Only Land Code Can Save St. Pete Sales Program

MTThe St. Petersburg administration is hoping the Land Code's ownership provisions will help spur new investment and development.
ST. PETERSBURG -- The liberal-minded administration of Russia's northern capital initiated land sales in the early 1990s, long before Moscow was ready to take the plunge, aside from a few minor experiments. But prior to the passage of the new Russian Land Code, the muddied situation concerning land-ownership rights in St. Petersburg was often cited as one of the negative factors influencing the city's investment rates and business development.

When the long-awaited code came into effect after the official version was published Oct. 30, one of the myriad inconsistencies between the Russian Constitution and the laws in effect in the country seemed to have been cleared up.

But the new code's effectiveness will depend much on the way it is applied and administered by regional governments, including the St. Petersburg city government at Smolny.

Among the First



While the right of individuals to own and trade in land is set out in the Russian Constitution, the legal basis on which land rights could be sold, transferred and guaranteed were never clearly established by federal law. Former President Boris Yeltsin confirmed the constitutional right in presidential decrees issued in 1992 and 1994, and a number of regions followed by beginning to sell land to individuals and legal entities.

St. Petersburg was one of these regions, but, as legal experts point out, before the passage of the code there was no guarantee that such sales of land were supported by the body of Russian law.

"The St. Petersburg administration, along with the governments of Samara and Tatarstan, got in line with Yeltsin's point of view and gave permission for the purchase of land by private investors," said Maxim Kalinin, a partner and real estate expert with the Baker & McKenzie law firm's St. Petersburg office. "However, these [sales] were never established as 100 percent legal."

The main reason Yeltsin supported the sale of land was not so much the guarantee provided in the Constitution but practical considerations arising from the privatization process. The Privatization Law, which was passed under Yeltsin, was supposed to decide ownership questions relating to the land on which privatized enterprises stood, according to a separate federal law. But such a law wasn't promulgated until the appearance of the Land Code. In the case of the privatization of existing enterprises or of opening a new business, questions sometimes arose over the ownership of a property.

Boris Moshensky, a real estate analyst at Colliers International, said the new code is intended to remove this disincentive for investment and development.

"Previously, if investors wanted to build their own building or facility, instead of purchasing the land they would sign a lease agreement, usually for 49 years. If for some reason [the St. Petersburg Property Committee] decided to annul the lease agreement, it was unclear what to do with the building the investor had built on the property," Moshensky said. "That is really weird, especially for foreign investors who have a real difficulty understanding how it could work."

Popular Ideas



"There's a high level of interest among the companies working in St. Petersburg and the northwest region in buying the territory on which they have located their facilities," said Maxim Popov, a manager with the Andersen Legal law firm. "It is basic corporate policy for many Western companies to have full title to the land on which they work."

"It's the company's choice whether it wants to pay the price based on the land-tax rate or simply to rent," he added. "But rents are less stable than the tax. Many companies are much more comfortable with a title of ownership -- they can achieve a return of their investment into the land, as opposed to by leasing, in case they decide to dispose of the [project later]."

Kalinin said the Land Code finally provides conditions in which these firms can choose the policy they find most appealing.

"The Land Code finally figures out the set of rights related to the ownership of the land, the mechanisms of dealing with the land from a legal standpoint," Kalinin said. "It will finally provide the opportunity to integrate the land and buildings located on it into one unitary object of property."

Bottom-Line Question



While the number of companies that did take advantage of St. Petersburg's regulations to buy the land on which their businesses were located was small, some, like industrial giant Kirovsky Zavod, have already found the opportunity advantageous. In 1997, Kirovsky Zavod bought the 190-hectare territory it occupied for $2.2 million and has touted the purchase as a significant factor in the rationalization process that has allowed the company to increase profitability. The company, which is now a holding with wholly owned subsidiaries producing tractors, steel and turbines, also rents land out to 300 other companies, bolstering the firm's revenues.

