By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government’s proposal to make residential real estate sales ‘exempt’ from Value-Added Tax (VAT) could have “very serious” implications for property developers, Tribune Business was told yesterday, one describing it as “a death sentence”.

This is because developers of subdivisions, gated communities, condo complexes - any form of residential real estate - will be unable to recover the 15 per cent VAT paid on contractors’ bills as a result of their ‘exempt’ status.

Unable to ‘net off’ this sum against property sales, Bahamas-based developers will likely be faced with having to increase prices to absorb the additional VAT burden - something that might put new housing out of reach for hundreds, potentially thousands, of Bahamians.

One developer spoken to by Tribune Business said that with margins around 20-25 per cent at best, having to absorb 15 per cent VAT “ruins the viability of any project”.

If new residential housing developments are slowed down, or scrapped altogether, as a result of VAT’s imposition, the wide-ranging ramifications would spread beyond home buyers and hit several vital economic sectors - chiefly construction and real estate.

The situation was flagged up in an analysis of the VAT Bill and regulations that was disseminated on Friday by the KPMG accounting firm.

It said: “One particular observation in respect of the exemptions is that the construction of a new dwelling will be subject to VAT, and as the sale of a dwelling is exempt from VAT, a developer will be unable to recover the VAT charged by the contractor.

“This VAT cost will no doubt be passed on to the home buyer, making new housing more expensive.”

Franon Wilson, Arawak Homes’ president, told Tribune Business that his company’s own in-house attorneys backed KPMG’s assessment of the VAT Bill’s implications for residential real estate developers.

“We are in agreement that that is the case as drafted,” Mr Wilson, also the Bahamas Real Estate Association’s (BREA) president, said.

Emphasising that it was not the Government’s intention “to drive home ownership costs up”, Mr Wilson conceded that the sector’s proposed VAT tax treatment might have that effect.

Adding that it was also incumbent on developers to assess their “systems and processes”, and see if VAT-related cost increases could be mitigated, Mr Wilson said: “Owning a home is not easy right now.

“To own a home, it’s not something you wake up one day and decide to do......... If the cost of owning a new home increases, you move the goal posts for a lot of people, and the further you move those posts, you’re affecting thousands and thousands of people.

“As drafted, [the Bill’s] very serious. It’s a concern, to put it mildly.”

Mr Wilson added that the real estate and construction sector, especially the latter, was “one of the largest” for creating both direct and indirect employment in the Bahamas.

Apart from the number of workers employed on a construction site, the BREA president said the project’s presence and activities created spin-off opportunities for numerous vendors - ranging from material suppliers to food and drink sellers.

Tavares LaRoda, Arawak Homes’ in-house counsel, acknowledged that the Government was “trying to walk a fine line” in its VAT treatment of residential housing.

While property sales in most countries attract VAT, the Christie administration has chosen to ‘exempt’ residential real estate sales, plus sales of vacant land, from the 15 per cent levy.

This is largely due to the fact it already earns 10 per cent Stamp Duty on most real estate sales, and recognition that imposing an additional 15 per cent on the conveyancing price would create an untenable burden for Bahamian property purchasers.

The draft VAT Bill and regulations, though, added that the tax will “apply generally in the construction sector on materials and labour, and other inputs, on both new construction and renovations of both residential and commercial projects”.

This means that while contractors will be able to ‘net off’ VAT paid on materials/labour against what they bill developers for, the latter will be unable to recover the VAT they pay on contractor invoices.

“It is a very fine line the Government is attempting to balance,” Mr LaRoda told Tribune Business. “They’re exempting the sale of residential dwellings and land attached to those buildings, and vacant land, to mitigate adverse consequences to housing.”

Noting that materials and labour were the major cost components in any housing construction project, Mr LaRoda said of the situation facing developers: “It won’t be an easy fix.

“It’s a complex issue, and I believe the Government will take any steps it needs to, to mitigate any adverse impact on housing. I’m sure they will.”

Yet one prominent residential real estate developer was taken aback yesterday when Tribune Business informed of the VAT ‘exempt’ implications for his profession.

Jason Kinsale, the principal behind the Sanford Drive-based Balmoral project, told Tribune Business that having to absorb VAT without increasing sales prices would likely cut many developers’ margins to around 5 per cent - a level that would make residential developments “non-viable”.

“That’s expensive. That’s big,” Mr Kinsale said, contemplating the consequences of 15 per cent VAT. “A 15 per cent increase is huge, huge.

“In this business, your margin is, say around 20 per cent as an example. You’re not doing this for 5 per cent, and you can’t increase prices by 15 per cent. It’s kind of a death sentence. You can’t make a new project viable.”

The Government’s proposed residential real estate tax treatment could drive buyers to purchase existing houses, as opposed to new projects, due to the cost factor.

Mr Kinsale mused that he might have to become a contractor himself, and employ all the construction workers, to counter the effects if the Government is “going to force this down my throat”.

“We can’t handle a 15 per cent increase in costs. It ruins the viability of any project,” he told Tribune Business.

“The margins might be 20-25 per cent. At 5 per cent, you can’t take the risk. That 20 per cent can go down the pan if you have unforeseen problems. It’s not good.”