In order to strengthen the supervision of industrial project construction land and promote the intensive use of construction land, the former Ministry of Land and Resources issued the “Industrial Project Construction Land Control Indicators (Trial)”[1] and “Industrial Project Construction Land Control Indicators”[2] in 2004 and 2008 (the “Industrial Project Construction Land Control Indicators” in 2008 hereinafter referred to as the “2008 Control Indicators”) as an important standard for approving the construction land of industrial projects.

In 2023, the Ministry of Natural Resources revised the “Industrial Project Construction Land Control Indicators”[3] (the “2023 Control Indicators”) in order to implement the comprehensive conservation strategy and promote the intensive utilization of various resources as well as to improve the utilization efficiency and output level per unit area of industrial land.

This Article aims to outline the main differences between the 2008 Control Indicators and the 2023 Control Indicators and discuss the potential implications of the 2023 control indicators on investors based on our relevant experience in industrial project investment.

With the release of the 2023 Control Indicators, the control indicators are categorized into mandatory indicators and recommended indicators (See Part III of this Article for details). The control value adopted by the local construction land control indicators of industrial projects (the “Local Standard”) shall not be lower than the mandatory indicators in the 2023 Control Indicators. As for the recommended indicators, although the control values thereof are optional for local governments to implement, based on our experience, if local governments choose to implement the recommended indicators, the control values will generally be stricter than the recommended values.

It shall be noted that the 2023 Control Indicators explicitly state that in the absence of local standards, the 2023 Control Indicators should be followed. Although the 2023 Control Indicators have recently been released and local governments have not yet formulated new local standards corresponding to them, we can anticipate a trend of higher requirements in local standards following the changes in the 2023 Control Indicators.

In terms of the system of control indicators, the 2023 Control Indicators have been updated compared with the 2008 Control Indicators. The 2008 Control Indicators specified land use control indicators such as investment intensity, floor area ratio, building coefficient, proportion of administrative offices and living service land, green space ratio, etc., while the 2023 Control Indicators have reorganized the control indicators into mandatory indicators and recommended indicators. It clearly stipulates that the mandatory indicators include floor area ratio, building coefficient[4] and the proportion of administrative office and living service land with the corresponding control values formulated for these three indicators. The recommended indicators include fixed asset investment intensity, as well as the newly-added land output rate[5] and land tax revenue[6] totaling three indicators. Local governments are responsible for formulating the control values of the three recommended indicators based on their local conditions and implementing the indicators.

At the same time, the 2023 Control Indicators have deleted the indicator of green space ratio. Nevertheless, the 2023 Control Indicators still put forward some requirements on arrangement of green space, such as the need to “coordinate the arrangement of green space according to the national land spatial planning in industrial parks and industrial project agglomeration areas”, and the requirement of  “green space generally not allowed within industrial project land unless it is necessary for safe production, and prohibition of constructing garden-style factories that are unrelated to industrial production”.

Compared with the 2008 Control Indicators, the 2023 Control Indicators explicitly require strict adherence to the 2023 Control Indicators for the reconstruction and expansion of industrial projects on state-owned land, while the 2008 Control Indicators only required reference compliance for such projects. According to the 2023 Control Indicators, only the construction of industrial projects on collective land may be implemented with reference to the 2023 Control Indicators, which means that the requirements for second-hand industrial land are now more stringent. If investors choose to invest in reconstruction and expansion of second-hand state-owned industrial land, such projects will be assessed according to the 2023 Control Indicators, which may increase the entry barrier for investors.

Compared with the 2008 Contral Indicators, the 2023 Control Indicators have increased the floor area ratio by 0.1 for most industries. As for the building coefficient, the 2008 Control Indicators required a building coefficient of not less than 30% while the 2023 Control Indicators set forth the building coefficient not less than 30% for industries such as petroleum, coal and other fuel processing, chemical raw materials and chemical products manufacturing, ferrous metal smelting and rolling processing, and non-ferrous metal smelting and rolling processing. For the other 27 industries, the building coefficient is set at not less than 40%.  This allows for construction of more buildings, structures and storage yards on industrial land.

