In a classical sense, a “greenfield investment” is the construction of a new industrial unit in a territory previously used as agricultural area.
The selected land is under agricultural use, and public utilities and infrastructure necessary for the industrial unit are typically not available. In many cases already existing industrial plants do not have any other choice but to expand towards the neighboring agricultural parcels. In the course of a greenfield investment, developers have to face several circumstances which differ from those of a “classic” or a “brownfield” industrial project.
The absence of infrastructure and the fragmented land parcels
Greenfield investments have several advantages, such as the freedom to design and select the territory with less limitations or the preferential land prices in Hungary, as agricultural plots can still be acquired at a more favorable price than a property in a built-in industrial zone. On the other hand, the acquisition of an agricultural land and the construction of public utilities are time-consuming and require close cooperation with the local government, authorities in charge and public utility service providers. It is also an important factor that a territory of a sufficient size for industrial investments can only be acquired by aggregating several small properties, due to the fragmented parcel structure of Hungarian agricultural lands. The barriers of land acquisition introduced by the new Hungarian Land Act must also be taken into account, as detailed below.
From legal perspective, a greenfield investment is the rezoning of the given property to commercial and industrial area in the local zoning regulations of the municipality, and the permanent withdrawal of the lands from agricultural use. The investor, who is typically a legal person, can only acquire the ownership of the given property if it is not classified as an agricultural land any longer. The reclassification requires the amendment to the zoning regulations on one hand, and the approval of the land registry office for the withdrawal from agricultural use (i.e. the permanent use of the land for other purposes) on the other hand. Finally, the reclassification of the land to ‘investment area’ or to other ‘non-agricultural’ category must also be registered by the land registry office. These procedures need approximately 6-8 months and require time and financial efforts from the investor.
The reclassification of an agricultural land to ‘investment area’ or to ‘investment target area’ is only possible if it has been classified as such in a decree or resolution by the Hungarian Government. As a result, in the literal sense, an ‘investment area’ can be established only with governmental support.
For the reclassification of the land to another category, a final and binding authority license is required that enables the authorized person to use, operate or conduct the authorized activity. The reclassification in this case can be completed only if an installation has been erected in the given area. This on its own is controversial: first of all, such an installation cannot be built on an agricultural land while the use of the land for other purpose has not yet been authorized by the land registry office. In addition, what kind of investor will decide to establish any installation on a property without being sure of acquiring its ownership?
Cooperation with the authorities
Close cooperation with the competent local government and authorities right from the beginning is essential, in order to ensure the launching of the proceedings at the right place and in due course.
Experience shows that Hungarian authorities, within the legal framework, support investments, especially large job-creating investments, and they are seeking to reduce administrative burdens. In case the project is prioritized by the Hungarian Government, procedural deadlines are shorter, however, the supportive approach of the authorities is common even in the absence of such “high priority” status. Accordingly, even in case of a relatively small investment, it is of great importance for the investor to maintain continuous communication and cooperation with the competent local government and authorities.
The investors must take into account the risk that in the course or at the end of the authority procedures, the land owner changes his mind and refuses to sell the land, or asks for a higher purchase price compared to the initial price agreed by the parties.
It might also happen that the land owner sells the land to a third party and the property might be acquired by speculators. Experience shows that in most of the cases these circumstances may cause delay or even frustration of a greenfield investment.
In order to secure the investment, the above mentioned risks must be reduced, which is possible, however, the legal tools available are limited. For example, under the new Hungarian Land Act it is not allowed to establish a call option right on an agricultural land for the benefit of a legal person, and it has become difficult even for natural persons.
On the basis of the above, investors with legal personality must ensure the acquisition of the ownership through new legal solutions and must use different types of property law securities or contractual collaterals.
By Gabriella Galik, Partner, KCG Partners Law Firm