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. Last Updated: 07/27/2016

Rents for Government Property Hiked

The Moscow city government raised rents on nonresidential state- and city-owned real estate properties by 35 percent as of April 1, a move that real estate insiders said would put the bite on corrupt government officials and companies that have been taking advantage of cheap state and municipal rents.

The hike was in accordance with a Dec. 28 government decree aiming to decrease the disparity between rents on government-owned and commercially owned offices, City Hall said.

"Convergence of market and municipal rates is good for the market," said Mikhail Gorokhovsky, director of Nasha Moskva realty. "[But] it's a blow to those companies who are playing on the difference [between municipal and market rates]."

Real estate experts said it is a common practice for tenants of cheap state-owned properties to sublet their spaces at market rates.

The rate hike will significantly complicate this process, Gorokhovsky said.

Rates on government-owned nonresidential properties have been as low as 25 percent of market prices.

"This will lead to changes on the market," said Konstantin Popov, co-owner of the Moscow Central Realty Exchange, or MTsBN.

Popov said the new hikes will force prices up on the market and some renters may be forced to find new more affordable spaces. "The ruble rate against the dollar has stayed put, so rates will rise in hard-currency terms," he said.

Nevertheless, he said municipal rents will still be far below market prices.

Rents on state and municipal properties in Moscow are determined through a complex formula established by Supplement No. 8 to Moscow Government Decree No. 689 issued on Aug. 12, 1996.

That decree, "On revenues for the first half of 1996 from privatization and leasing of land and nonresidential space, and on additional measures for improving accounting for and use of city property," calls for the use of an inflation coefficient when determining rental rates.

The city has replaced its 1.7 coefficient with a significantly higher figure of 2.3. That change raises the minimum rate on government-owned nonresidential property to 320 rubles per square meter per year.

Market observers say the city's formula ignores crucial characteristics like location when figuring rental rates on individual properties, which leads to corruption.

"Such a situation leaves things wide open for bribe taking," said Moscow Realtors Guild/Association vice president Sergei Bagayev, who is also president of the Vavilon realty agency. "Renters nevertheless pay market prices for good locations. But the difference [between commercial and] municipal rates goes into the bureaucrats' pockets."

Representatives from the Moscow city government's economic policy center for property and land issues would not disclose how much municipal nonresidential property the city rents out. But MTsBN's Popov put the figure at about 1.5 million square meters.

The Moscow government notification "on preliminary results of the Moscow government's 1999 program, and the Moscow government's 2000 program" said the capital city's authorities anticipate 2.9 billion rubles (approximately $1 million) in revenues generated from nonresidential rents.

Average rents on municipal nonresidential real estate range from $50 to $100 per square meter annually.