211 total votes.
By NEIL HARTNELL
Tribune Business Editor
The Bahamas Real Estate Association's (BREA) president yesterday warned "lots of sales will be cancelled" as the sector makes a last-ditch bid for a smooth VAT transition.
Christine Wallace-Whitfield called on the government to either provide a 60-90 day "transition period" for property deals signed before July 1, but which have yet to close, or "honour" them at the existing 7.5 percent VAT rate.
She told Tribune Business this would prevent market disruption, and reassure both buyers and sellers, describing the sudden jump from a 7.5 percent VAT to 12 percent come Sunday as "a little cut throat".
Calling on the government to work with a real estate industry that is one of its largest revenue generators, Mrs Wallace-Whitfield said it was unfair for parties to "under contract" deals to be faced with paying extra VAT on attorney fees and realtor commissions when they had a budgeted for - and had a legitimate expectation of - a 7.5 percent rate.
The BREA president is seeking an 11th hour meeting with KP Turnquest, the deputy prime minister and minister of finance, in a bid to address members' concerns over the VAT hike's implications with just three days left before it takes effect.
Besides the VAT-induced increase in transaction fees, Mrs Wallace-Whitfield said the industry also feared that Real Property Tax Act changes to the definition of "owner-occupied" property will lead to "significant" tax hikes - including the removal of the $50,000 "cap" - that could turn-off current and potential second homeowners.
"We would like to get clarification from them [the government] on what the industry is faced with," the BREA president told Tribune Business. "I've got a lot of people asking us what BREA can do.
"We want an official government position from them to BREA on current real estate transactions under contract, and whether they will still be faced with a 7.5 percent VAT rate after July 1. Will they be able to give consideration to the real estate industry having a 60, 90-day transition period after July 1? We're going to have a lot of sales cancelled [otherwise]."
Mrs Wallace-Whitfield said her phone, and those of other BREA executives, had been "ringing off the hook" with questions over how the transition to a 12 per cent VAT rate will be effected - especially for transactions where sales agreements have been signed but have yet to close.
"A lot of people are saying: 'I've got sales on the line. What's going to happen?'" the BREA president added. "It would be nice if the Government could work with us for a little bit of an extension to help those sales in the process of closing in the next month or two so they have an opportunity to stay at 7.5 per cent.
"Those sales were contracted with the understanding of a 7.5 per cent VAT and, all of a sudden, you've got 12 per cent. I understand the Government needs to generate revenue, but to me that's a little cut throat.
"You've got to work with us. We're one of the main industries that generate a lot of revenue. It would be nice if you could work with us. We're not talking months and months and months. We're talking a little bit of a grace period," Mrs Wallace-Whitfield continued.
"We now have to go back to the purchaser and say: 'The sale is due to close on July 31, but I'm afraid that if it's after July 1, you're going to have to pay more'. It doesn't look good."
Many purchasers, especially those on tight budgets, will already have made provisions for 7.5 per cent VAT and may struggle to cover the increase associated with attorney and realtors' fees. They may also encounter difficulty in obtaining the extra funding from lenders and other avenues.
Mrs Wallace-Whitfield said it was vital to avoid any market "shock", and added: "If we can get a grace period, a transition period for 60, 90 days, that's all we're asking for. We can then tell clients you've only got so much time to close this deal.
"In these last couple of weeks, it's very hard to rush these deals to a close. Attorneys have to do due diligence, title searches, all these things. When the sale was negotiated, VAT was 7.5 percent, but come July 1 it will be 12 per cent.
"That's not right. Sales agreed before July 1 should be honoured at 7.5 per cent, that would be great, or a 60-90 day transition period would give people time to close those sales. I understand why they have to raise the VAT, it is what it is, but if they can work with us we can come to a more amicable arrangement and be satisfied."
The Government has given time extensions and 'grace periods' to several key industries, including the hotel sector, construction and retailers, to enable a smooth transition to the 12 per cent VAT. The length of these extensions/grace periods is in keeping with what BREA is requesting.
