Being one of the most established residency-by-investment programs, the Portuguese Golden Visa is popular among individuals or families looking for a second residency, second home, second passport or a succession plan. Having multiple options of investment, one of the most popular is the purchase of a real estate or buying property for rehabilitation purposes. However, investment in real estate in a foreign country comes with some challenges due to the number of entities and the risks involved. And also, the Portuguese Golden Visa program as we know it is about to close for good.
The Portuguese Golden Visa has been around since 2012 and has been successful with individuals from many different countries having already gone through the process and obtained their Portuguese residency and eventually citizenship. One of, if not the biggest, route to pursue the Golden Visa is the real estate route – you can either purchase an existing real estate or one under construction, or older real estate (30 years old) with a contract to refurbish the purchased property. Both options are regulated by the Portuguese Foreigners Law and have been an engine of urban development and recovery, not only in large cities but also, more recently, in inland areas, and a tool to attract international players from tourism and hotel sectors. In fact, tourism and hotel developments are, at this moment, the trendiest option due to the lack of geographical restrictions on their eligibility and a minimum amount of investment from €280,000.
For either option it is possible to start the Golden Visa application and be granted the residency permit with a promissory agreement, instead of the definitive deed of acquisition, provided that the minimum amount of investment is fulfilled under such promise of acquisition, and this one is executed before the second renewal of the Golden Visa.
Changes to the Portuguese Golden Visa
Recently the Portuguese government announced the termination of the program. The proposal arrived to the Parliament this April 15 and it seems that this time is the true last call to apply for the Portuguese Golden Visa program. Although the proposal still needs to be discussed in the Parliament and approved by the President of the Republic, where some amendments can be introduced, we can expect the following:
- There is no retroactive effect;
- New processes and renewal processes will continue until the new law is published;
- Pending applications and future renewals will be converted into the D2 program – Entrepreneurs Permit – however, without residency requirement of 183 days /year. The Government proposes the current special regime of 7 days/year as staying period.
- New applications for residence permits relating to investments or support for artistic production, recovery or maintenance of cultural heritage country are admitted;
- The program is terminated as from the date on which this law comes into force - expectedly not before 45 days – end of June 2023.
This means that investors are now running after this last train more than ever, but it is important to have in consideration the risks when deciding on the investment, particular in regard to real estate.
Although these projects can be great opportunities of investment - namely in terms of value, as the property is sold below the market value that a completed and licensed unit would have, and also allows the future owner to personalize the real estate according to his personal tastes - the truth is that Murphy’s Law says that “Anything that can go wrong will go wrong.” When buying a development in progress, the level of risks often increase as a result of the nature of the business and the impact of the surrounding circumstances.
Challenges with the real estate stream
One of the current challenges, perhaps the biggest one, is the shortage of materials and inflation. Given the current situation the world is in, some materials cannot be delivered in time, meaning higher prices can be imposed by the providers if the contracts give them such leeway. As such, the constructions/rehabilitation works end up being postponed which then causes the agreed-upon delivery dates to not be met or prices to rise. Worst case scenario, the development as projected may no longer be viable due to the lack of materials or the exponential increase in development costs, leading to delays or even the definitive failure to comply with the contract.
Even though there must be some flexibility on the investors’ side, there are some measures that can be taken at the time of the negotiation of the contracts such as foreseeing a penalty for a potential delay or extension of the delivery dates to avoid situations of perpetual default, or choosing a company that has good supply contracts and enough inventory to conclude the works as adjudicated. At the time of the negotiation of the contracts it is also a good idea to add some clauses regarding the financial situation of the builder, their particular experience with the type of project, and the number of works he is developing at the same time. The possibility of intervention in the material selection by the investors is also recommendable. This will give the construction company an additional reason not to delay the works.
One other challenge that is reoccurring when speaking about construction or rehabilitation works is the inspection. More often than not, the investor will be abroad and will have neither the time nor the technical knowledge to inspect the works regarding the progression and the fulfillment of the contract – if all the materials accorded in the contract are being used, if the areas are met or if the quality of the materials is the one mentioned in the contracts. Given the technicality of such matters, it’s recommended for the investor to hire a third party that will be assessing the situation on their behalf - an inspection company focused on real estate matters is probably a good idea. The majority of the companies performing the construction/works usually accept a clause regarding the inspection of the construction site in the contracts and with that the investor will have another layer of protection - he will have the knowledge from an expert regarding the works and if, at any time, the contracts are not being fulfilled, the inspection will notice it sooner rather than later and it will be easier to fix and to avoid abuses or extra costs.
There is, also, the challenge regarding the credibility of the companies involved in the process and the decision of hiring. Coming from abroad, it is normal for the investor to not know much about the market - whether if the companies responsible for the construction or works are reputable, if they are dealing with the right person, etc. There are some ways to mitigate such adversity. Getting in touch with an experienced lawyer in this area of law, whom the investor can trust and maintain a good relationship with, is a big step because they will be their “boots on the ground” for all the matters that might arise during the process. In addition, it is important to get some references of previous clients and works concluded to understand the level of professionalism and results as well as to establish in the contracts the necessary guarantees to protect the investor.
The role of deadlines
It's also important to note that the deadlines will be of extreme importance. Signing a contract for a construction will always set a timeframe for the works to be concluded. However, and as it usually happens, there is always a risk of delays or “minor” aspects that can postpone the final delivery of the construction. Most of the times the builder will try to claim that delays are caused by force majeure events or third parties (for instance the City Hall who is the responsible entity for the licensing process) - and insist it shall not be considered a breach of the contract. Although this might be true, it is important to establish some limits to such situations and control mechanisms to avoid that the investor is completely unaware and/or powerless.
Labor, health, insurances, taxes, extra works and permits are essential aspects during the work performance and can impact not only the timings, but also the quality, feasibility, environment aspects and costs of the project. As such, it is important to establish the party that is responsible for the same, as well as the terms under which such responsibility takes place and how to enforce it when necessary, especially in cases where outsourcing is something frequent. On the other hand, aspects regarding the intellectual property and right of retention of equipment and materials shall not be ignored in case the worse case happens and the investor is compelled to change the builder.
In this regard, one cannot forget about legislative framework and last minute changes in the real estate / urban policy. Municipalities can define their own urban and construction rules and the times (usually 10 years) such framework is amended. It is essential to be on top of the projects to find good business opportunities but also potential future restrictions or conditionings in terms of use, dimensions, requirements, restrictions to local accommodation (Airbnb) use, between others.
Recently the Portuguese Government is pursuing a policy of incentives to make more properties available for long term rentals as well as affordable property for the purchase of local residents. These policies sometimes can demand some actions of the current owners in terms of anticipating any kind of obligations or impositions, but can also create great investment and business opportunities due to tax incentives and loan conditions.
Last but not least, and given the fact that there are no travel restrictions, it’s always recommended for the investor to visit Portugal in person to visit the construction site or property to have a feel for it as well. Regardless of the technical and legal opinions involved, and given the amount of investment and the responsibility of owning a property, there is, in the end, nothing better than a trip to Portugal to assess if it suits the investor’s criteria and needs. In addition to it, coming to Portugal will also facilitate a meeting with the constructor or builder and that will help establish relations and for the investor to assess the situation by themselves. And with the good weather, good food and safety, what is there not to like when scheduling a trip to Portugal?
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