But other huge enterprises, such as Electrosila, which as its primary business produces giant electrical motors and occupies hundreds of hectares of St. Petersburg real estate, have not availed themselves of the option to buy. Analysts say the main reason for this was not legal but economic.

"Economically, the purchase of land was not a profitable move, so most investors just preferred to rent the land, even though they were entitled by law to purchase it," said Alexander Shabasov, the chairperson of the city's Investment Tender Commission and deputy chairperson of the Construction Committee.

At least for the present, the new Land Code will result in a significant reduction in the cost of purchasing land. The cost of purchase for the land is calculated on the basis of the land-tax rate for the property and depends on the district in which the land is located and the purpose for which it is being used.

The code sets out parameters for the multiples of the land-tax rate that will be assessed in the purchase price based on the population of the municipality in which the land is located. In cities with a population above 3 million -- Moscow and St. Petersburg -- the price is from five to 30 times the land-tax rate. In cities with populations between 500,000 and 3 million, the price falls to between five and 17 times the land-tax rate. In towns with a population less than 500,000, the price is to be set at three to 10 times the rate. This represents a significant reduction in the case of St. Petersburg, where the city had been charging between 12 and 112 times the land-tax rate for property.

According to Vladislav Myagkov, a manager with Andersen Legal, the land-tax rate in St. Petersburg varies from $0.06 to $2 per square meter per year, depending on location and usage. Rental prices vary, again depending on location, from about $0.01 to $450 per square meter per year.

The St. Petersburg administration uses the two main determinants, location and zoned usage, to split land into 19 different price ranges, some of which have sub-groups differentiated by the physical characteristics of the land, such as infrastructure and existing buildings.

Whether buying instead of renting land for business purposes will be a popular alternative will depend on the actions of Smolny, which is responsible for setting the local land-tax rate. In a presentation to a meeting of the real estate committee of the American Chamber of Commerce in Moscow after the code passed its second reading in July, Deputy Economic Development and Trade Minister Alexander Maslov, who was the person responsible for the negotiations during the code's creation, said businesses should seize the opportunity to buy their land early. Maslov said local administrations will likely raise their rates from the minimum set out under the code.

"In theory, the Land Code decreased the average price by two-thirds," Kalinin said. "But the land-tax rate can be changed every year, so it's still difficult to say what kind of influence the Land Code will have on real price calculation."



Old Dog, New Tricks



The new Land Code raises difficulties for Smolny other than the relatively simple question of price. While the city already had a process established for the sale of property, it was not in complete compliance with the new code. Though the process of discussion and debate over the code had been protracted, St. Petersburg found itself unprepared for a quick shift to the new rules, causing two weeks of confusion for both city officials and investors.

On Nov. 19, the city's Investment Tender Commission, or ITK, announced that Smolny had determined that the commission's process of confirming investment and construction projects was not in complete accordance with the new federal law. As getting the go-ahead from the ITK is one of the major steps required in order to receive approval for investment projects, Smolny called off all work on new projects while it examined how its own regulations would have to be changed to be in harmony with the federal code.

Even though the ITK has resumed its work, there still appears to be a lack of consensus among legal specialists as to how the new code has altered the process.

According to Alexei Skvortsov, senior attorney at Reim Consulting, which provides property and development consultation services, one of the results of the new code is that those planning new commercial development no longer need the ITK's approval before moving on to sign an agreement for the purchase of land with the St. Petersburg City Property Committee, or KUGI.

"Article 7 of the Land Code says that any kind of legal usage for the land may be chosen without any additional permission and confirmation being required," Skvortsov said after the ITK had postponed a session on Nov. 22. "According to our analysis, the new code allows investors to skip the approval procedures at [the ITK] and sign an agreement for land usage directly with KUGI," Skvortsov said.

He also said that, according to his reading of the Land Code, to begin a project an investor needs only to check the State Land Registry, which not only catalogues all of the land in an area but sets out how it is zoned, to determine whether the land may be used for the intended purpose.

