A paralysed development is one of the few situations in real estate where the price is genuinely dislocated from the value, and it is also one of the few where the buyer can inherit problems that cost more than the discount. Both statements are true at once, which is why these transactions reward diligence more than instinct.
The licence is the first question, not the building
Building licences in Spain lapse. Municipal rules vary, but a licence granted years ago on a project that stopped may have expired, and reviving it is not always a formality: the applicable planning rules, technical building code and energy requirements may all have changed in the interval, which can mean redesigning to a current standard rather than resuming an old permission.
Before anything else, establish what permission exists today, whether works can lawfully restart, and what a renewal or new application would require in time and cost. A discount that assumes the old licence still works is not a discount.
State law sets part of the frame. Under article 11.4 of the consolidated Land and Urban Rehabilitation Act, new build works require an express authorisation and administrative silence counts as refusal, a rule the Constitutional Court upheld in judgment 143/2017, and article 11.3 adds that no powers or rights contrary to planning can be acquired by silence. The Act does not regulate when a licence lapses: that answer has to come from the rules that govern the licence in question.
What has been built, and what is registered
Physical reality and registered reality diverge in stalled projects. Works completed but never declared, a new construction never registered, a horizontal division never formalized. Each of these is fixable and each takes time, professional certificates and notarial work.
The technical condition matters as much. A structure left exposed for years may need testing rather than assuming. Where the original technical team is gone, someone has to take professional responsibility for what was built before anyone will certify what is built next, and that is frequently the hardest thing to procure in the entire transaction. Mandatory ten year insurance for residential work depends on technical control having been in place at the relevant stages, which is a problem to solve before completion rather than after.
Registration has its own sequence. Article 28 of the same Act requires, for a deed declaring a new construction still in progress, the administrative permission the works need and a certificate from a competent technician that the description matches the approved project; for a finished construction the notary also requires the technician’s certificate of completion in accordance with the project and the further documents that article lists for delivery to users and for the intended use, and registrars apply the same requirements. Article 20 of the Building Act adds that no deed declaring a new construction of a building within its scope is authorised or registered without evidence of the guarantees referred to in its article 19, the ten year structural cover being compulsory for buildings whose main use is housing under its second additional provision, subject to the exceptions that provision sets out. A 2000 instruction of the Directorate General for Registries and Notaries sets how that evidence is given when deeds declaring finished works and notarial records of completion are authorised and registered.
In a stalled project the cheapest thing on site is the concrete. The expensive part is establishing who will certify it.
The debts that follow the property
Some obligations attach to the asset rather than the person, and a buyer takes them regardless of what the purchase contract says between the parties. Unpaid local property tax within the periods the law allows. Unpaid community of owners contributions for the current year and the three preceding it. Tax affections arising from earlier transfers that were self-assessed. Registered charges of every kind, in their order of priority.
Three of these rest on specific provisions. Under article 9.1.e) of the Horizontal Property Act, the buyer of a unit in a building under horizontal property answers, with the unit itself, for contributions owed by previous owners up to those attributable to the part of the year of purchase already due and the three preceding calendar years. Under article 64 of the Local Finance Act, a change of ownership leaves the property charged with the full local property tax due, as a subsidiary liability in the terms of the General Tax Act, whose article 79 also keeps transferred property charged with the taxes on those transfers, whoever holds it, subject to the exceptions that article sets out.
The registry extract tells part of the story and certificates tell the rest, which is why the sequence set out in our note on the documents that decide a Spanish deal matters more here than anywhere else. Add to it the urban planning position: outstanding development obligations, contributions owed to a development board, and any infrastructure not yet handed over to the municipality.
When the seller is insolvent
Buying from a company in insolvency proceedings changes the rules. The sale may require court authorization, the process has its own timetable and publicity, and the insolvency practitioner rather than the directors controls the outcome. In exchange the buyer typically obtains a cleaner position, because the process is designed to deal with creditors.
Buying from a company that is not yet in proceedings but is heading there is the more dangerous case. Transactions concluded in the period before insolvency can be reviewed and unwound where they damaged the general body of creditors, and a purchase at a price that cannot be defended as market is exposed. The protection is a defensible valuation, a price paid transparently, and advice taken before rather than after.
