[The Era of Urban Maintenance Trusts①] The Pros and Cons of Trust Projects Promoted by the Government

Transparency and expertise are advantages
but pay 1-4% commission on sales revenue
Trust companies vary in project execution capabilities

To smartly choose a trust company,
consider commission adjustments and termination conditions

[Asia Economy Reporters Kim Hyemin and Hwang Seoyul] It has been six years since the trust method was introduced in urban renewal projects such as redevelopment and reconstruction. Currently, the trust method accounts for about 4% of all renewal projects. This low adoption rate is due to its lesser-known status and perceived lower necessity. However, the ‘Dunchon Jugong’ incident exposed flaws in association-centered renewal projects, changing perspectives on the trust method. The government has also stepped up with activation measures. Can the trust method become the mainstream for future renewal projects? We examined its pros and cons.

Trust Company Manages Entire Project Instead of Association…What Is a Trust Method Renewal Project?

Privately driven redevelopment and reconstruction projects are broadly divided into association and trust methods. The association method is the commonly used approach. Landowners form an association and handle all procedures from selecting contractors to permits and sales. The biggest advantage is that the association makes decisions independently, but problems arise as residents with limited knowledge of renewal projects manage operations, often escalating unnecessary conflicts. The more complex the stakeholders in the project area, the harder it is to resolve conflicts internally, causing project delays.

The trust method was introduced to address these issues. In this method, a trust company is delegated by landowners or the association to manage the entire project from financing to sales. The association pays fees from the sales revenue. Trust method renewal projects are further divided into project implementer and project agent types depending on whether an association (or promotion committee) exists. The project implementer type involves landowners entrusting the trust company with renewal project tasks before an association is established. The project agent type involves the trust company participating in projects where an association exists.

From the trust market perspective, renewal project methods fall under land trust (development trust). Among these, the majority of renewal projects are loan-type trusts where trust companies directly engage in financing, according to industry sources. According to the Financial Supervisory Service, the loan-type land trust assets under management by real estate trust companies increased from 5.3 trillion KRW in 2016 to 8.7 trillion KRW in 2020.

Can Enhance Negotiation Power with Contractors Based on Expertise…Also Prevents Association Corruption

The biggest advantage of the trust method is that it allows transparent and professional project management. Since experts are involved from the early stages, factors causing project delays such as design changes can be minimized. It also prevents unexpected disputes between contractors and associations that could delay completion or the project itself. A trust industry insider said, "Cost overruns are one of the current issues in the renewal project market, and trust companies can negotiate better with contractors than non-expert associations. This is why the trust method is gaining attention after the Dunchon Jugong incident."

In cases where projects have been delayed for a long time due to conflicts among stakeholders within the association, the trust company can serve as a mediator. Since the trust company manages the entire project, it can also prevent issues like association corruption. From the perspective of buyers, it effectively safeguards rights by preventing various illegal acts, misappropriation of sales funds, and disputes that may arise during project progress. The project implementer type does not require a promotion committee or association establishment, potentially shortening the project period by 1 to 2 years.

Must Pay Average Trust Fees Around 2%…Trust Companies’ Project Execution Capabilities Vary

Despite several advantages, trust fees remain unfamiliar to residents. Trust companies typically charge 1-4% of sales revenue as fees. However, since the association method does not involve separate fees, this is a major reason for hesitation in adopting the trust method. A trust industry insider said, "Competition among trust companies has lowered fees to an average of around 2%. The trust method excludes sales-related costs from construction costs, making construction relatively cheaper. Therefore, residents should compare the saved construction costs with the fees to evaluate actual benefits."

There are also concerns that trust companies’ capabilities in executing renewal projects vary. Trust companies are increasing experts by recruiting sales and management personnel specialized in construction renewal projects, but there can be significant differences in staff proficiency. Industry evaluations note that some companies balance their organization and workforce well relative to their order volume, while others do not. If a trust company with low understanding of the project site aggressively pursues orders, lack of experience may cause delays in permits and approvals, extending the project period.

Unlike the association method, the trust method requires not only 75% consent from landowners to designate the implementer but also that at least one-third of the land area be entrusted. If gathering consent takes too long, the expected project shortening effect may not be realized. It is also problematic that residents’ opinions may be excluded or conflicts with association members may arise without clear resolution methods.

Check Fee Adjustments and Specify Termination Conditions…How to Choose Wisely

Experts advise checking several points in advance to choose a trust company wisely.

First, confirm whether trust fees can be adjusted if the project is delayed or halted. They also emphasize the need to establish specific contract termination conditions. Even if the trust company sets high service fees causing economic losses to landowners, it is difficult to claim damages without special circumstances.

To promote the trust method, the government also needs to prepare more detailed measures. Although the government has announced plans to create a standard contract, experts say it must have legal binding power to be effective. Real estate lawyer Kim Yerim said, "Without binding force, it will only serve as a reference and will not be an effective means to resolve issues." She added, "Currently, it is not easy for landowners to request information disclosure from trust companies. Article 124 of the Urban and Residential Environment Renewal Act (Disclosure of Related Materials) does not specify trust as a project implementer, so this part also needs revision." Measures to prevent possible collusion with contractors are also necessary.