Mrs Wallace-Whitfield, meanwhile, also warned the Government against "scaring away" wealthy second homeowners through the Real Property Tax Act amendments that threaten to throw many into a higher tax bracket with no 'cap' protection.
"Anything and everything that is related to the real estate industry affects us," she told Tribune Business, pointing to the increase from 1.5 per cent to a 2 per cent rate on the value above $500,000 for real estate classified as 'other property'.
"We have to approach buyers really carefully. They're going to say: 'Gosh, wow'," Mrs Wallace-Whitfield said. "You're trying to sell your product to foreigners looking for second home ownership, so we have to change the wording and approach.
"We are a destination for second homeowners. We have an excellent product in the Bahamas. With all the islands we've very unique compared to other Caribbean countries. We do have something different but we don't want to scare them away. We want to be an attractive market for second homeowners. They do bring business and revenue to our country."
While some observers will likely argue that wealthy foreigners can afford to pay more taxes, and should share in the sacrifice Bahamians are being called upon to make, it should not be forgotten that the fierce competition for scarce investment dollars means this nation cannot afford to price itself out of the market with frequent tax increases and tinkering.
The concerns stem from the Real Property Tax Amendment Bill that accompanied the 2018-2019 budget, which requires "owner-occupiers" to reside in their homes for six months or more per year. This is a marked change from the current Act, which defines "owner-occupiers" as persons who reside in their homes "on a permanent or seasonal basis".
This allows the Bahamas' second homeowner community, many of whom are in this nation for just a few months per year, to be taxed at the "owner-occupier rate" that was reduced in 2016. They currently pay a rate of three-quarters of one percent on their home's value between $250,000 and $500,000, with the portion above $500,000 taxed at one percent. The total sum they pay is also capped at $50,000 per annum.
But, with the elimination of "seasonal basis", homeowners will now have to reside in their Bahamas properties for a minimum of six months per year to retain "owner-occupied" status.
Should they fail to meet this benchmark, their properties face being reclassified as "residential property" or "other property". Since non-Bahamians cannot qualify for the former, foreign second homeowners will fall into the 'other property' category where the tax rates are much steeper.
Real estate classified as 'other property' is taxed at a rate of three-quarter of 1 per cent on its first $500,000, with a 2 per cent rate applied to its value above this threshold. And the 50 per cent 'cap' does not apply, meaning the tax rate is effectively doubling.
"We fully appreciate the need to raise additional revenue as the government moves toward a more stable financial position," said Mrs Wallace-Whitfield. "We have also asked the government to respect the need to make home ownership affordable, and to continue to attract second homeowners.
"BREA recognises that there is always room for compromise. Accordingly, BREA has accepted the increase from $500,000 to $750,000 minimum investment for residency for those who qualify. As such we are seeking to discuss a proposal for a gradual, rather than sudden implementation, of certain aspects of teal property tax changes and a delay in the implementation of the increase in VAT rates, terms and conditions for sales or developments currently under contract or underway."
According to Wallace-Whitfield, it is important for The Bahamas not to be perceived as a jurisdiction that changes business terms mid-stream.
She added: "The Bahamas is seeking to retain a very special place in the global market. However, costs do influence behaviour and can impact our ability to remain competitive. While developments that are still in the planning stages have time to amend their business plans, projects that are underway that were built to sell at a certain price point may not have the same price flexibility.
"BREA is faced with twin concerns, which include an increase of VAT on fees associated with a purchase in addition to an increase in percentage of real property tax from 1.5 per cent to 2 per cent above $500,000 (which also includes a removal of a $50,000 cap).
"BREA is desirous of meeting with the government in an amicable atmosphere in order to derive a mutual position in an effort to stimulate growth, which in the final analysis is the best way forward for a productive real estate industry and a financially healthy nation. "