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Business news
City Reforms Improve Development Processes
09.28.2004 12:08

real_estate_development St Petersburg Times

By Karina Chichkanova and Glenn Kolleeny

Over the past year, institutional investors, foreign investors and international private equity funds have begun to look seriously at real-estate development projects in Russia and St. Petersburg. In every region, these investors are faced with imperfections in land legislation. But, according to Salans law firm, existing legislation offers investors some measure of protection and new laws are being introduced to improve land-development processes all the time. They also say that St. Petersburg has been particularly active in tackling legislative deficiencies to improve the property investment climate.

There is growing demand for quality, well-designed projects and the services of experienced developers. However, finding an appropriate land plot remains difficult. Available land is often not well-prepared from the legal and technical points of view. Most land on the market is owned either by the city or federal government. Often, however, land plots have not been properly documented as regional or federal. Federal and regional land legislation is often contradictory, and federal legislation on investment and construction is inadequate.

Local administrations generally lack transparent policies for land allocation and sale, the prices of land plots are artificially inflated and even high asking prices do not guarantee adequate infrastructure or easy access to utilities. Other challenges involve rezoning land and the lack of "formed" plots suitable for development.

Nevertheless, in most regions, local authorities not only understand and appreciate these problems, they are developing and implementing measures to alleviate them.

Since the Constitution places land issues under the joint jurisdiction of the federal and Russian Federation subject authorities, local authorities are solving problems that have not been adequately addressed at the federal level. They are also making their own policies for making the processes of granting state property and land plots more transparent and easier to understand.

One step taken by the St. Petersburg government to improve the investment climate is the law on land tenders. Adopted on June 17, 2004, the St. Petersburg law "On the Procedure for Granting Real Estate Owned by the City of St. Petersburg for Construction and Renovation" makes tenders the primary means of acquiring ownership or lease of land plots for construction and renovation. This is a quick and transparent procedure for investors to obtain land rights.

Although the Land Code made tenders the primary way of acquiring state-owned land, land tenders have only been held in a limited number of regions. The problem is not only the lack of bidders, but also the lack of budgetary funds to "form" the land plots and prepare the required documentation. Also, state officials have had difficulty making quick decisions.

St. Petersburg has been able to introduce the tender procedure by ceding the task of preparing technical and legal documentation of land plots to commercial entities. The right to prepare documentation for the conduct of land tenders is awarded on a competitive basis.

Although St. Petersburg has already held a few land tenders, the procedure is relatively new. Hence there are a few flaws that must be addressed.

The most glaring flaw is that land tenders award only the right to lease a land plot, which makes it difficult to borrow funds from a bank to finance the transaction. Also, regulatory acts of the government of St. Petersburg still limit the permitted use of land plots during the lease term and there is a lack of reliable and detailed information on land plots being tendered.

Potential investors are provided only with general information on the boundaries of the plot, existing encumbrances and whether or not there are any buildings or other improvements on the plot. In some cases, the investor must obtain required approvals of sanitary and environmental protection agencies.

In any case, the city often has no intention of surveying the plot and it is unlikely that the investor will be able to receive any detailed information on qualitative factors such as soil conditions and ecology in advance. Moreover, there are cases where investors have learnt during the design stage that their real estate has encumbrances or other restrictions on development that were never officially registered.

Information on the availability of utilities declared at the start of the tender, for example, may not reflect reality, or may entail unforeseeably high expenses to hook up.

In such cases the investor can invoke the protection afforded by the Civil Code. Article 612 (1) of the Civil Code establishes that the lessor is responsible for flaws in leased property even if the lessor was unaware of those flaws when the lease agreement was signed. The Civil Code allows the lessee, i.e. the investor, to demand that the lessor correct the flaws at their own expense, correct the defects itself and deduct the related costs from lease payments, or terminate the lease.

However, Article 612 (1) has not yet been applied to resolve problems with state land.

Other legislation, such as laws concerning obtaining building permits and getting design approvals, has already been adopted. The city is continuing to work on laws regulating land development, zoning and tax benefits, as well as the much-needed General Plan.

All of these measures should make the city more competitive and attractive for investors.

Karina Chichkanova is a senior associate and Glenn Kolleeny is managing partner of the St. Petersburg office of Salans international law firm.)

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