Town councils find new way to pump banks for cash

Town councils in Spain have come up with a novel way to raise revenue – by forcing banks to develop their land banks. That means more unsold new homes.

A recent article in the Spanish financial press made me smile. It described how stony-broke town councils, especially those hardest hit by the real estate bust, have come up a with a controversial but apparently legal way to raise money; by forcing banks to develop land acquired in debt-for-property swaps and charging them for the privilege.

Thanks to the real estate bust that has dramatically reduced the fees earned from developers for building licences and such like, local councils are now 15 billion Euros a year poorer than they were. Many of them are bust, and desperately need money, especially in southern regions like Andalucia and Valencia.

Who has all the money these days? The banks, of course. Town councils are reported to be targeting banks with development land and throwing the rule book at them. The job is made easier by tip-offs from former owners quite happy to see the banks suffer a bit.

Town councils have the law on their side. Land laws in Spain allow for compulsory purchases by town councils if certain types of land are not developed within a set period. The councils can buy the land at rural land values, often around 10% of the book value. So the choice they give banks is ‘develop the land, or we will take it from you and pay you 10% of what it’s worth on your books’.

That’s not much of a choice for banks, who can’t afford to take a 90% write down. It’s often cheaper to build.

But the last thing Spanish banks need right now is spending cash building more new homes when they can’t sell the ones they already have.

Thoughts on “Town councils find new way to pump banks for cash

  • The significant element in the Spanish planning system that gives rise to town halls having this dubious ability is that once planning is given for a scheme the development of the project is thereafter obligatory. the town hall is an effective minority partner with the power to force the development for the public good and to realize its own percentage share of the developed land. This is also being applied against marginally solvent developers,forcing them out of business in favor of the town halls, which can expropriate or change the system from developer-led to town-hall-led, or indeed they can invite an infrastructure developer to enter as a partner. This is Very Aggressive given that the landowner gets a bill for the costs at a greatly inflated level and usually loses his property. Even if the developer manages to stay within time limits and extends the process, he is liable for higher land taxes as he passes certain stages and this is again used aggressively against the landowner. Spain has a culture of pitting the Town Hall against entrepreneurs generally, and we know who wins that one!!

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