"The problem is that, on the basis of that understanding, the approval process seems too easy, which is unusual," Skvortsov said. "Meanwhile, the Land Code itself does not go into detail explaining how these procedures should go. The city government is probably waiting for further explanations from Moscow in order to set up its work according to the Land Code."

Four Russian cities -- Novgorod, Kazan, Irkutsk and Ufa -- have already moved ahead without any further information from the Kremlin and taken a big step to implement the provisions of the new code by creating complete registers of all of the land in their municipalities along with their respective zoning regulations. Myagkov said this has allowed the administrations in these places to streamline their land-purchase procedures. A register of a number of properties within certain central regions of St. Petersburg has been put together, but it still leaves a lot of the land in the city uncovered.

Business as Usual



But ITK chairperson Shabasov said the committee will definitely continue its work as it did before the adoption of the code, explaining that the interruption in the committee's activities had only to do with the examination of construction projects.

"The reason for the delay was a logical one," Shabasov said. "It's much easier to bring local laws in accordance with those at the federal level that have already been approved. If for some reason the president hadn't signed the Land Code and, instead, sent it back for correction, we would have had to go back and correct the regional laws as well, which would mean wasting both time and resources.

"I don't see anything wrong with the way we went about it. A week of working in the wrong direction could have meant half a year of making corrections," he added.

The changes in the regional regulations consist of three orders from Governor Vladimir Yakovlev. The first, setting the land-tax tariffs in accordance with those set out in the federal legislation, was signed by the governor Nov. 22. A second, requiring that the City Architecture Committee issue a document for each construction project, clearly defining the borders of the land under consideration, was signed on the same day. The third requires that those wishing to purchase land for development have a Land Choice Act document approved by the city administration. The potential buyer of the land receives the act after getting preliminary approval for a construction project in a particular region.

Shabasov said the governor will sign the last document soon and that the approval process will not be changed significantly by the regional regulations from what it was before the adoption of the Land Code.

"The Land Code doesn't alter the existing scheme for dealing with investment documentation," he said. "The governor's amendments just provide a legal foundation to what we've already been doing for the last few years."

But according to one property expert who asked not to be identified, the delay during the wait for the new regulations will cause some hardship for investors with projects already in the process of being approved.

"To receive approval for any development project, an investor has to collect a certain number of documents, a process that usually takes a few months," he said. "Each of the documents has an expiry date, so the delay in the ITK's activities might wipe out a few months work on the part of some investors.

"If the city administration had paid more attention to this question, it could have made all of the corrections to the procedures and laws earlier, or at least let investors know beforehand about the pause," he added.

But Shabasov said there will not be any problems as a result of the delay.

"As a result of the delay, a few documents pertaining to some projects might in fact expire, but this won't be a big problem," he said. "The Investment Department of the Construction Committee is already prepared to extend the dates on these documents so that projects already in the process of being approved will not suffer."

Baker & McKenzie's Kalinin said that while the city didn't seem to be prepared to deal with the new situation after the code was passed, part of the blame should be shouldered by the federal government.

"The approval of the sale of lots for construction projects was interrupted because there was no clear understanding of the Land Code yet at the regional level," Kalinin said. "It seems, though, that this is not the St. Petersburg administration's fault because the Land Code came into effect immediately on the date of its official publication, Oct. 30, and this left the regional government no time to prepare."

And, while Kalinin said the Land Code doesn't bring significant substantive change to the process of approving projects and handing over the deeds to property, he said that Smolny used the pause in its activities to clear up a few other contradictions between the regional and federal laws that existed even before the Land Code's adoption.

Streamlined?



There are still concerns about what the Land Code will mean in practice and the possibility that there will still be changes in its implementation. In his July presentation, Maslov said further changes might still be on the way. But he said these would be aimed at upping the tempo of land purchases.

"The Land Code on its own won't be able to change the situation completely because there is a very notorious bureaucratic tradition existing in this country and an ineffective justice system," Maslov said.

We're going to monitor the process and the prices of land sales very closely. If they are slow and few, we will take action by introducing amendments into the law."