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. Last Updated: 07/27/2016

City Votes to Hold On to Nearly All of Its Land

More than 18 months after the law allowing land sales in cities came into force, the Moscow City Duma on Wednesday passed in a third and final reading a bill letting the city remain the owner of most of the land in the capital.

The bill, which was proposed by Mayor Yury Luzhkov and passed with 16 amendments, enables the city to continue its decade-long practice of leasing out plots of land.

This effectively splits the ownership of a building and the land that it stands on, and goes against the spirit of the Land Code, lawyers said.

City Hall's intransigence has already driven many investors in commercial real estate to the Moscow region, in particular to locations just outside the Moscow Ring Road. The regional government has proven much more flexible and swift in responding to the code.

Some investment funds will not allow investment in a property without land ownership, and City Hall's bill can be seen as a slap in the face.

The bill must still be signed by Luzhkov to become law, and will come into force shortly after being published in an official city newspaper.

"In cases when federal laws do not make it obligatory that land be removed from the ownership of the city of Moscow, the offering of leases will continue to be the main form of distribution of land owned by the city of Moscow," the bill says.

City Duma Deputy Ivan Novitsky, the head of the committee that drafted the bill, defended the legislation Wednesday.

"The bill takes into account all the recent developments in the land laws," he said. "This bill will give us what is necessary to provide land for construction."

It was unclear Wednesday whether the federal government might challenge the legislation. The Property Ministry declined to comment.

Lawyers have said that potential buyers have all they need under the Land Code to buy land under enterprises, but City Hall has persistently refused to put the land up for sale. Mostranskomplekt, a storage and car-parts company, has been fighting for this right in the courts.

City officials are battling with the federal government over control of the capital's land, the most valuable real estate in Russia.

The Stiles & Riabokobylko real estate agency has estimated that up to 60 percent of Moscow's land could one day be in private hands, unlocking potentially more than $10 billion in value.

According to the bill, the price for any land that is offered for sale will be set by City Hall and may be significantly higher than that provided under the federal Land Code.

In line with the Land Code, the bill states that investors must pay for the right to obtain a rental contract with the city. This is to be determined through a tender process and can be seen as an analogue of a sale price. The minimum land lease is 25 years, but a shorter term may be established by mutual consent.

"This triggers the risk of authorities insisting on a land lease for a shorter term, contrary to the investor's interest," said Anna McDonald, partner at Salans, a law firm. "The maximum term is established as 49 years."

She said this was unlikely to be sufficiently long to interest an investor in land plots.

The bill is unclear on land ownership by foreign firms and individuals, said Kim Pisklova, an associate with the CMS Cameron McKenna law firm.

Although investors are permitted to own nonresidential land plots, it is not clear if this includes foreign firms or foreigners. "Clarifications will be required in the very near future," Pisklova said.

Gerald Gaige, head of Ernst & Young's real estate advisory services for Russia and the CIS, said the bill brings welcome clarity to City Hall's intentions after months of uncertainty.

Investors, developers and others interested in the market will react in different ways: Some will stay away, others will decide not to participate at all, and those who do get involved will find financing harder to get than if property could be owned, Gaige said.