Developing affordable housing in partnership with a municipality

Four Models of Cooperation Between a Municipality and an Investor

The municipality has the land and a housing need, while the investor has the capital and construction experience. How the two parties join forces is determined by the cooperation model. This model decides who bears the demand risk, how long the relationship lasts, and whether the entire project must be tendered under the Czech Public Procurement Act.

Therefore, the model is chosen at the very beginning and can only be changed later at the cost of new negotiations with the municipal assembly. Before the first meeting, the investor should know which model they are offering to the municipality and what steps it entails for the local authority. The four basic models differ in who owns the land and the building, who bears the risk of vacant apartments, and how strongly the municipality influences the design of the project.

Czech legislation does not have a separate law on public-private partnerships. The acronym PPP refers to long-term cooperation in which a private company finances, builds, and often operates a public benefit project. The former Concession Act ended in 2016 and was replaced by the Public Procurement Act. The general framework of PPP projects is described in our article PPP projects: public private partnership.

The Municipality Sells or Leases the Land

The simplest model is based on the municipality selling or leasing the land, and the investor building their own project on it. The contract may contain conditions in favor of the municipality, such as a share of rent-regulated apartments or a priority offer of apartments to local residents. The investor bears the entire market risk. However, the municipality must publish its intention and, in the case of a sale, must justify a price lower than the market rate. Otherwise, the transfer is invalid, even if both parties acted in good faith. The sale is decided by the municipal assembly, while the lease is usually decided by the municipal board.

Right to Build on Municipal Land

The right to build (superficies) is a property right to have a structure on someone else's land for a predetermined period. The municipality thus retains the land, and the investor acquires the right to build, which can be pledged as collateral to a bank. The right to build can be established for a maximum of 99 years (Section 1244 of the Czech Civil Code). Unless the parties agree otherwise, upon the expiration of the right to build, the municipality must pay the investor half of the building's value at that time. This compensation must therefore be negotiated right at the beginning and reflected in the financial model.

The Investor Builds, the Municipality Buys or Leases the Apartments

In this model, the investor builds the building, and the municipality commits to buying or leasing the apartments long-term upon completion. This is convenient for the municipality because it does not have to find a contractor itself. However, for the investor, this is the riskiest model because the cooperation can easily fall under the public procurement regime. This is because the municipality usually wants to decide on the number, size, and equipment of the apartments. In that case, it is no longer buying a finished property but ordering construction according to its requirements.

Concession: The Investor Builds and Operates

In a concession, the investor builds the building and operates it themselves, typically renting out apartments under conditions set by the municipality. The remuneration comes mainly from rent, possibly supplemented by a payment from the municipality. A concession is viable where the investor can estimate demand and is willing to bear the risk of vacant apartments. However, without real risk on the part of the investor, it is not a concession but a standard public contract.

When Cooperation with a Municipality Becomes a Public Contract

It costs the investor the most when they discover too late that their contract with the municipality should have gone through a public tender. The content of the cooperation, not its title, is decisive. A public works contract also includes the construction of a building according to the municipality's requirements if the municipality has a decisive influence on the type or design of the building (Section 14(4) of the Czech Public Procurement Act). However, it must be an agreement for pecuniary interest through which the municipality actually acquires the building. Standard regulatory requirements of the municipality, such as those from the zoning plan, do not in themselves constitute a public contract.

Conversely, the purchase or lease of an existing property is not subject to a public tender. An exception applies to the acquisition, lease, or tenancy of an existing immovable property (Section 29(1)(h) of the Czech Public Procurement Act). The boundary between the two situations is therefore a practical question. Is the municipality buying a building that the investor built according to their own design, or did it order apartments according to its specifications and the investor merely constructed them? The more say the municipality has in the project, the closer the contract is to a public procurement contract.

In a concession, the law requires two things: the investor receives the right to exploit the operation of the building as remuneration and bears the operating risk (Section 174 of the Act). Operating risk means that the investor is not guaranteed a return on investment. If the municipality guarantees apartment occupancy or compensates for rent shortfalls in full, the risk does not transfer to the investor. Such a contract is then a public works contract with all the associated consequences.

