guzman said.

Mr. Fabul claimed that it only takes the HLURB 30 days to process the license to sell, but this is assuming that all other necessary requirements — like the ECCs (which are issued by the Environment department), the building and other local government permits — have already been secured.

"We even help them by processing the license to sell even while they still have to complete their requirements," he said.

Mr. Fabul also said the HLURB offers temporary permits to sell — valid for six months — to developers which only have to submit their building permits. Developers, however, do not want these, he said.

Delays in the issuance of the permits to sell are already being addressed, Mr. Fabul claimed. In particular, other agencies have already agreed through Executive Order 45 to issue their respective permits within prescribed periods, he added.

Media is also to blame, he said, for allotting advertising space and air time for projects that have yet to be covered by selling licenses.

Jones Lang LaSalle Philippines research head Kathy Marcelo, meanwhile, said another cause for violations is the issue of raising the money needed for actual construction.

"Due to the increasing demand in the market, most developers pre-sell their projects to accumulate additional capital for their construction," she said.
Other analysts also noted that the P20,000 fine for an advertisement that will generate millions of pesos in revenues makes for an easy decision to push the sale.

PD 957, however, metes out heavier penalties for the violation, including a 10-year jail term for repeat violators.

Mr. Fabul said property developers who repeatedly violate the rules on selling are told that their applications for permits would be denied. The denial, however, can be appealed, and Mr. Fabul admitted that the regulator has yet to issue a final denial of a permit to sell applications.
Jones Lang LaSalle’s Ms. Marcelo said the fine should be increased to make the system more effective.

Claro Cordero, Jr., Leechiu Associates senior manager for consultancy services, also called for stricter penalties.

"[For] The existing measures that HLURB has, specifically for license to sell issuance, they should have stricter ways of implementing the policies and should impose appropriate penalties let’s say suspension," he said.

CB Richard Ellis Philippines associate director for global corporate services Ryan Isip said the rules need to be tweaked.

"The rules on pre-selling without the license to sell are not clear they should be tweaked so that there are conditions — what can be done, what can’t be done," he said, adding that HLURB monitoring is important given that sales are also being conducted over the Internet and through telemarketing.

One gray area is the charging of reservation fees — Mr. Isip noted that for a buyer’s payment to be considered a sale, he should have put in 30% of the total cost.

"[The] reservation fee is only P20,000," he said.

It is also not clear if advertisements with disclaimers stating that they are being put out "for announcement purposes only" are legal.

Megaworld’s Mr. De Guzman, meanwhile, said their firm has proposed that the processing time for the development permit and the license to sell be cut short. The HLURB, he said, could remove the two-week waiting period between the publication of the license to sell and its effectivity.

Megaworld also wants the assessments and fees be computed as early as possible after the submission of the initial application.

The HLURB could also fast-track its clearance system in connection with the issuance of the development permit and license to sell, he added.

"If these improvements of the existing rules and regulations are implemented by the HLURB at once, the processing time for the license to sell will be greatly reduced to the benefit of the legitimate developers," Mr. de Guzman said.

THE CASE of property developers advertising developments even without licenses to sell, and in the process generating profits, should be a "non-issue," Colliers International Philippines Inc. director Richard Raymundo said.

"There are ways to do it in a legal way, anyway. The fact that you can announce projects, [means] you’re basically not breaking any rules," he said.

Danilo Antonio, a professor at the Asian Center for Excellence — a partner of the Asian Institute of Management — said property developers that put out advertisements with disclaimers should not be held liable.

"This is just image building and does not really put buyers at risk," he said.
Putting out advertisements before developers can sell does not really make sense financially, he added. Reservation fees, meanwhile, are "a mechanism that allows buyers to get the units they want."

"And reservation fees are usually refundable if the license to sell is not there yet. Developers [should] know better than accept non-refundable reservations," he added.

Developers, analysts and Housing and Land Use Regulatory Board (HLURB) executive officer Romul Q. Fabul said that ultimately, it is the buyers’ responsibility to find out whether the properties they plan to acquire are already covered by permits to sell.

"In the end, you still have to check if the developers have a license to sell," the Asian Center’s Mr. Antonio said.

Buyers should conduct due diligence before signing a contract and paying for the unit, Jones Lang LaSalle Philippines research head Kathy Marcelo said.