Both situations are regulated in the consolidated Insolvency Act. Until a creditors’ agreement is approved or the liquidation phase opens, article 205 prevents the assets of the estate from being sold or charged without the judge’s authorisation, with the exceptions in article 206. On the look back, article 226 makes rescindable the acts damaging the estate carried out in the two years before the application for insolvency, and between the application and the declaration, even without fraudulent intent, and extends the same treatment, under the conditions it sets, to the period before a communication of negotiations with creditors. For acts not covered by the presumptions of articles 227 and 228, which include onerous dispositions in favour of persons specially related to the debtor, article 229 puts the burden of proving the damage on whoever brings the action, and article 230 excludes from rescission, among others, ordinary acts of the debtor’s business carried out in normal conditions. If a sale is rescinded, article 235 orders the return of what each side received, with fruits and interest, and article 236 treats the buyer’s right to its consideration as a claim against the estate, to be satisfied at the same time as the property is returned, unless the judgment finds bad faith, in which case the claim is subordinated and article 235 adds liability for the damage caused to the estate.
Which tax the transfer pays
The indirect tax on the purchase depends on who sells and what is sold, and the answer for a finished building need not carry over to a stalled one. Article 20.Uno.22 of the VAT Act exempts second and later deliveries of buildings when they take place after construction or refurbishment is finished, so a half-built structure sold by a business in the course of its activity falls outside that exemption. Article 20.Uno.20, by contrast, exempts deliveries of non-buildable land on which there are paralysed, ruinous or demolished constructions, within the limits that provision sets, among them its definition of buildable land, which includes land classed as building plots (solares) under planning legislation and other land on which building has been authorised by the corresponding administrative licence, and its exclusion of land that is urbanised or being urbanised; such a sale then follows the rules for exempt deliveries set out in the next paragraph. Where the sale is subject to VAT and not exempt, article 7.5 of the Transfer Tax Act takes it out of transfer tax, and the deed may still bear stamp duty under article 31.2 where that article’s conditions are met.
Article 7.5 also keeps transfer tax on deliveries of real estate that are exempt from VAT, and on real estate included in the transfer of a business estate when, in the circumstances, that transfer is not subject to VAT. Where an exemption under article 20.Uno.20 or 20.Uno.22 is available, article 20.Dos allows the seller to waive it, in the form and with the requirements set by regulation, when the buyer is a taxable person acting in the course of its business and entitled to deduct, in whole or in part, the VAT borne on the acquisition, or, failing that, when the foreseeable use of the property is, in whole or in part, in operations that give that right.
In distressed transactions the person who accounts for the VAT can also change. Article 84.Uno.2.e) of the VAT Act makes the business or professional buyer the taxable person, instead of the seller, for deliveries of real estate made as a consequence of insolvency proceedings, for deliveries in which the exemption under article 20.Uno.20 or 20.Uno.22 has been waived, and for deliveries made in enforcement of a security over the property, which the article extends to a transfer in exchange for the total or partial extinction of the secured debt or of the buyer’s obligation to extinguish it. The buyer then accounts for the VAT itself instead of paying it to the seller.
Buying the debt instead of the asset
Sometimes the better route is to acquire the loan secured on the asset rather than the asset itself, and then negotiate from the creditor’s position or enforce. This is a well established strategy in Spain and it has a particular local feature worth knowing: where a credit that is the subject of litigation is assigned, the debtor may in defined circumstances extinguish it by reimbursing the assignee the price actually paid, plus costs and interest. That right shapes how these transactions are structured and priced.
The rule is article 1535 of the Civil Code. A credit counts as litigious from the moment the claim relating to it has been answered, the debtor has nine days from the assignee’s demand for payment to exercise the right, and article 1536 lists assignments to which it does not apply, among them an assignment to a creditor in payment of its credit.
The route also demands a different kind of diligence, focused on the enforceability of the security and the state of any proceedings rather than on the building.
Financing the purchase
Banks are slow with distressed assets and frequently absent. Funding for these transactions comes from lenders who underwrite the asset and the plan rather than the borrower’s history, which is the market described in our note on private debt secured on Spanish real estate. Expect a conservative loan to value, expect the lender to want the works budget and the licence position evidenced before drawdown, and expect the exit to receive more scrutiny than the entry.
The transactions that work are the ones where the buyer has priced the discount against a real list of costs to fix, not against an assumption that the problems will turn out to be smaller than they look. In stalled projects they rarely do.
Montclare structures and arranges financing secured on European assets, and prepares the corporate and tax structure that sits behind it. Our services are set out on our services page.
This article is informational and does not constitute tax, legal or financial advice. Lending and credit intermediation are regulated activities and the treatment of any transaction depends on its facts. Each engagement is subject to scope and applicable regulation.