Money-Growing: History Protected by the State

But there are some who are willing to take the risk. However, property disputes between the federal government and the city authorities over the rights to monuments exacerbate tensions in that specific sector of the real estate market and make investors and tenants a little uncomfortable.

At a government session held in late October Minister for Economic Development and Trade German Gref once again demanded, on behalf of the federal authorities, that Moscow transfer several architectural monuments to the federal government, accusing the city officials of unlawfully taking over ownership of those buildings.

It is quite indicative that the ‘federals’ do not claim the titles to all monuments of national significance but only to those that are likely to make money, such as the landmark edifices of the department stores GUM, TsUM, Petrovsky Passazh, the Manezh exhibition center, to name just a few of the some 840 buildings in total. Those claims clearly reflect the situation with cultural and historic values in Russia – most of them are of no interest to anyone, while the commercially profitable facilities have long been snapped up.

Beginning with the Kremlin

Given the acute shortage of land plots in Moscow, historic and cultural monuments – whether well-preserved, dilapidated or ruined beyond repair – constitute a valuable real estate resource that can bring good returns of up to 14 per cent with the payback on investment taking 18 months or longer.

The grandest monument functioning as an office and a museum is the Moscow Kremlin. Basically, those are the key functions of such buildings. Residential quarters in architectural landmarks protected by the state are rare. The specific design of old buildings makes it impossible to convert them into apartments that would meet both town-planning and consumer requirements.

Nonetheless, monuments can interest investors not only in terms of prestige, reputation or convenient location, but also for economic reasons. “By restoring a building that is an architectural monument an investor comes into possession of a property whose value is comparable to works of art like good paintings, investments in which, as we all know, always pay,” says Ilya Shershnev, development director of Swiss Realty Group

Upon restoring historic structures companies often open their head offices there. Many governmental agencies, banks, development firms, and public organizations occupy architectural monuments.

For instance, the headquarters of the Moscow mayor’s office at 13, Tverskaya Street are situated in the House of the Moscow Governor-General; the seat of the Directorate for Construction Investment Programs (DIPS) is a mansion at 8/1, Vozdvizhenka, once owned by Nikolai Sheremetev; Moscow’s Main Directorate for Protection of Monuments (GUOP) occupies what was once a manor house at 19, Pyatnitskaya Street; Konversbank’s head office is situated in a mansion at 12, Goncharnaya Street; the SKholding development corporation rents office space in a complex of buildings at 6, Stoleshnikov Pereulok [lane] – the former estate of merchant Kozhin.

One of the buildings within that estate is a lost monument that the corporation is willing and able to restore. Oksana Basova, spokesperson for SKholding, says that the development company attaches great importance to being situated in the immediate proximity to government bodies, with which it maintains permanent contact. In addition to the convenient location the architectural monument offers enough square meters to house the company’s employees.

“Investments in the reconstruction and restoration of an existing architectural monument exceed the cost of construction of a similar office building, which is why it is economically justified to open top class offices, such as class A and B, on the premises of reconstructed buildings,” says Shershnev.

The average weighted rental rates for class A offices in Moscow exceed 500 euros per square meter per year, while the demand for top quality office space has been exceeding supply for many years, according to the Aton investment company.

This is why it is becoming increasingly popular to use historic and cultural buildings as office space. In particular, the Krost concern is currently carrying out reconstruction of an architectural monument at 22, Malaya Dmitrovka. Most of its space – 70 per cent – will be occupied by class A offices to be leased to one tenant, 10 per cent will be taken up by the Pozner Television School, with the city authorities taking over the remaining 20 per cent. The 6-storied building, with a total space of 16,200sqm, will have a 2-level underground parking lot.

Another interesting project is 23b, Bolshaya Kommunisticheskaya Street, currently undergoing reconstruction by the Moscow Directorate for Construction Investment Programs (DIPS). The building consists of two parts – a non-residential side facing the street, while the side facing the courtyard will be residential. The total space of the property is 2,835sqm. The building is an architectural monument, that dates back to 1852.

The height of the house was raised to three stories in Soviet times and certain elements of the fa?ade were removed. The reconstruction work will restore the original design of the fa?ade with the building being reduced back to two floors. Upon completion of that part the building will be leased out as office space.

The second part of the building – the adjoining residential house – will also undergo reconstruction and will continue to be used as a residential area afterwards. The total space of the reconstructed complex will amount to approximately 5,000sqm. The project will also include the construction of a 30-space underground car park within the complex.

Quite often architectural monuments are used as exhibition halls, for example, VVTs (the All-Russian Exhibition Center), Gostiny Dvor, and – previously – Manezh, closed down after a fire broke out there earlier this year. Incidentally, according to the Guild of Exhibition and Fair Organizations under the Moscow Chamber of Commerce and Industry, the annual turnover of the exhibition business in Russia is valued at approximately $500 million, with Moscow accounting for more than half of that amount.