A small-scale concession with an estimated value of no more than CZK 20 million does not have to be awarded by the municipality in a tender procedure (Section 178). However, the value of the concession includes the total turnover of the investor over the entire duration of the contract, i.e., including rent from tenants. For an apartment building operated for decades, the project will therefore quickly exceed this threshold. Furthermore, a concession contract can only be concluded for a fixed term, and the municipality must justify any duration exceeding five years in the tender documentation based on the return on investment (Section 179).

What the Municipality Must Do for the Contract to Be Valid

The investor bears the consequences of any mistake made by the municipality. The Czech Act on Municipalities sets out the procedure for how a municipality disposes of its property, and its violation leads to the invalidity of the contract. The court takes this into account even without a petition. The investor cannot defend themselves by claiming they did not know about the municipality's error. Courts have repeatedly ruled that anyone dealing with a municipality must know the rules by which the municipality forms its will and verify them.

The first prerequisite is the publication of the intention. The intention to sell, lease, or establish a right to build must be posted by the municipality on its official notice board for at least 15 days before a decision is made (Section 39 of the Czech Act on Municipalities). If the intention is not published, the contract is invalid. The same consequence applies to a sale below the market price without justification. The law does not specify exactly where the justification must be stated. For affordable housing, the specific reason should therefore be included in both the background documents and the resolution, such as the investor's commitment to rent apartments at regulated rates.

The second prerequisite is approval by the correct body. The transfer of real estate, the establishment of a right to build, or the assumption of debt is decided by the municipal assembly (Section 85 of the Czech Act on Municipalities). The lease of land is decided by the municipal board, unless the municipal assembly has reserved this right for itself. Any legal transaction without the necessary approval is invalid (Section 41(2) of the Czech Act on Municipalities). A clause in the contract stating that the conditions have been met only establishes a presumption. The investor should therefore request an extract of the resolution and compare it with the contract to be signed.

The third risk arises during the cooperation itself. In its resolution 23 Cdo 2678/2018, the Supreme Court confirmed that amendments regarding extra work signed by the mayor without the approval of the municipal assembly are invalid. The municipal assembly that approved the original contract thereby also reserved the right to decide on its amendments, and the mayor may only act within the scope of the resolution. For a twenty-year contract, this means that significant adjustments to the price, scope, or number of apartments must go through the municipal assembly again. Whether a specific cooperation requires approval by the municipal assembly or if the municipal board is sufficient is assessed by the Czech legal team at ARROWS law firm individually before each signature.

State Aid: When the Municipality Offers More Than the Market

Affordable housing is based on the municipality providing something to the investor below market price: cheaper land, a right to build free of charge, or rent subsidies. Such an advantage may constitute State aid under European Union law. If it is not authorized or does not fall under an exemption, the investor risks having to return it with interest. The risk therefore falls mainly on the investor.

EU rules allow for the support of services of general economic interest (SGEI). A new decision of the European Commission from December 2025 explicitly includes among them not only social but also affordable housing for households that cannot secure an adequate apartment on the market. However, the municipality must precisely define the service, set the parameters of the compensation payment, and ensure that the investor does not receive more than their costs and a reasonable profit. How municipalities handle similar cooperation in social services is described in the article PPP projects in social services.

The Procedure from the First Meeting at City Hall to Signing

Cooperation begins with the municipality and the investor clarifying what the municipality actually needs. This involves the number of apartments, target tenant groups, and rent levels. The cooperation model will emerge from this. At the beginning, the investor finds out whether the municipality has unencumbered land, what the zoning plan is, and what budget outlook the municipality has approved. Only then does it make sense to prepare a financial model and a draft contract structure.

The second step is to assess whether the cooperation is subject to the Public Procurement Act. If so, the municipality must select a partner in a tender procedure, and the investor becomes a participant. This changes the entire course of the project. The investor cannot simply negotiate the contract with the municipality, as the municipality must set the conditions in advance and evaluate bids from all interested parties. This extends the entire project timeline.

The third step is the publication of the intention and the preparation of the resolution. The investor should see the draft resolution before it is discussed by the municipal assembly. The resolution should contain the full text of the contract, or at least all essential conditions. In the case of a price below the market rate, it must also include the justification. The more precisely the resolution describes the contract, the less room there is for a later dispute over what the municipal assembly actually approved.

The fourth step is signing and registration in the Land Register. The right to build is established only upon registration in the Land Register, and only from that moment can the bank financing the construction count on it. Therefore, the investor plans the loan drawdown only after registration. Which step is critical in a specific project depends on the chosen model and whether the municipality acts as a contracting authority. This is why the Czech legal team at ARROWS law firm determines this individually for each project.