There are three adjustments to this indicator in the 2023 Control Indicators. First, the requirement for the proportion of construction area has been added.  Based on the condition that the area of administrative and living service facilities does not exceed 7% of the total land area of the industrial project, the requirement of the construction area not exceeding 15% of the total construction area of the industrial project has been added.  Second, the requirement for the proportion of construction area for research and development, design, testing, and pilot facilities necessary for industrial production has been added (i.e., the construction area shall not exceed 15% of the total construction area of industrial projects and shall meet the requirements of relevant industrial building design codes), supporting enterprises to adapt to the development and expansion needs of new industries and new formats. Third, requirements for compound utilization and jobs-housing balance and residents have been added, emphasizing “the rational planning of land for commercial services, scientific research, warehousing, rental housing, public facilities, and other purposes in industrial parks and industrial project agglomeration areas to promote compound utilization and jobs-housing balance and maximize overall utilization efficiency”.

Compared to the 2008 Control Indicators, the 2023 Control Indicators amend the fixed assets investment intensity, with a significantly higher average increase than other indicators. At the same time, the 2023 Control Indicators also explicitly state that the recommended indicator of the fixed assets investment intensity for strategic emerging industries and advanced manufacturing projects should be increased by 5% to 10% on the basis of the corresponding industrial project’s baseline. The fixed asset investment intensity indicator encourages local areas to explore and formulate indicator coefficients suitable for local industrial development, and improve the input and output level of industrial project construction land.

In general, the control indicators applicable to the project are provided in the documents such as the state-owned land use right grant contact, investment agreement and performance supervision agreement. If the project fails to meet the requirements of the control indicators under these agreements, it may constitute a breach of such land transaction documents and may be subject to contractual breach liabilities. In practice, the common types of liability for contractual breach include deduction of performance bond, payment of liquidated damages, making up the shortfall in the unfinished tax targets, until the land is reclaimed without compensation. “Reclamation of the land without compensation” is obviously the most serious legal consequences, while the breach of contractual obligations involving monetary penalties requires attention to whether the amount can be measured or estimated in advance, whether there will be repeated penalties, and whether the penalty ceiling can be agreed. In addition, it is also necessary to pay special attention to whether the local government will impose restriction on issuance of construction permits, real estate title certificates, the subsequent operation qualifications of the project, or the future transfer of the project, based upon the achievement of relevant control indicators. Therefore, in the event that the requirements of the control indicators may increase, investors need to actively communicate with the competent government departments and strive to control the assessment requirements of the control indicators and the contractual breach liabilities within the scope that the project can actually achieve and the framework of legal compliance.

Another point worth noting is that the Ministry of Natural Resources had proposed in the 2021 draft solicitation for the 2023 Control Indicators[7] that the industrial land administrative offices and living service facilities (including research and development, design, testing, and pilot facilities in a single large-scale industrial projects) should not be divided or transferred, however these requirements were deleted upon official publication. Since there is currently no clear policy on whether the restriction on division and transfer will no longer be imposed, we recommend investors to continue monitoring this issue. We understand that the government may loosen this restriction, and if there are investors have such need, we suggest clarifying it in the negotiations with the government.

The publication of the 2023 Control Indicators reflects the government’s desire to improve the economical and intensive use of land, allowing for the construction of more buildings and structures within the permitted land area, while putting forward higher requirements for the unit land output of the project. We recommend that investors fully consider the potential impact of the 2023 Control Indicators when evaluating investment projects, stay updated on the revision and implementation of the new local standards in the location of the project. It is important to engage in sufficient communication with the local government on the applicable indicators, and fully understand and evaluate the consequences of failure to meet the various control indicators under the land use right grant contract, supervision agreement and other agreement or documents.