Transformation Charter Code

COMMENTARY ON THE PROPERTY SECTOR TRANSFORMATION CHARTER CODE

Section 20(1) of the Property Practitioners Bill states that:

“The Property Sector Transformation Charter Code, as amended from time to time, applies to all property practitioners”

But how will the code be enforced on the industry? Well, this will be done in an indirect but very effective way. From the time that the Property Practitioners Bill becomes law, one of the requirements for the issue of a Fidelity Fund Certificate will be that the Property Practitioner is “in possession of a valid BEE certificate.” (Section 50(a)(x)). To get this BEE certificate you will have to comply with the Code.

This Property Sector Code was published in the Government Gazette on 9 June 2017. Its main purpose is to set out a path for transformation in the property sector. In the preamble it states that the Code:

• Constitutes a framework and establishes the principles upon which Broad Based Black Economic Empowerment (B-BBEE) will be implemented in the property sector; and
• Establishes targets and qualitative undertakings in respect of each element of B-BBEE; and
• Outlines processes for implementing the commitments (to transformation) contained in the code and creates mechanisms to monitor and report on progress.

It is therefore of vital importance for all owners of estate agencies know what is happening here so that they can start preparing themselves for compliance. It will also be of interest to all estate agents to know of these big changes that will be taking place in the industry.

The Code starts by setting out the challenges facing the property sector, starting with situation created by the Native Land Act of 1913, which denied black South Africans the right to the ownership of more than 93% of the productive land in South Africa. It sets out the sad situation that we are faced with in the property sector where property ownership is predominantly white and where black people are underrepresented as employees and business owners in all parts of the property sector.

The code also seeks to redress gender inequalities in the sector, especially in respect of black women.

Amongst the objectives of the code are:

• To promote economic transformation, especially as regards ownership and control and management of businesses, and make the sector more representative;
• To unlock obstacles to property ownership by black people;
• To promote development and encourage investment, especially in under resourced areas;
• To support micro and small enterprises;
• To improve skills development;
• To facilitate the accessibility of finance.

Exempted micro enterprises
The Code will not apply equally to all businesses in the property sector. The Code recognizes that it will be more difficult for smaller businesses to comply and lower levels of compliance will be required by these smaller businesses. Businesses falling below certain thresholds are totally exempted from specific compliance with B-BBEE requirements.

Property enterprises whose businesses are “asset-based”, I assume this to mean enterprises which trade in property, are exempt if the net assets of the business are less then R80 million. Enterprises who are services based, like property management companies, will be exempt if the turnover is less than R10 million.

Estate agencies however, get a special mention and they are only treated as Exempted Micro Enterprises (and exempt from the B-BBEE requirements) if the annual turnover is less than R2.5 million.

Qualifying small enterprises
Assuming your estate agency has an annual turnover of more than R2.5 million, the next category of enterprises that you might fall into is the category of “Qualifying Small Enterprises”. These are enterprises with assets of less than R400 million for asset-based enterprises and an annual turnover of less than R50 million for service-based enterprises.

But once again, estate agencies get a special mention, an estate agency business will fall into this category if it has an annual turnover of less than R35 million.

So, for an estate agency to fall into the category of Qualifying Small Enterprises, it must have an annual turnover of more than R2.5 million, but less than R35 million. I think that a lot of estate agencies will fall into this category.

Generic category
Estate agencies with an annual turnover of more than R35 million will fall into the Generic (unlimited) category. Other service-based property businesses will only fall into this category if they have an annual turnover of more than R50 million.

Start-up enterprises
A new business will be treated as an Exempted Micro Enterprise for the first year. If it is going to tender for contracts above a specific value during this period, it will however need to submit a scorecard for a Qualifying Small Enterprise, or a Generic scorecard, depending on the value of the contract.

The Scorecard (section 10)
Your B-BBEE compliance is determined on the basis of a scorecard. There is a slight difference in the weighting on the scorecards for Qualifying Small Enterprises and Generic Enterprises (to make it easier for the smaller enterprises) but the emphasis on the various elements remains similar. The factors that are measured in the scorecards are:

The category of economic development is unique to the property sector. Under this heading the extent to which an entity contributes towards development in under resourced areas is measured.

The maximum score possible is 105 points for QSE’s and 117 points in the Generic category. If you exceed targets you can also qualify for bonus points.

Scores for each category are calculated based on set formulas and the outcome of the calculation will determine your level of compliance.

