[Beginner's Guide to Burin] The 'Jaechohwan' Recalled... How Much Will It Cost to Rebuild Our House?

Reconstruction Excess Profit Recovery System Prepares for Full Implementation After Constitutional Approval Last Year

The Standard for 'Excess Profit' Is 'Post-Completion Price - Project Start Price'
Calculated Excluding Development Costs and Normal Housing Price Increases

According to Ministry of Land Simulation, Maximum Up to 840 Million KRW Per Union Member
Despite Claims of 'Unrealized Profit,' Constitutional Court Rules It Is Not a Violation of Property Rights

[Asia Economy Reporter Lee Chun-hee] When you become a real estate reporter, you sometimes get unexpected KakaoTalk messages from friends. "How do I apply for a housing subscription?" "What is first priority?" For the 2030 'Burin-i (real estate + beginner)' who only have subscription savings accounts created by their parents when they were young, I am trying to create a guide.

The 'Reconstruction Excess Profit Recovery System,' commonly called 'Jae-cho-hwan,' has been brought up again. As the Ministry of Land, Infrastructure and Transport recently began preparations for full implementation by revising the redistribution criteria for the burden charges collected through the excess profit recovery system, it has once again become a hot topic in the real estate market. Today, we will learn about this Reconstruction Excess Profit Recovery System.

What is the Reconstruction Excess Profit Recovery System?

The Reconstruction Excess Profit Recovery System is, as the name suggests, a system to 'recover excess profits generated during the reconstruction process.' When reconstruction occurs, the relevant union and its members gain considerable additional profits.

First, a 30-year-old 'old' apartment is reborn as a 'newly built' apartment, so the price of a single housing unit rises compared to before. This price reflects the increase in surrounding market prices during the project period. Additionally, by increasing the floor area ratio, the additional units are sold to the general public, and some are sold for public rental housing, generating further profits.

The Jae-cho-hwan was first introduced during the Roh Moo-hyun administration with the purpose of 'preventing privatization of development profits to stabilize housing prices and promote social equity.' The system collects the excess profits beyond an appropriate profit limit from the union and its members in the form of burden charges, then imposes these charges on local governments to be used for rental housing construction and purchase costs, management fees, subsidies and loans for maintenance project implementers, and infrastructure installation costs.

The calculation method for the burden charge reflects this purpose. The reconstruction burden charge is determined by the formula: 〔Housing price at project completion - (Housing price at project start + Total normal housing price increase + Development costs)〕 × Imposition rate.

The housing price at the completion date (approval date) is calculated based on the union members' sale price (official price at completion), plus the housing prices of general sales units and acquisition prices of small units such as public rental housing. Subtracting the housing price at the project start date, which is either the 'approval date of the reconstruction promotion committee' or '10 years before completion,' yields the profit gained by the reconstruction union and its members.

However, the government cannot recover all these profits, so a kind of 'net profit' is calculated by deducting development costs such as construction and union operation expenses. Then, the 'normal housing price increase,' calculated using either the fixed deposit interest rate or average housing price increase rate, is subtracted to isolate only the excess profit from the net profit.

From the excess profit, up to 30 million KRW per union member is exempted. If the average profit per member exceeds 30 million KRW, a burden charge of 10% is imposed on the excess amount up to 50 million KRW. If the excess profit exceeds 110 million KRW per member on average, the burden charge is calculated as 20 million KRW plus 50% of the amount exceeding 110 million KRW per member.

How much is the actual burden? ... Some places require up to 840 million KRW per union member

So, how much is actually imposed? So far, reconstruction burden charges have been imposed in five complexes within Seoul. These include Hannam Yeonrip (currently Hannam Paragon) in Hannam-dong, Yongsan-gu, where burden charges ranged from an average of 340,000 KRW to 55.44 million KRW per union member.

At first glance, these amounts may not seem very large. However, in 2018, the Ministry of Land, Infrastructure and Transport conducted a simulation on 20 major reconstruction apartments in Seoul, including 15 complexes in the Gangnam 4 districts. The simulation predicted that in one Gangnam complex, the burden charge could reach as high as 840 million KRW per union member. The average for the 15 complexes in the Gangnam 4 districts was estimated at 439 million KRW, and the average for all 20 complexes was 366 million KRW.

Naturally, there were complaints among reconstruction promotion complexes. Moreover, since residents are not selling their homes but merely exchanging old homes for new ones, many questioned the fairness of collecting a portion of 'unrealized profits' that have not yet materialized.

In response, the Hannam Yeonrip reconstruction filed a constitutional complaint with the Constitutional Court, arguing that the Reconstruction Excess Profit Recovery System infringes on constitutionally guaranteed property rights. However, the Constitutional Court ruled at the end of last year that "the provisions allowing recovery of the increase in housing value exceeding the normal housing price increase generated through housing reconstruction projects do not infringe on the property rights of the union," upholding the constitutionality of the system. Accordingly, complexes that received reconstruction project approval since 2018 must pay the calculated excess profit burden charge once the apartments are completed.

With the constitutional ruling, the Reconstruction Excess Profit Recovery System has become an irreversible policy. However, calls for system improvements continue. Issues raised include: ▲when projects are prolonged, the project start date is set as '10 years before completion,' effectively making the housing price at that time dependent on 'luck'; ▲only the general sales unit prices and small housing acquisition prices are added to the completion price; ▲burden charges are imposed on the union or trust operator rather than individuals, causing internal conflicts over the amount to be paid. These shortcomings of the system are argued to need reform.

This content was produced with the assistance of AI translation services.