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Unintended consequences

Dear Sir,

I have been absent somewhat from my letter writing to you; probably on purpose because there isn’t much good to say nowadays. The island has been subject to a painful two-plus years because of the pandemic, which has affected pretty much everybody. Some have weathered the Covid storm a bit better than others, but many have had a terrible time with adjusting to job losses, reduced income, diminishing hope and perpetual head-scratching from a variety of daft government policies and directives of one sort or another.

One daft policy was brought to my attention this past week from some real estate friends and, while I consider myself somewhat informed about happenings on island, because this is my home and I take a keen interest in pretty much everything “Bermuda” — likely ingrained in me from my time in public service as a senator and MP — I totally missed this particular doozy of a policy that the Government implemented in March 2021. Maybe this policy was released when I was having my eyes fixed abroad — you know the issue, Mr Editor; as we age, the eyes get older and things called cataracts develop that affect one’s vision. All is good now, thankfully, and for the first time in 53 years I don’t have to reach for my glasses when I wake up in the morning! But I digress!

This new doozy directive I am referring to is the “Economic Investment Certificate and Residential Certificate Policy” issued by the Ministry of Labour, and it became effective March 1, 2021. Now, to be fair to the minister and those who crafted the new policy, I do think the overall intent is noble. It is laying the groundwork to attract foreign capital into the island by giving non-Bermudians the option of investing a minimum of $2.5 million into a variety of different areas, such as property, Bermuda Government bonds — there’s plenty of that issued at present — Bermuda charities, Bermudian-based businesses, BSX-listed Bermuda companies, etc. There’s a dearth of different investing options that foreign investors can consider, which is a good thing and let’s hope the policy is successful.

However, the policy appears poorly drafted and one wonders if the Government consulted with stakeholders when formalising the new rules. For those unaware, the theme of the policy is to entice overseas investors to part with $2.5 million of their money and invest in Bermuda, after which they would be issued an Economic Investment Certificate for a five-year period. This certificate would allow the investor a variety of perks, such as residing in Bermuda along with their family and seek employment in Bermuda for the investor. After five years, the EIC holder can apply for a Residential Certificate, which will allow residency on island for an indefinite period for the investor and their family.

I think most of us can appreciate the intent that the Government has here to attract foreign investment on to our shores and increase the “boots on the ground” on island that will see additional local spending and the multiplier effect of that money circulating in the economy.

However, one quirk in this new policy, which although not written seems to be enforced and has become government practice — as told to me by real estate professionals — is that existing leasehold condominiums are now not available to overseas buyers, unless the buyer already has an existing RC or if the condominium is located in a government-approved resort residential development — read here St Regis, Bermudiana Beach resort, Morgan’s Point and likely the Fairmont Southampton once it is renovated, and any other resort facility, for that matter.

If a new overseas buyer wishes to purchase a leasehold condominium outside of a resort residential development effective March 1, 2021, they must invest $2.5 million to trigger the process; ie, apply for an EIC and an RC may be granted in five years at which time they can purchase a leasehold condo located outside the government-legislated resort residential development, subject to after-repair value threshold policy.

Mizzentop

This new government directive seems most strange to me and very discriminatory. Many will know the leasehold condo developments targeted by this government directive, such as Mizzentop, Innwood, Strawberry Hill, Cloverdale, St James Court, Mount Wyndham and likely a few others that I can’t recall. I’m sure many Bermudians purchased condos in these developments, and they did so knowing that their investment would have a decent resale value because the units could be sold on to non-Bermudians. That option has now been taken away by the Government and the premium price they paid for that option has likewise been ripped away and forfeited. With the passing of this policy, Bermudian-owned condo units have likely seen an immediate 30 per cent to 50 per cent devaluation of the asset!

Now, let’s suppose that many Bermudians borrowed money to buy a condo before March 2021. The Loan-to-Value of their asset has now turned upside down and the property could well have negative equity! I sure hope the banks haven’t been asking for more collateral against these loans! Wow, did anyone in the Government think this through? It’s a prime example of “unintended consequences” on a harebrained, poorly thought through policy.

On the other side of this policy is the non-Bermudian owner of the property. Having brought capital into the island by purchasing an approved leasehold condo before the March 2021 policy, they now cannot sell it to another foreigner because the developments noted above are not attached to a hotel development. Their asset has also taken a 30 per cent to 50 per cent valuation hit. I am sure there are a lot of angry non-Bermudian owners of condos who are spreading negative news reports about the Government’s new, discriminatory policy. Bermuda’s reputation has just taken another hit. Thank you, minister! More unintended consequences!

What also seems strange is that the Government is requiring a five-year wait for foreigners before granting an RC under this new EIC policy, whereas the previous condominium leasehold policy was to grant an RC almost immediately upon the foreigner buying the real estate. Why such a long wait? Don’t we want more boots on the ground and shouldn’t the RC be used as a real incentive to get overseas investors to part with their hard-earned cash? The Government is also forfeiting the 8 per cent tax and stamp duties levied on leasehold condominium sales to foreigners! Don’t we need the cash to help balance the budget? More unintended consequences!

The Government needs to immediately amend this policy back to the previous rules. If it wishes to incentivise condo and residential sales attached to hotel developments, it should not take away existing incentives from other condo owners that were ingrained in their original purchase. That is just wrong. It is also discriminatory. One expects better from a government that claims its legacy as one supposedly protecting people’s rights!

ALLAN D. MARSHALL

St George’s

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Published January 24, 2022 at 8:00 am (Updated January 23, 2022 at 2:15 pm)

Unintended consequences

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