Escrow accounts a year after entry into force of the Developers Act
Residential escrow accounts have been in use in Poland for over a year, but banks so far do not offer much choice to real estate developers. Access to such accounts may also be limited for smaller developers.
The Act on Protection of Rights of Buyers of Residential Units and Single-Family Houses—popularly known as the “Developers Act”—went into force on 29 April 2012. In the act, the Polish Parliament introduced, among other solutions, a requirement for real estate developers to set up residential escrow accounts to which homebuyers’ funds would be deposited. The act established two types of escrow accounts: closed (in which the bank releases the funds to the developer all at once, after receiving the agreement transferring ownership of the property to the buyer) and open (where the funds are released to the developer in tranches, upon completion of each stage of the project, in accordance with the schedule set forth in the contract). Open accounts are further divided into three types: without additional security, with a bank guarantee, or with an insurance guarantee.
Little to choose from at banks
Banks in Poland have had to adapt to the conditions of the new act. Several of them began offering residential escrow accounts. They have decided not to disclose information concerning the costs of opening such accounts. They also have not stated directly whether a residential escrow account may be opened only in connection with issuance of financing for the project. These issues are tailored to each developer and each type of project, through individual negotiations.
All of the banks offer both open and closed residential escrow accounts. Most require that the developer maintain a current account or auxiliary account at the same bank.
Recently cooperative banks have begun to offer closed residential escrow accounts to their customers. Because these banks operate locally, their offers are especially designed for smaller developers.
Open escrow accounts without additional security were included in the act in order to enable small and medium-sized real estate developers to meet the obligation to provide protection for the funds of buyers. However, there is a concern that this may not be achieved in reality.
The act did not require the bank to examine the creditworthiness of the company with which it would enter into an agreement to establish an open residential escrow account. However, this does not exclude the need for careful analysis of the project in order to determine whether the developer will be in the position to carry it forward to completion. It is possible that the only method of limiting the risk for the bank will be to sign an agreement for a closed account. The safest option for the bank would be to combine the escrow account with financing of the specific development. Thus it is for the most part only major developers with an established reputation and a credit history with the specific bank that will have the opportunity to establish open residential escrow accounts. Smaller developers, who have the greatest need of funding for their projects, may not have access to this type of account.
An open residential escrow account with a bank guarantee carries great risk for the bank. Therefore banks will demand additional security. In practice this makes it much harder to open this type of account.
The legislative changes are causing a retreat from traditional sources of financing for residential developments. Developers will have a limited ability to build using the buyers’ funds. This is forcing developers to seek new sources of funding for projects. They may not all succeed in finding funding.
Security at a price
The Developers Act imposes numerous obligations on banks in connection with opening of residential escrow accounts. The bank should assess the developer’s fulfilment of the conditions set forth in the act. This is done on the basis of specific documents, depending on the stage of the project, e.g. the building permit, the agreement with the general contractor, and the construction log. The bank may assign the monitoring of these activities to in-house or external specialists. Clearly this will generate additional costs associated with opening of escrow accounts.
The reason for low supply on the market for residential escrow accounts is primarily the low demand. Developers who began sales of projects before the effective date of the Developers Act were not required to establish residential escrow accounts. As many older projects are still under construction, it remains to be seen how the market practice concerning escrow accounts will develop.
Karolina Turko and Ewa Jasic, Banking & Finance Practice, Wardyński & Partners