Construction projects in the protected sector

The adoption of the Law n°1.508 of 2 August 2021 regarding the safeguard and reconstruction of premises for residential use, covered by the provisions of Law n° 1.235 of 28 December 2000, reveals new questions which real estate professionals should consider. These questions refer to real estate projects including one or many old building(s) and may have impact on the interest of such projects.

Before the adoption of this law, apart from the possible tax advantages, the purchaser of an old building subject to Law n°1.235 of 28 December 2000 relating to the rental conditions of certain premises for residential use built or completed before 1 September 1947, was freed from the constraints of Law n°1.235 simply because of the demolition operation (restricted choice of tenant, controlled rents, right to renewal of the tenant, etc.), thus taking the project out of the scope of the so-called "protected" sector.

However, the Monegasque Government intended to put an end to the gradual disappearance of the protected sector as a result of property development operations on old buildings, and to enable the renewal of the protected sector stock.

Consequently, although real estate operations resulting from the demolition of old buildings still offer - under certain conditions - tax advantages, new constraints are imposed on professionals.

A real estate transaction that is still advantageous on the tax front

The registration of a deed of transfer involves in principle the payment of registration duties, the rate of which still varies between 4.5% and 7.5% depending on the purchaser (despite Bill 1048 containing various tax provisions, considering increase of these amounts). Since these duties are calculated proportionally on the basis of the price of the property acquired, they can reach significant amounts.

However, the current tax system enables - under strict conditions - exemption from the payment of these registration fees, particularly in case of acquisition operations with a view to the demolition-reconstruction of the property.

In this respect, Law n°842 of 1 March 1968 aiming to change the system of registration duties applicable to real estate transactions subject to value added tax, provides, by reference to an Ordinance of the same year, for an exemption from registration duties in particular for transactions involving the acquisition of land covered by buildings intended for demolition.

This exemption is nevertheless conditional on the purchaser carrying out the reconstruction work within four years of the acquisition, this period being extendable by one year, in particular in the event of force majeure, by the director of the tax services.

Subject to introduction of new constraints

Despite of the tax advantage that these demolition-reconstruction operations on old buildings present - for the time being - new constraints must be taken into account.

Law n°1.508 of 2 August 2021 has brought into the scope of Law n°1.235 of 28 December 2000 on the protected sector, premises for residential use which, although built or completed after 1 September 1947:

• replace premises built or completed before 1 September 1947 which are subject to the provisions of the said law and which have been the subject of regularly authorised full demolition work; or
•  compensate for the lack of construction of the substituted premises.

Thus, from now on, if the demolished building falls within the scope of the protected sector, the professional planning a demolition-reconstruction project will have to transfer to the Monegasque State, in the newly constructed building or in another equivalent building, a number of flats of the same surface as the ones destroyed, distributed over one or more dedicated floors and meeting the strict requirements of the Law. Under this condition, the remaining premises resulting from the reconstruction operation will be located outside of the protected area.

The Act states that the transfer price of these replacement flats will be calculated on the basis of the construction cost, and that the terms of the transfer will be specified by ministerial order.

The Monegasque State will acquire the status of co-owner in the building where the substituted flats or the flats transferred in compensation are located.

In return, the professional will be granted an increase in the buildable volume of the new building unless urban planning standards or other technical or legal constraints do not allow such an increase, in which case the obligation to transfer flats in substitution or compensation will not apply.

In this context, it is now up to the operator to question - before any acquisition of an old building - firstly on the applicability of Law 1.235 of 28 December 2000 to the building whose acquisition is planned, and secondly on the impact of this law on the general economy of its demolition-reconstruction operation.