Eunma Apartment Notified of 2 Trillion Won Reconstruction Excess Profit Recapture Charge
The reconstruction excess profit recapture levy (known as 'Jaechohwan') has become a reality for apartment reconstruction projects after roughly 20 years. The levy is a system under which the public takes a portion of the excess profits generated by reconstruction. The union of Eunma Apartment in Gangnam-gu, Seoul has been notified by the Gangnam District Office of an estimated charge of 2.0044 trillion won. Earlier, the union of Banpo Hyundai (now Banpo Centreville Asterium) in Seocho-gu received advance notice totaling 17.9 billion won. Until now, the excess profit recapture system had been applied only in limited cases, such as some small-scale townhouse redevelopment projects.
The excess profit recapture system calculates excess profits by subtracting normal housing price appreciation and development costs, such as construction expenses, from the rise in home values brought about by reconstruction. If the average excess profit per union member exceeds the exemption threshold, an assessment rate of 10 to 50 percent is applied according to the excess profit bracket.
Construction cost-sharing payments and the excess profit recapture levy are distinct concepts. The cost-sharing payment is money union members pay additionally to the union in order to be assigned a new apartment. When construction costs rise or expected revenues from units sold to non-members fall short, the shortfall grows and cost-sharing payments increase. The excess profit recapture levy, by contrast, is a payment of a portion of the excess profits generated by reconstruction to the public. Because of this structure, if the levy is enforced on Eunma Apartment, reconstruction union members could face an estimated average charge of 460 million won per person on top of cost-sharing increases stemming from rising construction costs.
The levy is imposed even if the homeowner did not sell and thus never cashed in the actual gain. That is because the excess profit recapture system levies charges on unrealized profits based on the point at which the reconstruction project concludes. Mid-term buyers are no exception. While the reconstruction levy is in principle paid by the union, a secondary payment obligation can arise for individual union members under conditions set by law, such as when the union is dissolved or the charge cannot be covered by union assets. The charge is also not calculated solely on gains arising after the purchase. In speculation-overheated zones, the transfer of union membership status is in principle restricted after the union's establishment permit.
The preliminary charge amount and the final confirmed amount can differ. The figure the Gangnam District Office notified the Eunma Apartment union of is also an estimate; the final charge is confirmed after the project ends. If housing prices or other factors change during the course of the project, the charge can fluctuate as well. Because the local government notifies the union of a total amount and the union then allocates each member's share according to its internal criteria, an individual member's actual burden may differ from the average charge.
Ko Jun-seok, a professor at Yonsei University's School of Business, said, "When the excess profit recapture charge is imposed, financial plans must take into account whether members can afford it," adding, "It is advisable to review financial plans in light of additional cost-sharing payments from rising construction costs and charges previously assessed on nearby complexes." He added, "If union members cannot pay the charge, it inevitably leads to forced auctions." Park Hab-soo, an adjunct professor at Konkuk University's Graduate School of Real Estate, said, "If many union members lack the ability to pay the charge, there could be a wave of calls to hold off on the project and wait for the excess profit recapture system to be abolished rather than proceed."
