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Land acquisition: Simple task made difficult for investors

For French investment advisor Michel Lacombe, the end is finally in sight. Six months after he began looking for a 200,000 square metre Slovak factory location for French auto parts manufacturer Plastic Omnium, he now has only one more hurdle to clear - the owner of a small plot of land who is holding out for 12 times the price Omnium is willing to pay.
"All the owners, including the town of Lozorno, agreed on a price - 150 crowns per square metre - but one owner is refusing to play the game, and wants to sell for 1,700 crowns," said Lacombe October 3. "But it's not a real problem - Plastic Omnium has the status of a 'strategic investor', and because of that it's possible to ask for expropriation. I expect that in three or four weeks the state should expropriate this property [and sell it to Omnium]."


This aerial shot of a site on the outskirts of Bratislava, shows the variety of land use interests at play in Slovakia.
photo: Katarína Začková

For French investment advisor Michel Lacombe, the end is finally in sight. Six months after he began looking for a 200,000 square metre Slovak factory location for French auto parts manufacturer Plastic Omnium, he now has only one more hurdle to clear - the owner of a small plot of land who is holding out for 12 times the price Omnium is willing to pay.

"All the owners, including the town of Lozorno, agreed on a price - 150 crowns per square metre - but one owner is refusing to play the game, and wants to sell for 1,700 crowns," said Lacombe October 3. "But it's not a real problem - Plastic Omnium has the status of a 'strategic investor', and because of that it's possible to ask for expropriation. I expect that in three or four weeks the state should expropriate this property [and sell it to Omnium]."

Despite the satisfaction evident in his voice, Lacombe is far from happy about the hassles he has encountered in trying to find a site for the Omnium investment, which at 70 million euros ($62 million) is the fourth biggest in Slovak history. In acquiring the land he has had to cut deals with over 300 separate owners, a process which has pushed back the construction start date from August to November. He has even had to fight the Catholic church, after the Trnava archdiocese refused to sell the plot it owned in the middle of the Omnium site.

"They want to play? OK, but they play solo," said Lacombe, explaining that the French investor had simply bypassed the stubborn clerics. "We bought all the land surrounding the church property, so they can keep their land. But I think they didn't play a correct game for Slovakia - they have to take care of our souls, not their own money."

Even with all land purchase contracts signed, Lacombe's work in some ways has just begun - he must register all ownership changes with the Malacky district office, he must secure approval for the Omnium project and must have the land rezoned for industrial development. He must pay to have all infrastructure - roads, gas, electricity, telephones, water, sewage - connected to the site. Is he frustrated?

"Yes. Yes, yes," Lacombe replies. "Imagine that in order to buy something you have to negotiate with hundreds and hundreds of owners - papers, discussions. The only way to attract foreign investors is for the government to build industrial parks. You have to avoid having foreign investors going directly to owners. You have to offer a complete site with all facilities."

Lacombe's tale has become a common story in Slovakia - while acquiring land is not the greatest barrier that foreign investors face in setting up shop here, it can be a needlessly arduous process and also something of a lottery, depending on which municipality - and sometimes even church diocese - a foreign firm intends to build in.

Time on their hands

Real estate professionals say that for investors, buying land is usually more a question of time than money. For starters, branches of foreign firms (with the exception of banks) cannot own land directly in Slovakia, and thus must set up a Slovak limited liability or joint stock company to hold title for them. Paul Carrier, an attorney with the Slovak branch of the Squire, Sanders and Dempsey law firm, noted that the process of registering a new firm "can be a bit time-consuming," and might take anywhere from two to six months.

Then there's the search process, which can turn into a nightmare given Slovakia's byzantine land registry system. Martin Holec, managing director of Bratislavská Realitná Kancelária (Bratislava Real Estate Office - BRK), estimated that in "ideal cases", foreign buyers should expect to devote 12 to 18 months to finding and acquiring land before they can start building a factory. "Sometimes, though, this process can take up to three or four years," he said.

It's identifying, finding and negotiating with land owners that makes buying large tracts of real estate so time consuming. In Slovakia, all land was nationalised by the communists in the late 1940's, and then was given back to its original owners in the early 1990s through a process called 'restitution'. Land may now be owned by one of three entities - private owners, municipalities and the state.

If investors choose to buy from private owners, they may find it impossible to deal with the hundreds of title holders attached to a large prospective industrial site - which is why firms tend to prefer buying from the state, which administers its land holdings through the national Land Fund. But in buying from the Fund, they may run into problems with 'unidentified land' - land whose owners did not reclaim their property after the fall of communism, but whose sale to an investor may bring them running for compensation.

"[In buying unidentified land from the state] there's a bit of a risk that hidden claims may come out of the woodwork," said Squire Sanders' Carrier. "It's a potential nuisance factor that may involve nuisance money."

The other risk in buying from the state, according to Laurie Farmer of real estate consultants Spiller Farmer, is that the investor may be landed with a former military or industrial site that was contaminated during communism. "The contamination would have to be removed [at the investor's expense], but there would be no record of it, because there is no record of anything the army did [during communism]," said Farmer.

Such was the case of Sumitomo Electric Wiring Systems (SEWS), which, on the verge of buying a site in western Slovakia's Topoĺčany, discovered that the land was contaminated with hydrocarbons. "It was our intention to buy the land until we commissioned an environmental survey," said SEWS GM Kevin Phillips. "The deal changed on the day we signed, and we are now leasing the property."

