Moscow Land Tax, Rent and Privatization Prices Rise

Municipal authorities win more time to approve general plans but developers may face delays to change-of-use applications.

Russian laws often include some unenforceable requirement that must be met by a set time, on pain of dire consequences for both business and the authorities. As D-Day approaches, everyone realizes that the requirement has not been met but nobody is willing to face the consequences. So the time limit is extended, though the requirement remains unfulfilled, and so it goes, over and over again.

Regional rezoning delay

Approval of general plans, and land use and development rules, is a striking example of this. Let us recall that the former mainly determine municipal development strategies and infrastructure location, while the latter refer to zoning and development parameters/restrictions. The Russian Town-planning Code (2005) required local authorities to approve these documents by 1 January 2008 otherwise they would be prohibited, among other things, from condemning and providing land plots and issuing construction permits.

Vitaly Mozharowski

Partner
Goltsblat BLP

In other words, everything would grind to a halt. Understandably, only a tiny percentage of municipalities actually satisfied this requirement (many were often simply short of money), so the deadline was extended first to 1 January 2010, then to 1 January 2012 and again to 31 December 2012. Following the New Year tradition, two federal laws were signed a day before the deadline expired, on 30 December 2012. Yet, in contrast to previous years when time limits were merely extended, the current regulation has proved more complex.

First, the date when the most adverse circumstances occur (prohibition on providing land plots out of publicly-owned land for construction purposes and on issuing construction permits if land use and development rules are not in place) is now determined by the type of municipality: for municipal districts — after 30 June 2013; for urban-type population centers and urban districts — after 31 December 2013; and for rural communities — after 1 June 2014. Financially challenged municipalities are thus given more time to prepare their town planning documents.

Second, there are new, adverse consequences related to municipalities that lack general plans. Without a general plan for an urban-type population center or urban district, decisions may not be taken on land re-categorization for private purposes. In addition, regulations allowing a simplified procedure for including land plots within the boundaries of population centers before 31 December 2012 are no longer in effect. This procedure was commonly used to recategorize agricultural land for building estates of detached residences. Developers who own agricultural land and want to change its permitted use can only wait and hope that the municipalities will approve their general plans as soon as possible this year.

Land values double

Yet Moscow and the Moscow Region stand out among the rest: the approval of general plans and land use and development rules is postponed here until 31 December 2014. Moreover, in the Moscow Region, even in the absence of relevant territorial planning documents, decisions may be taken on land reservation, condemnation and re-categorization of land plots until 31 December 2014. The reason for this apparently lies in last year's expansion of the territory of Moscow and subsequent reduction in that of the Moscow Region.

Maksim Popov

Associate Director

Goltsblat BLP

That is the end, however, of the good news for existing and potential titleholders with land plots in the Moscow metropolitan area. It appears that the authorities of Moscow and the Moscow Region have really got down to increasing their revenues from land. The cadastral value of land plots was finally updated in Moscow at the end of 2012, and it almost doubled for multi-story apartment blocks, increased by 160 percent for highways and infrastructure facilities, 25 percent for industrial buildings, 40 percent for retail facilities and hotels and 60 percent for office buildings. Needless to say, land tax, rent and privatization purchase prices go up hand-in-hand. The cadastral value of land on the territory of "New Moscow" has gone up by an average of 50 to 100 percent, yet remains much lower than that of similar land plots within "Old Moscow".

Ad hoc decisions

Moscow Region colleagues are not lagging behind either: in 2013, the cadastral value of land plots used for industry and other specialized purposes will be increased by 10 to 100 percent over last year, while base rents will rise by approximately 10 percent; and local authorities are not allowed to set rental reduction factors. Moreover, in the Moscow Region, publicly owned land plots will be leased out for construction on investment conditions. This means, in particular, that the rental payable for a land plot will be determined on the basis of the market value and investors may be obligated to build, renovate or repair social, utilities and transport infrastructure facilities and transfer them to state or municipal ownership.

Before 1 January 2013, the rental for publicly-owned land plots granted for construction according to the prior location consent procedure was determined in compliance with the general rules, i.e., by applying base rates stipulated by the Regional Law. In other words, tenants-to-be could determine the rental beforehand. Now, they will depend entirely on the authorities' judgment. Such decisions will be made ad hoc.

The regional government will determine the procedure for agreeing the investment conditions and exercising control over their fulfillment, as well as the procedure and conditions for paying rent for land plots granted for construction on investment conditions. As so often in Russia, even though the law has come into effect, the Moscow government has adopted no relevant regulations at the time of writing. As a result, investors currently acquiring publicly owned land for construction are pretty much up in the air.

The State Duma is currently considering a draft law regulating land absorbed into Moscow.... using the   analogy of the APEC and Olympic laws.

Olympic Law for New Moscow

Federal lawmakers may also spring some unpleasant surprises on owners of property in "New Moscow". The State Duma is currently considering a draft law regulating land absorbed into Moscow. For instance, one measure would simplify condemnation of land plots and other property located on absorbed territories for state and municipal needs, by using the analogy of the "APEC law" and the "Olympic law".

Some of the toughest constraints on the rights of landowners and users include stricter deadlines for concluding indemnity agreements and, of key importance, immediate enforcement of court rulings on condemnation of land plots. In other words, no matter how long you might argue over the indemnification amount, while you are doing so, some highway may already be under construction on your land plot. Moreover, the law does not list the facilities to be located under these tough procedures, so it will be up to the federal government. This seemingly results in a much narrower scope of public control over so important a decision.

In our opinion, events of international significance with strict preparation work deadlines can hardly be equated to development of "New Moscow", where there is virtually no longer any discussion of locating buildings for the federal authorities.

Moscow Region seeks parity

It might be supposed that the new law, if accepted, would work against people owning small land plots intended for housing construction and individual smallholdings. As for big land owners (such as the Masshtab Group of Companies, which claims to possess over 3,000 hectares in "New Moscow"), they will most probably prefer to resolve the issue of land condemnation on friendly terms with the authorities in exchange for direct and indirect preferences for their other projects.

In the meantime, the Moscow Region would also like to extend the simplified procedure introduced by the Law regulating land absorbed into Moscow to its own territory. According to recent publications, Andrey Vorobiev, acting for the Governor of the Moscow Region, has written an official letter to the Prime Minister pointing out that, if the simplified mechanism only covers Moscow, it will lead to unbalanced town-planning, meaning there will be a lot more highways constructed in Moscow than in the Moscow Region. It is interesting to see if the Moscow Region authorities succeed in lobbying, given that the name of the law that has already passed at the first ("essential") reading implies that it only concerns land absorbed into Moscow.

Despite the above, this is unlikely to damage significantly the investment appeal of the Moscow metropolitan area, which still draws residential and commercial real estate developers like a magnet.