Oversight
The implementation of the code is to be overseen by the Property Sector Charter Council. Entities within the property sector will be encouraged to contribute towards funding the Charter Council and this will be recognised as part of Enterprise Development or Supplier Development. You can therefore buy some points by contributing to the costs of the Council.

Qualifying enterprises (including all estate agencies with a turnover of more than R2,5 million) will have to submit a B-BBEE report, a certificate and a scorecard, verified by an accredited BEE verification agency, to the Charter Council on an annual basis. They will then receive their BEE certificate.

Key principles in measuring B-BBEE compliance:

• Substance takes precedence over legal form.
• Misrepresentation will be dealt with in accordance with the B-BBEE Act.
• The splitting of enterprises to enable them to qualify in lower category may constitute an offence.
• All representations about compliance must be supported by suitable evidence.

Application of the Codes
How this code is to be applied and how the scores are to be calculated is very complicated and requires specialist knowledge of the B-BBEE Act. That is where the BEE verification agencies will come in.

An enterprise will be awarded points on their scorecard for compliance with different categories. The closer you are to your targets, the more points you will earn. You also have the possibility to earn bonus points if you exceed your targets. Once your scorecard is marked, it will determine at which level of B-BBEE compliance the enterprise is at.

Below you will find the targets that have been set in the various categories on the scorecard. Compliance to this level will give you a score in excess of 100%. You will then qualify as a level 1 Contributor. The levels go right down to Level 8, and if you score less than 30 points, you will be treated as a Non-Compliant Contributor.

Ownership
In this section, the targets for ownership of property sector companies that render services (like estate agencies) are stated as follows:

• 27% ownership by black people
• 10% ownership by black women
• 3% ownership by “broad-based ownership schemes and/or designated groups”
• 3% ownership by “new entrants”.

To score in this category, property owning companies are given a period of 10 years to achieve 50% black ownership, in annual increments.

Management control
The targets that are set in the code for Management Control of estate agencies are the following:

• 50% of voting rights must be held by black people at board level, of which one half must be held by black females;
• 50% of the executive directors as a percentage of all executive directors must be black and half of these directors must be black females;
• 60% of the executive management must be black, and half of these must be black females.

The code specifically defines the term “management” in the context of an estate agency. Somebody is part of management if he is earning more than R360 000 per year and is “possessing a level of authority”. This means that for someone to qualify as a manager for the purposes of your scorecard, the person will have to earn no less than R30 000 per month.

In generic enterprises, for someone to qualify as a senior manager, they must earn more than R450 000, for someone to qualify as a middle manager, they must earn between R225 000 and R450 000 per annum and a junior manager must earn between R225 000 and R150 000. These requirements obviously put in place to prevent window dressing. If you are going to call an employee a manager, they will need to have a salary that goes along with the title.

Employment equity
The employment equity targets for estate agencies are as follows:

• 50% of all agents must be black and 35% must be black females.
• 35% of the total management team must be black and 18% must be black females. (Remember, these people need to earn decent salaries – as stated above - to qualify as managers.)
• 30% of the administrative team must be black.

It seems as if there’s quite a bit of overlap between the categories of Management Control and Employment Equity, and you may be able to earn points in both categories for the same thing.

Skills development
Under this heading, targets are set for enterprises to use a certain percentage of their income for skills development, including learning programs, apprenticeships and internships. An agency will need to spend 5% of its expenditure on skills development to qualify for the full quota of points in this section.

Enterprise and supplier development
Under this heading, targets are set for enterprises to use the services of other entities that are BEE compliant.

Socio-economic development
Under this heading, you are awarded points if you reach targets for contributions to socio-economic development projects that benefit black groups and promote transformation and development.

Economic development
Under this heading, enterprises are encouraged to invest in economic development projects, especially those in under resourced areas.

What level of compliance is required to obtain a “Valid BEE Certificate”? My understanding of the law at this stage is that it will not matter what your level of compliance is, and that all you will have to do is go through the process to work out your scores and then submit that to the Charter Council. The Charter Council will then issue you with a BEE certificate. This certificate might reflect that you are completely non-compliant. The certificate will however be a valid BEE certificate and on the strength of the certificate, you will qualify for your Fidelity Fund Certificate.

This process would therefore just help the Charter Council to assess the current situation within the property sector as regards transformation.

I’m confident however that this situation will not last forever. My prediction is that, in terms of the Regulations to the Property Practitioners Act, the Minister will regulate that a “valid BEE certificate” will have to reflect that you qualify at a certain level of compliance. At that stage things are going to get very interesting in our industry. I also predict that this is going to happen sooner rather than later.

Deon Welz
Miltons Matsemela Inc