What the Investor Needs to Include in the Contract with the Municipality

A contract with a municipality for twenty or thirty years must anticipate changes that no one can foresee today. Therefore, the investor needs a mechanism to adjust rent based on inflation and construction costs. This needs to be agreed upon in advance and precisely. If the contract is subject to the Public Procurement Act, it can only be modified later within the limits permitted by law. A material change would require a new tender procedure (Section 222).

Reserved changes are the best protection for the investor. If the contract describes in advance and clearly under what conditions the price or scope changes, their application does not constitute a material change. The contract should therefore include a price clause, a procedure for changing the number of apartments, and rules for cases where the municipality fails to fulfill its part, such as failing to provide utility connections or issue consents on time.

Another point is the termination of cooperation. The contract must state what happens to the building if the municipality terminates the contract prematurely and what compensation the investor will receive. Indeed, statutory compensation for the building only targets the expiration of the right to build, and the bank's pledge also affects it. The contract will therefore regulate compensation for both cases as well as the relationship to the statutory pre-emptive right. How to work with this instrument in real estate development is analyzed in the article Using the right to build in development projects.

Typical Mistakes and How Much They Cost

The most expensive mistake is relying on the mayor's signature. The investor negotiates a contract with the mayor, signs it, and starts building. Later, it turns out that the municipal assembly did not approve the contract or approved a different version. The contract is invalid, and the investor is left with an unfinished building on someone else's land. All that remains is a claim for the return of performance, which must be pursued in a lengthy dispute with an uncertain outcome.

An investor who pays for project preparation before approval is even on the horizon can end up similarly. In its judgment 23 Cdo 3306/2021, the Supreme Court stated that in the case of a reasonable expectation of concluding a contract, regard is also had to whether the municipality acted in accordance with the law and whether approval by its body could be expected. If approval cannot be expected, the company cannot rely on the conclusion of the contract and will find it difficult to obtain damages for terminated negotiations. The preparation costs thus often remain with the investor.

The second mistake is underestimating the tender procedure. The municipality concludes a contract directly with the investor, naming it a cooperation agreement. However, a competitor can petition the Office for the Protection of Competition to ban the performance of a contract concluded without a tender procedure. If the Office imposes the ban, the contract is invalid from the outset; it can only be postponed or not imposed for reasons of public interest (Section 264). The investor thus loses a project into which they have already put years of preparation.

The third mistake is making changes without the approval of the municipal assembly. During construction, the budget and schedule change, and the parties address this with amendments signed by the mayor. If the municipal assembly does not approve them, they are invalid, and the investor cannot claim the agreed extra work. The problem often comes to light only during the final inspection or final billing, when nothing can be returned.

The fourth mistake is ignoring State aid. The investor obtains cheap land and a rent guarantee from the municipality without verifying whether it constitutes unlawful State aid. The recovery of the advantage can come years after the completion of the building, destroying the project's return on investment. Where a specific contract risks invalidity and where it risks the recovery of aid is assessed by the Czech legal team at ARROWS law firm based on the relationships between the municipality, the investor, and the tenants.

Investor Risks in Cooperation with a Municipality

Summary for Owners and Management

This article has shown that when building affordable housing with a municipality, the investor bears the risks arising on the municipality's side. A contract without a properly published intention or without approval by the competent municipal body is invalid. Cooperation in which the municipality acquires a building designed according to its specifications for pecuniary interest is a public contract. A concession will only stand if the investor bears real operating risk.

For company management, this means deciding on the cooperation model before starting to finance project documentation. A delayed decision will prove costly. A late discovery of the obligation to tender sends the project back to the beginning, and an invalid contract means years of litigation over the return of the investment. In a long-term project, such mistakes can no longer be corrected by an amendment.

Therefore, before the first meeting at city hall, it is necessary to know which model the company is offering and what steps the municipality must take. It is equally important to monitor every resolution of the municipal assembly throughout the cooperation. An investor who monitors these steps themselves protects the project's return on investment better than any contractual penalty.

The Czech legal team at ARROWS law firm will assess the cooperation structure from both a legal and tax perspective and prepare contracts and draft resolutions. We also negotiate with the municipality and supervisory authorities on behalf of the investor. Write to us at consultation@arws.cz or take a look at our development and construction law service.