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. Last Updated: 07/27/2016

Land Code Won't Solve Everything Overnight

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The real estate industry should not expect the new Land Code to start working smoothly overnight nor to solve all problems with recalcitrant local administrations, said the man behind the code.

"The Land Code on its own won't be able to completely change the situation because there is a very notorious bureaucratic tradition existing in this country and an ineffective justice system," said Deputy Economic Development and Trade Minister Alexander Maslov at a meeting last week of the real estate committee of the American Chamber of Commerce.

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

In his first public engagement after the code passed the State Duma's second reading on July 14, Maslov said a local administration opposed to land sales could simply refuse to sell land, but he encouraged would-be purchasers to take their local administration to court if it stood in their way.

The latest draft of the Land Code avoided the contentious issue of sales or "turnover" — which could include privatization — of agricultural land, but another principal issue, the provision of a national regime for foreign investment in land, proved a stumbling block for the government, Maslov said.

"The very idea that foreign individuals and firms should have equal rights with Russian individuals and firms [to own land] raised problems not, as was to be expected, only from the parties of the left, but also from the center and even the right," he said.

The version of the Land Code that passed provided for foreign companies and individuals and stateless persons to buy land, except on the national borders and in other restricted areas, he said. The list of excluded areas is to be approved by President Vladimir Putin, he added.

The code does not define what is a Russian or a foreign company and, therefore, allows Russian-registered companies that are 100-percent foreign-owned to qualify as Russian companies, Maslov said.

Maslov said firms should buy the land under their buildings soon after the code comes into law because the price is likely to rise. Local administrations have an incentive to set higher rates for selling land or the land will be sold at the minimum rate set by the code, he added.

The government accepted that the price of the land under enterprises had been built into the price of privatization even though the land was leased or a permanent use right was granted; the government, therefore, did not believe that the sales should generate large sums for state budgets, he said. Its proposal had been to set the price of the land at five to 10 times the annual tax on the land, he added.

According to consultants Arthur Andersen, the average land tax rate in Moscow this year is 97,200 rubles ($3,320) for 1 hectare, or 9.72 rubles (32.2 cents) per square meter. The highest rate, for land inside the Garden Ring, is 720,664 rubles per hectare, or $2.46 per square meter.

The sale price in the final edition of the code was set at five to 30 times the land tax rate for Moscow and St. Petersburg, five to 17 times for cities with populations between 500,000 and 3 million, and three to 10 times for towns with a population of less than 500,000, Maslov said.

In addition, land under different types of enterprises will cost different amounts according to the type of the enterprise. The variation is limited to plus or minus 30 percent.

"We are not quite satisfied with such a [system for calculating value] as we believe that those rates remain inflated, but we could not have passed the Land Code without this compromise," Maslov said.

Konstantine Kouzine, a real estate lawyer with Linklaters & Alliance, said the new code was a significant improvement on earlier drafts but had contradictions with other laws.

Kouzine and Adrian Moore, the real estate and construction partner at Baker & McKenzie law firm, submitted comments on the draft Land Code to the government on behalf of American Chamber of Commerce, the Russo-British Chamber of Commerce, and the European Business Club.

"Some, but not all, of our comments were implemented in the draft," Kouzine said. "It's a compromise. It looks as if the government wants the principal ideas of the code adopted in the first place and to fine tune it later."

He said one advancement in the code is that there is no reference of a separate land-privatization law, meaning that as soon as the law is adopted, land will be able to be privatized.

Also, the code gives not only foreigners but Russians the right to own and trade in land, Kouzine said. The Constitution had previously established this right, but there was no law setting it up, he added.

Fritz Digmayer, a commercial lawyer, real estate law expert, manager and head of the German desk of Arthur Andersen/Andersen Legal Moscow, said the passage of the second reading of the law was a big political success for the government, Maslov and Economic Development and Trade Minister German Gref.

If the bill becomes law "it will improve the investment climate in Russia. Land ownership will be a guarantee for investors," he said.

Digmayer, who worked for German agency Treuhandanstalt in privatizing state-owned land in former East Germany after reunification, said the price of land determined by the State Duma in the draft of the land code seems to be very low.

This could be explained only by the political need for compromise, he said. The former East Germany's state-owned land was sold only on the basis of public tenders to achieve the highest possible price; the market value of the land was found by "going to the market," he added.

Digmayer would not agree with Maslov's contention that the price of land might already have been built into the price paid for enterprises. This appears to be unrealistic, since until now land could not be owned, and therefore was not part of economic calculations, he said.

"In my opinion, land should be dealt with as a public good, to be sold for the benefit of the public budget on the basis of its market value," he said.