Whether investors favour speed or safety in purchasing land, the outlay in time continues with the registry process at the local cadastral office. Although officials are allowed a month in which to register changes in title, many cadastral offices are short staffed with the waiting list extending up to a year for average cases. The problem, according to BRK's Holec, is not that official caseloads are too heavy, but that responsibilities are too broad. "These offices should register title, no more than that," he said. "They shouldn't investigate the legality of contracts, and whether they are written in the proper form, as they do now."

In addition to the cadastral office, investors have to deal with local town councils to get their site rezoned, to get project approval, building permission and, with greenfield projects, to have the city masterplan modified where necessary.

Help at hand

But according to Alan Sitár, foreign investment advisor to Prime Minister Mikuláš Dzurinda, the government has come up with a plan to ease dramatically the time and difficulty involved in buying land. The Economy Ministry, he said, is just now putting the finishing touches on a new law that will "set up the structure of how the government will be supporting the creation of industrial parks".

Under the terms of the bill, he said, municipalities will contribute at least 30% of the cost of building an industrial park, whether in land or infrastructure. Each park will be fully connected to local utilities and transportation routes, thus relieving investors of a prohibitive cost burden. Although the government has not stated how many such parks would be built, Sitár predicted it would be somewhere between two and five, including the 'Silicon Valley' high-tech park project that has already broken ground in western Slovakia's Malacky district.

"Land acquisition is one of the crucial questions for investors, and it's one of the areas where they come to us for help," said Sitár, adding that with the proposed industrial parks, investors would be dealing with one owner - likely the local municipality - while the state would solve land acquisition problems on its own. "There is no universal solution [to how the state will buy land for parks], we'll deal [with purchases] on a case-by-case basis."

It is expected that the industrial parks scheme, apart from simplifying land acquisition, will also help to spread investment out across the country by reducing the differences between settling in one region and setting up in another. For one thing, if parks are built in the north and east, Bratislava will no longer have such an advantage over these parts of the country because of its infrastructure development

Secondly, differences in land ownership patterns across the country will no longer be as important in determining investment choices in the wake of industrial parks. At the moment, land in those parts of Slovakia which used to be under Austrian rule in past centuries - mainly the west of the country - tends to be divided into much smaller units than in other regions. The reason is that under Austrian rules of inheritance, each sibling would receive an equal portion of the family land, meaning that over generations, one estate could become subdivided into hundreds of small plots, creating a massive headache for anyone wanting to buy a large tract of land for a factory.

In those parts of the country which used to be under Hungarian rule, meanwhile, inheritance custom still declares that the oldest sibling inherit title - making for a southern Slovak landscape made up of far larger land units than in the west, and thus a more attractive land purchase equation involving far fewer vendors.

Once industrial parks are built, however, such concerns will no longer be a factor for many investors looking for a factory site, meaning that FDI patterns may become more uniform across the country.

But even for those investors who don't make use of the proposed parks, land acquisition may become less troublesome in the near future.

Some municipalities, aware that breaks given on land to investors may repay themselves many times over in taxes and job creation, have become far more active in luring foreign firms and helping them through the bureaucracy of starting up. Milan Zavřel, spokesman for the Malacky district office, listed four significant investment projects begun or being considered in the area, and said his office was offering its services to help investors jump through the hoops.

"We know what can be bought where and what institutions the investor must contact, and we can speed up processes like registering ownership and getting a building permit to the point where the investor has these in one or two weeks," he said. "For us, this is a priority."

In addition, pressure is building for reform of bureaucratic procedures, with Deputy Prime Minister for Economy Ivan Mikloš announcing last month that a two-tiered fee system would be introduced at cadastral offices, giving customers the option of express services.

For BLK's Holec, such changes can't happen soon enough. "We need to change the entire system, and the attitudes as well, not just one law. Cadastral officials are overloaded, so we need more manpower, and this must be given high priority in the state budget. Their function also has to change from investigating to registering title. And finally, we need a central land registry instead of all these regional offices."

Attorney Carrier had similar advice. "They need to standardise and improve the real estate registry system, and also to pass legislation requiring hidden interests to either file [land claims] or lose [title]," he said.

And while strength may be building to make some changes, patience is also growing with those aspects of land purchase that cannot be altered. Acknowledging that selling land to foreigners remains a sensitive issue in Slovakia, as in any country, Malacky's Zavřel said that domestic firms now rarely cried foul over investment incentives given to foreigners. "They may see it as favouritism in a certain sense, but on the other hand they realise they don't have the capital to put these sites to good use," he said. "Besides, today's political opposition used this principle in the past - opening up space for domestic firms - and we have all seen the result - asset stripping, factory closures and layoffs."

Even wisdom to know the difference between what can and can't be changed seems to be spreading across both sides of the investment fence. "Whether or not a town council helps investors depends on the education and awareness of the elected officials," said Zavřel. "But most importantly, they have to know what they want."

"Investors often think that because they bring in a lot of money they can have what they want," said real estate consultant Laurie Farmer. "But that's actually not true. You have to know what you're up against, and I think those who get frustrated are perhaps not dealing with it in the right way."

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