"They should check if the developer has secured all government licenses that are needed, as well as check the track record of the developer. They should make it a point to put all things in writing so that there would always be a reference in the future," she said.

Century Properties spokeswoman Terrie Fucanan agreed.

"As we have always maintained, consumers always have to be vigilant by doing a background check on the developers they are buying properties from. They should always check on the developer’s track record and ability to deliver projects on time," she said.

Mr. Fabul said buyers can always call the HLURB. They can also ask the sellers of the project to show them the license number released by the regulator, he added.

For advertisements, he said projects which have been given their permits include the HLURB license number in the ads.

Leechiu Associates senior manager Claro Cordero Jr., meanwhile, said that while a wise buyer should look for an HLURB license even before giving a deposit, "it’s not all the time that the buyer knows specifically whether the developers have been issued license to sell."

Amina Lim, who bought her condominium unit last year, said she did not know that she had to look for an HLURB number when checking out projects.

"None of the marketing people I talked to while looking for my unit told me their HLURB license number. They market their projects rather than tell buyers what needs to be done," she said.

Ms. Lim eventually settled for a condominium unit in a project that was already standing.

But advertisements that have the disclaimers would not deter her from buying the project being advertised, she said, "especially when I really like the project and it’s from a known developer."

Another condominium buyer noted that investors assume that property developers are selling when they come out with advertisements.

"Kaya ka nga naga-advertise eh, kasi nagbebenta ka (you are advertising because you’re selling the project)," he said.

Stick with the good ones

Analysts said it is best to bank on property developers’ reputations when making a purchase.

"Big developers would not risk their reputation to do a thing like that. It’s the small guys that are likely to do that," the Asian Center’s Mr. Antonio said.

The HLURB’s Mr. Fabul said that despite the number of violations, some followed the rules. Of the 180,000 units that were given selling licenses last year, the regulator only got 1,500 complaints.

"This is less than 2%," he said. The figure, however, does not include violations caught through HLURB monitoring.

Mr. Fabul said that among the companies that follow HLURB procedures are Ayala Land, Inc. and publicly listed Cityland.

"Cityland is very conservative — they always put their license numbers in the ads," he said.

Other property developers that sell condominium units that are already built also claimed to meet the HLURB’s requirement.

A DMCI Homes, Inc. official, for instance, said the firm does not need upfront money from buyers for its projects.

"Because everything is sourced from the group — the materials, the construction of the projects, etc. — we can afford not to sell immediately. Our marketing strategy is different," the official, who requested anonymity, said.

DMCI Homes is the housing arm of construction conglomerate DMCI Holdings Inc.

E. Ganzon, Inc. (EGI) President Eulalio Ganzon, meanwhile, claimed his company only sells its projects once completed.

"We are a technical company, our efforts are towards construction and planning specifications; we only do minor advertisements. We don’t work on pre-development sale," Mr. Ganzon said.

Tweaking the rules

Mr. Fabul said the HLURB is tightening its rules — where before it allowed ads meant for announcement purposes, it has decided to prohibit these as well.

"We found out that even these advertisements that say for announcement purposes only already sell. We called the numbers that were published in the advertisements and pretended to be buyers and they sold to us," he said.

Under a new memorandum signed last September, which has yet to take effect, property developers who wish to advertise projects need to file an application for advertisement approval.

Advertisements have to indicate the exact location of the project, license to sell number and date issued, project completion date, maximum selling price, and names of the owners/developer. Pictures should also be labeled properly and developers should differentiate between "actual photographs," "architect’s perspective" or "artist’s illustrations."

Disclaimers, any future development not covered by license to sell, and exaggerations or misleading information are prohibited.

Regulating and monitoring ads, said Subdivision and Housing Developers Association, Inc. Chairman Willie J. Uy, are part of the HLURB’s job.

"Although I would wish that they would be a little lenient, it is within the purview of HLURB to regulate and monitor the ads. This must be in response from buyers who were victimized by unscrupulous developers promising them heaven and earth," Mr. Uy said.

The new set of rules, however, does not change the penalties to be imposed. Whether it will lead to changes in the industry thus remains to be seen. — with inputs from Ruby Anne M. Rubio