By NEIL HARTNELL
Tribune Business Editor
More than $1bn in real estate projects may have been unleashed, and "a serious challenge to home ownership" removed, after the Government clarified that the sector can reclaim VAT "inputs".
Developers yesterday told Tribune Business they had been given "a tremendous amount of confidence to take the leap" on new and existing projects due to the outcome of a meeting with KP Turnquest, deputy prime minister, and senior ministry of finance officials last week.
The meeting, with the newly-formed Bahamas Developers Association and related professionals, addressed the industry's long-standing concern that the 2018-2019 budget's tax policy changes made it impossible for real estate projects to recover value-added tax (VAT) paid on their input (construction/development) costs.
This was based on the Government's decision to revert back to the old ten percent stamp duty structure for real estate transactions, and abandon the previous stamp duty/VAT split, which developers interpreted as making real estate sales "VAT exempt".
As a result, they feared this would leave them unable to "net off" or offset the VAT paid on construction materials - and the likes of contractor, engineer and architect bills - against the "output" tax whenever a property is sold.
Besides increasing real estate costs for both Bahamian and international buyers, and potentially putting home ownership beyond the reach of many Bahamians, developers were also concerned that the greater tax burden would push them into loss and render projects - especially those already underway - commercially non-viable.
But the Association, in a statement issued yesterday, said Mr Turnquest and Marlon Johnson, acting financial secretary, told last week's meeting that the industry was interpreting the Budget in a way that the Government never intended.
They pledged changes will be introduced to make it clear that all construction and development-related activities will be treated as "taxable supplies" for VAT purposes, therefore allowing developers to reclaim their 'input' tax payments.
Hailing the long-awaited clarification, the Association said the move would unlock multi-million dollar projects that had been placed on hold pending this decision. Palm Cay's $100m One Marina expansion was said to be among the developments that will now move forward, while another unnamed developer said they had "revived enthusiasm" for a high-end 12-acre project.
Jason Kinsale, Aristo Development's president, told Tribune Business yesterday that last week's meeting and clarification had "taken away one more level of stress" faced by himself and other developers.
"I think it provides a tremendous amount of confidence going forward for developers to recognise the fact that we're able to claim the VAT back," he said. "We've been told a mechanism has been provided to ensure that flows smoothly.
"We weren't looking for concessions; we were looking for the ability to claim back the VAT spent. Now that's been addressed, that eases the burden of having to make up the 12 percent. There was no ability for the end buyer to absorb additional costs, or for us to absorb a 12 percent increase in costs that was never factored into any business plan.
"The reality is that by the end of these projects we have made a 15 percent profit margin, and adding 12 percent VAT would bring it down to just 3 percent. The likelihood was these projects would be affected dramatically to the point where they were not economically viable."
Mr Kinsale, who has spearheaded the development of projects such as the Balmoral Club, ONE Cable Beach and THIRTY-SIX on Paradise Island, said previous interpretations of the Budget's tax changes had deterred developers from wanting to invest in new projects.
They had also threatened to have "a monumental impact" on projects already underway, and the Aristo chief said 12 percent VAT would have been impossible to absorb given the "dramatic increase" in construction costs experienced in recent years.
Confirming that the VAT 'recovery' uncertainty could have frozen the real estate development industry without the Government's action, Mr Kinsale said "everyone seems relieved" following the outcome of last week's meeting with the Deputy Prime Minister.
"Everyone seems relieved," he added. "It gives you that confidence needed to take the leap forward. I think there's quite a few large projects going on right now, and so I think everyone just feels relieved. It's one more level of stress that's gone away."
Franon Wilson, Arawak Homes' president, told Tribune Business that the Government's clarification was "huge" since it removed a major obstacle to Bahamian home ownership caused by previous Budget interpretations.
He added that it would revive an industry that has "the greatest trickle down effect" in The Bahamas, given real estate development's ability to generate activity for multiple industries - especially construction, architects, engineers, attorneys and others involved in providing housing-related services.
"The group was so pleased to hear them [Messrs Turnquest and Johnson] say that, with the changes made, the intent of the Government was never to do what some people interpreted the changes to have done," Mr Wilson said.
