Distress Sales and Ukrainian Real Estate Market: Purchasing Land and Building in 2023

Well before Russia’s full-scale invasion of Ukraine, an interesting trend started to emerge in the Kyiv real estate market. Foreign investors would purchase unfinished or dilapidated residential houses within five kilometers of Kyiv city limits with a view to repairing and re-selling them for a hefty profit. This is commonly known in the US as “flipping properties.” 

These investors employed different strategies to maximize their profit, depending on the specific opportunity. This is still applicable today, albeit at greatly reduced prices due to the war.

For example, today there are many unfinished residential buildings left abandoned all around the Kyiv suburbs. They are usually available for a fraction of their original cost, and they come with land plots and utilities, including electricity, water, sewage, gas. 

The reason for the cheap pricing is simple: the owners ran out of money necessary to finish the construction work and urgently needed to recoup at least some of their investment.  When approached with cash in hand, these “distress sales” often become golden opportunities to flip the property at a huge profit.  All you need is a few good real estate agents and a competent law firm.

In other cases, foreign investors sought out completely dilapidated houses/shacks beyond repair. Presuming that the location was good, and the land plot sufficiently large (and hopefully flat), these houses were razed and new properties built in less than six months, using inexpensive labor, ready to be sold for a large profit. 

Depending on the size of the land plot, an investor might sometimes construct several townhouses instead of one free-standing building. However, such an approach, while far more profitable, requires additional permissions from the local city council and utility companies.

As with any real estate purchase, foreign investors interested in buying a free-standing building and land underneath, must first perform due diligence on the property to learn who the real owners are (legal entities and/or physical persons) and whether there are any potential liabilities (property liens, arrests). This involves a careful review of the land status under the building as well analysis of all documents related to the building itself, including any agreements related to electricity, sewage, gas, water, etc.

Here's a basic due diligence checklist for a building purchase in Ukraine, including land rights.

(a)       Land Documents

·       The title certificate (or certificate on right to lease the land, if applicable) should be carefully reviewed, including an extract from the State Land Cadaster and an extract from the State Register of Ownership Rights to and Encumbrances on Immovable Property. The extract from the State Land Cadaster should indicate the full name of the owner and the land cadaster number. This information must be included in the notarized sale-purchase agreement along with the designation (zoning) of the land plot where the building is located.  If the building was built for one purpose (e.g., residential), but the land plot has a different zoned purpose (e.g., agricultural), this is an indication that the building has not been properly registered for use and legally put into commission (i.e., the building is not intended for its particular purpose). In such a case, additional time and expenses will be required to change the designation (zoning) of the land plot.

·       The extract from the State Register of Ownership Rights to and Encumbrances on Immovable Property also discloses the owner of the land plot under the building and whether there are any liens, arrests or any other encumbrances on the land plot. Importantly, if the building is zoned as residential and the residents have created a co-owner association, then the co-owner association may be indicated as the owner of the land plot.

(b)       Building Documents

The investor (or their lawyers) should collect and review the following documents:

·       The original purchase agreement, which establishes ownership rights and/or a certificate of ownership rights.

·       Extract from the State Register of Ownership Rights to and Encumbrances on Immovable Property, which confirms ownership rights to the building or a part thereof. The extract identifies the owner, the legal grounds on which ownership rights were acquired and the existence, if any, of liens, arrests or other encumbrances on the building.  Note that the State Register of Ownership Rights and Encumbrances on Immovable Property is somewhat new and, therefore, not all buildings may be found in the register. If so, the seller will need to produce a certificate from the Bureau of Technical Inventory (BTI), which also confirms ownership rights, and the above-mentioned title documents for entrance into the State Register prior to the notarized sale-purchase transaction.

·       A technical passport issued by the BTI or by a certified professional, which indicates the original layout or legally registered repair or reconstruction works. It also contains a plan of the entire premises and the exact room and other measurements, including the zoning of the premises (i.e., commercial, residential, etc.) The BTI (or a certified professional) should issue this document just prior to the closing of the transaction. 

·       All agreements with utility companies (water, electricity, gas, heat, etc.) to prove that the building is connected to all of the necessary utility networks. The seller should also provide confirmation that it has no debts before these utility companies; otherwise, the purchaser may need to extinguish any such debts before the relevant utilities are connected (the buyer is not liable for seller’s debts, but the utility companies may nevertheless make the buyer’s life difficult).

With reference to taxation, the following taxes apply to (a) the investor’s purchase of the house and land; and (b) the investor’s sale of the house and land:

(a)       the investor’s purchase of the house and land

When buying a house and land underneath it, the foreign investor needs to pay a notary fee for preparation and certification of sale-purchase agreement and state duty in the amount of one percent of the purchase price indicated in the agreement, but not lower than one percent of the evaluated price (this is usually split between the buyer and the seller), and contribution to the Pension Fund in the amount of one percent of the purchase price (the price of the building only) indicated in the agreement.

(b)       the investor’s sale of the house and land

When selling a house and land underneath it, the foreign investor will pay 18 percent of income tax and 1.5 percent military tax, as well as notary fees for the preparation and certification of the sale-purchase agreement and state duty. This is in the amount of one percent of the purchase price indicated in the agreement, but not lower than one percent of the evaluated price (usually split between the buyer and the seller).

Importantly, a non-resident investor is exempt from taxation if all three of the following conditions are met:

·       More than three years have passed since the purchase date.

·       The land plot does not exceed the so-called “free transfer maximum”, as defined by Article 121 of the Land Code. Note that different maximums may apply, depending on (a) land designation; and (b) type of locality (i.e., city, village, etc.). For land plots intended for construction of residential buildings such maximums are 0.25 hectares for villages, 0.15 hectares for town-type villages and 0.1 hectares for cities. 

·       This is the first real estate sale for such non-resident during this fiscal (calendar) year.

Furthermore, a foreign investor may deduct the costs if he/she purchases an unfinished construction object or future real estate object. Reconstruction/repair costs cannot be deducted from the sale price for taxation optimization purposes after the investor purchases a building which has already been put into exploitation.

With new construction flooding the Kyiv housing market, there is currently a tremendous surplus of apartments and houses for sale. Moreover, Russia’s war in Ukraine has emasculated the Ukrainian real estate market, bringing property prices crashing to an all-time low. Couple that with the impossibility of obtaining credit from Ukrainian banks, anyone with a little extra cash can find a lucrative investment opportunity in Ukraine that will provide significant capital appreciation after the war. 

When viewed from this pragmatic perspective, now is the perfect time to invest in real estate in Kyiv. 

Frishberg & Partners is a Kyiv-based American law firm, specializing in corporate law since 1991. www.frishberg.com