Get the latest updates as we post them — right on your browser

. Last Updated: 07/27/2016

Moscow to Abolish 49-Year Land-Lease Policy

City Hall plans to scrap its policy offering 49-year leases on land as it moves toward selling sites through open tenders.

The long-term lease termination order, dated Aug. 18 and signed recently by Mayor Yury Luzhkov, was the result of a meeting of City Hall’s top officials on the construction sector.

Luzhkov said at the meeting that he was dissatisfied with the sector’s performance.

A City Hall official, who declined to be named, said the mayor was particularly annoyed over how plots of land in the city had been awarded to firms or investors for construction purposes.

"From now on, plots of land in this city will be allocated to firms or investors only through open tenders," newspaper Vremya Novostei quoted the mayor as having said at the meeting.

"This new initiative will not allow any city official to enrich himself by awarding these plots of land to those firms, investors or business organizations with which he is directly or indirectly affiliated," Luzhkov was reported as saying.

As a mayoral decree, the lease termination order will not need the City Duma’s approval to take effect, a group of legal experts said. It is an executive directive to restore order in a situation gone bad, they said.

Under the law, municipalities have the right to sell their own land, but the capital has been slow to begin sales. St. Petersburg, Samara and Nizhny Novgorod have already initiated land sales, while Moscow has stuck with long-term leases.

The rules of the leasing game — who gets what and under what conditions — are not always clear. Many local and foreign investors, outsmarted in this game of unclear rules, have complained, citing insider deals as well as favoritism on the part of the city’s officials as the hallmarks of the present scheme.

A Western real estate investor, speaking on condition of anonymity, called the present scheme the real estate sector’s equivalent of Russian roulette.

"Besides the heap of official documents you are required to get, you are surprised at every corner with contradicting demands and last-minute changes that only the most stoic and those with a fundamental understanding of Russian business etiquette can sail through," he said during REALEX-2000, an exhibition on investment, construction and real estate properties held earlier this year at the Manezh Exhibition Center.

Other reports on the issue of land leasing in Moscow quoted Martijn Kramer, head of real estate consulting at Arthur Andersen, as saying the investors would be content with leasing if their rights were made clear.

Michel Pascalis, managing director with realtor Jones Lang LaSalle, also decried the lease system as not encouraging long-term investment in the sector.

"The long-term land lease policy is not regarded by some investors, who do not know the local rules very well, as an attractive enough incentive to justify long-term financial commitments to this sector," Pascalis said in an interview.

He added that should the present laws change, investors who have existing leased sites will want to know if they will become landlords and what extra costs they face.

To execute the new land policy, a special tender commission will be set up, City Hall sources said.

The commission will be headed by Deputy Mayor Valery Shantsev, who will study all the investment programs of those bidding for any plot of land in the city. He can then pass a resolution on whether or not a particular firm or investor can take part in the tender.

"The deputy mayor will oversee this commission and I have many reasons to believe that he will be more objective in executing this new land policy, at least for the obvious reason that he has never been involved in the construction sector, and therefore, he will only be guided by the city’s interests," Luzhkov said.

Deputy Mayor Oleg Tolkachyov, chairman of the land and property committee, said City Hall plans to review all previous contracts executed under the present scheme, analyze all firms’ past works, business or commercial dealings with City Hall in this sector.

"Any firm or investor found guilty of any business malpractice, insider trading or having had unhealthy business ties with the city’s executives in charge of the present scheme will not be allowed to bid for tender rights on any piece of land again," Vremya Novostei quoted him as saying.

City Hall has been trying to find the best and most profitable way to use its limited land. Since 1997, the City Duma has been refining the terms of the bill on land sales. The result of such deliberations is the experimental project of selling 13 plots of land in the Zelenograd region, located 35 kilometers northwest of the city center, with the results to be announced Monday.

The city’s chief architect, Alexander Kuzmin, said recently that the city is experiencing some problems with the shortage of land.

"We are looking at the possibility of putting the limited available land resources to maximal and profitable use," he added.

It seems the new initiative is the practical realization of this goal.

At a press conference on the Zelenograd pilot project, Tolkachyov said the minimum bid for a hectare of land would be $300,000 to $500,000. There is no fixed upper limit.

Vladimir Maximov, a member of the city land utilization committee, had earlier said at a press conference that City Hall gets about $8 million per leased hectare in rent each year.

Simple calculations, using the above quoted figures as references, put the investor’s speculative rents over the 49-year lease period a little below $400 million per hectare, while the cost of buying the same space today, even at the heart of the city center, will pale in comparison.

Real estate consultant Sergei Andrianov said the new policy will have a positive effect on the real estate market.

"We expect the new policy to bring normalcy to land acquisition in the city," he said.

However, there are worries that the highest bidder in the tender may not have the best intentions or investment projects for the plot of land, he added.

Another undesirable side effect of the new policy, Andrianov said, is that during the old contracts’ revision suggested by Tolkachyov, executions of projects initiated on such contracts are likely to be put on hold.

"This will not create an atmosphere for investment cash flow to this sector as investors involved in the projects, whose land-lease contracts are under revision, are likely to minimize their financial commitments to such projects, until the situation becomes clearer," he added.

Open tenders are always good practice, Pascalis said.

"Unfortunately, the transparency of other previous tender projects held in Moscow in other spheres is questionable, as officials are more used to just allocating properties," he added.

Pascalis said every step toward full property ownership and transparency in this sector will ease the market and attract long-term investments.

"However, the market will be more affected by a better political environment than procedural changes. The investors are more interested about the security of their investments and how far their rights are guaranteed. These can only be achieved in a stable political situation," he added.