"Developers were able to clarify matters at the meeting and, in so doing, it made a positive impact for development in The Bahamas. The bottom line is that they never intended to do what some people thought the changes were intended to do. The Government clarified that their intent was not to stop or slow down construction in The Bahamas."
The Arawak Homes chief said previous interpretations of the Budget's tax changes suggested they would cause a significant increase in construction costs, potentially placing home ownership beyond the reach of many Bahamians.
"Someone wanting to get a home right now, if the cost for a home and lot package was $200,000, the changes as interpreted would have had the effect of adding $24,000 on to the price," Mr Wilson added. "That would have been a serious challenge for developers and homeowners in The Bahamas for sure.
"I can tell you first hand that home ownership would have been a serious challenge because people's incomes have not gone up, and they've not gone up proportionately to the escalating costs of real estate.
"Adding 12 percent to the cost of a home would have resulted in many people qualifying for 12 percent less, or struggling to qualify with the bank and meet the lending criteria. It's definitely a big deal."
Mr Wilson said details on the system that will allow developers to reclaim their VAT 'inputs' still have to be worked out, noting that the issue was "time sensitive" and the sums involved potentially large for both the Government and industry.
Yet he added: "The trickle down effect from real estate is the greatest in the country. "When you talk about construction projects you need the banks, lawyers, people in the field, architects and engineers. This is one of the main drivers, if not the biggest driver, in the country. If we're doing great the country is doing great."
Mr Johnson, meanwhile, confirmed that the Government would clarify its real estate/construction VAT policy to make clear that these activities are "taxable supplies", so developers can claim 'input' credits.
"It was just a matter of clarifying the policy," he told Tribune Business. "When we reverted back to the straight Stamp Duty on real estate, that caused the confusion.
"We wanted to clarify that all construction activities and development activities are taxable supplies and can be reclaimed as VAT inputs.
"The transaction related to the actual sale of property is VAT exempt, but the materials used are taxable supplies, so they can be reclaimed."
Representatives or principals from Albany; Arawak Homes; Sterling Hurricane Hole and Sterling Global Developments; Aristo Development; Palm Cay; Baker's Bay; Passerine at Abaco Holdings; Starfish Construction; Children's Bay Cay; and Williams Cay, Exuma, were among those who attended last week's meeting along with two attorneys and a real estate accounting specialist.
An Association spokesperson said: "There was a grave concern among developers about a change in the ability to claim back costs on VAT returns when the Budget that took effect July 1 was announced.
"It was a right every other business had, and suddenly developers and builders were deprived of that. The change created immediate alarm and threatened to impact construction jobs, real estate and investment.
"Given that there is such a small profit margin in development, a sudden increase of 12 percent with the elimination of credits for material outlay was enough to bring sections of the industry to a grinding halt," they continued.
"We had been seeking a meeting to try to resolve the issue so some of the projects that were on hold, and others that were considering scaling back, could move forward. We got that meeting on September 27 and it went well. We now await specifics and timelines."
The Deputy Prime Minister and Mr Johnson had described the language used as an "inadvertent accidental oversight", with Mr Turnquest saying: "My technical team and I stand by to assist, and you will be pleased to know that we are making changes in the DIR (Department of Inland Revenue) to expedite and facilitate payment of the VAT credits which you are due."
Developers had also complained of long waits to receive VAT credits and refunds, with one condo developer said to be owed millions of dollars.
"All we were asking for was the same thing every business has: The right to claim back costs on VAT returns. Without that, costs would soar so high that some projects underway would have been in jeopardy for completion. New projects were put on hold or sent back to the drawing table for reconsideration," said the Association spokesman.
"It was like a tsunami of development costs coming in on a tide of trouble, so we are greatly relieved that resolution was achieved and the industry can move forward, but we do need confirmation of processes along with the welcome assurances of remedy."
Members of the Bahamas Developers Association met with K. Peter Turnquest, deputy prime minister, to discuss concerns impeding major developments. Although industry principals welcomed his assurances, they await implementation and timeline specifics