[Real Estate AtoZ] Trust-Based Reconstruction Faces Issues Everywhere... Will Attention Shift Back to the Association?

As the number of complexes pursuing reconstruction through the trust method increases, complaints continue to arise in various places. Although it was expected as an alternative to the union method due to its relatively superior expertise and ease of financing, skepticism about the trust method is growing as recent reconstruction projects such as Yeouido Hanyang Apartment have been stalled. Industry insiders expect that, as the government has lowered the threshold for terminating trust contracts in maintenance projects, some complexes will switch to the union method during the project implementation process.

Apartment Complex 7, Mokdong New Town, Yangcheon-gu, Seoul.

What is 'Trust Method Reconstruction'?

Trust method reconstruction is a method where a third-party real estate trust company takes full charge of the project, from financing to sales, instead of a union formed by residents. It was introduced in March 2016 with the revision of the 'Urban and Residential Environment Maintenance Act.' It gained attention as cases of intensified conflicts between unions and construction companies due to soaring construction costs, such as in the Dunchon Jugong reconstruction, became frequent. According to the industry, there are 16 sites in Seoul pursuing maintenance projects through the trust method. Among 16 complexes pursuing reconstruction in Yeouido, Yeongdeungpo-gu, Seoul, 7 are using the trust method, and among 14 complexes in Mok-dong, Yangcheon-gu, 6 are pursuing reconstruction through the trust method.

Trust reconstruction has the advantage of significantly reducing the project duration compared to general reconstruction. In typical reconstruction, each stage?'establishment of the promotion committee → approval of union establishment → approval of project implementation → approval of management disposition → relocation → demolition → sales'?takes more than a year. In contrast, since the trust company takes charge of the project implementation, the time required until union establishment approval can be shortened by about 2 to 4 years.

Another advantage is the favorable initial financing. The trust company can raise funds from financial institutions through its own capital or based on credit by obtaining guarantees from the Housing and Urban Guarantee Corporation (HUG). For unions lacking sufficient financial power, it is possible to secure project funds through the trust company.

Controversy over Lack of Expertise... Some May Switch Back to 'Union'

However, as problems have emerged in many complexes choosing the trust method due to sloppy management in the trust industry and overheated bidding competition, the need to reconsider the trust method has been raised. In the selection process of the construction company for the Yeouido Hanyang Apartment reconstruction, the trust company was held responsible after the construction company selection was halted due to a corrective order for including the Hanyang shopping mall (Lotte Mart) site, which was not agreed upon for purchase, in the project site. Conflicts between residents over union and trust methods have also intensified in the Mok-dong New Town 7 Complex (Mok-dong 7 Complex) reconstruction project in Yangcheon-gu.

High fees are also a reason for hesitation toward the trust method. Typically, the trust method requires paying the trust company a fee of 1-4% of the sales revenue, and in large-scale Seoul reconstruction complexes, the fees alone can reach hundreds of billions to trillions of Korean won. This raises questions about whether the advantages of the trust method justify such high fees.

As complaints arise in major complexes in Yeouido and Mok-dong, opposition to the trust method is spreading to other complexes in Mok-dong. Mok-dong 6 Complex has settled on the union method, and opinions in favor of the union method are also gathering in the 8th and 12th complexes. The 4th complex is reportedly still deliberating between the two methods. An industry official said, "After the Dunchon Jugong incident, the advantages of the trust method, such as rapid project progress and expertise, were highlighted, leading to a trust wave in Yeouido and Mok-dong. However, as problems have recently surfaced in Yeouido Hanyang and Mok-dong 7 Complex, the atmosphere on site is changing amid criticisms that the trust companies' capabilities are insufficient compared to the huge fees."

The industry expects that, as the government has lowered the threshold for terminating trust contracts in maintenance projects, some complexes will switch to the union method during the project implementation process. Recently, the Ministry of Land, Infrastructure and Transport prepared a standard trust contract and implementation regulations that include eased conditions for terminating trust contracts, opening the possibility of switching to the union method.

Professor Seo Jin-hyung of Gyeongin Women's University (co-representative of the Fair Housing Forum) explained, "Even if the trust method is chosen, it cannot be guaranteed that project speed, transparency, and profitability will all be ensured. With the preparation of the standard plan, trust companies lacking expertise face increased chances of contract termination. In cases like Gangnam, where expertise can be secured through star union leaders, pursuing the union method may be more advantageous than choosing the trust method, which incurs high fees."