The city’s cultural heritage can also be used as premises for small hotels. As a part of its project to develop a chain of mini-hotels in the city center JSC Stabilnaya Linia plans to open its first 3-star hotel at the intersection between Bolshaya Nikitskaya and Gazetny Lane in the architectural monument Menshikov House designed by the prominent Russian architect M. F. Kazakov.

Igor Lavrik, director general of Stabilnaya Linia, believes that foreign tourists arriving in Moscow would be happy to stay at the renovated historic building within 130 meters of the Kremlin. The outward appearance of the restored monument will be in keeping with the concept of small hotels offering a homely atmosphere and a quiet location away from noisy entertainment establishments and fulfilling all the guests’ requirements. The hotel will have 27 rooms at the rate of approximately $160 per night.

Making money on monuments is also possible by securing a lease on the property, for further reconstruction – at least, partial – and resale. For example, the building at 25, Gagarinsky Lane was sold for $5.5 million. That price covered the monument proper – the house of a Decembrist – and a newly built annex, with a total projected space of 2,900sqm, estimates, documentation and 49-year-lease rights.

A complex of three restored buildings – of 136, 155 and 870sqm, with a 15-space parking area, was sold last year for $3 million in central Moscow. Deals for the sale of lease rights to a part of a historic building are also rather common. For example, a 15-year lease on a 220-sqm property is currently up for sale in Gostiny Dvor, at a price of $700,000. The rental rate for the same restaurant premises with seating for 60 guests is $10,000 per month.

But, deals with historic monuments are not always successful. The most publicized example is the Forum cinema theater that has changed hands many times. Its latest known buyer – Poliprom-K, which won a 2002 auction – has spent 95.1 million rubles on the property. However, the building is still lying idle. Another obstacle is that many of these types of property are overpriced. For instance, the Sodruzhestvo realty firm failed to find a buyer for an architectural monument near the Kurskaya metro station, offered for $5.5 million.

Property disputes between the federal government and the city authorities also impede the implementation of commercial real estate projects in this sector.

But the main reason that many monuments cannot be used for commercial purposes is their lack of liquidity. Vladimir Sokolovsky, chairman of the Main Directorate for the Protection of Monuments (GUOP), says that only about 1,000 buildings of Moscow’s 7,000 architectural monuments can be leased out or sold, while the remaining 6,000 have to be maintained and restored by the city government itself.

The palace of Count Durasov in Lyublino has already been put up for auction twice. The price of the lot is $2 million – or 50 per cent of the amount spent by the city on restoration of the landmark estate. Investors, however, show no interest considering the area of the building (1,640sqm) and adjacent territories (3 hectares) too large and maintenance costs too high. The Otradnoye estate situated 40 kilometers from Moscow has not found a buyer, either.

Petrovsky Palace at 40 , Leningradsky Prospekt, with a total space of 17,060sqm, and an entire territory of 3.2 hectares, is another example of a failed commercial project. The city spent 1.5 billion rubles on restoring the architectural masterpiece, but it attracted no investors, says Sokolovsky. Most likely, the city-owned GAO Moskva will take charge of the palace. After reconstruction is completed the authorities plan to open the Moscow City Center for International Cooperation, the Reception Hall of the mayor’s office and a hotel of approximately 50 rooms on its premises. The upper floor will house deluxe apartments, with a small restaurant in an adjoining room.

The Price of a Masterpiece

Evaluating invaluable architectural monuments is quite a difficult job. The price can change considerably during auction. The Forum Theater mentioned above was originally put up for sale at 43,134,000 rubles, but the price more than doubled as a result of bidding. Quite often the opposite occurs, as was the case with the Durasov Palace.

Sometimes monuments are sold at prices considerably below their market value. The deeds to the Count Dolgorukov Palace at 19, Prechistenka were transferred to the Museum and Exhibition Complex of the Russian Academy of Arts for a symbolic price, according to Vladimir Sokolovsy.

In the same manner the Moscow Museum of Modern Art secured ownership of the House of Merchant Gubin at 25, Petrovka designed by the prominent architect Matvei Kazakov, and the Rerikh Museum bought a historic building near the Pushkin Museum. In these cases properties were not put up for auction, with their titles being transferred directly to the museums. The city authorities are helping them to carry out restoration works.

According to Swiss Realty Group experts, if it were put up for sale today the Dolgorukov Palace could be sold at $4,000 to $4,500 per square meter. The price of the Gubin Mansion would be approximately the same

The average cost of reconstructing architectural monuments amounts to approximately $1,500 per square meter, according to DIPS. The directorate has spent some $10 million, or $1,200 per square meter, including the cost of furnishing and equipment, on its mansion on Vozdvizhenka Street. The historic part of the building is some 3,000sqm, with a total territory of approximately 6,800sqm.

Investor experience shows that the estimated cost of reconstruction can fluctuate considerably depending on circumstances. Before the reconstruction of a building at 12/1, Bolshaya Nikitskaya began, JSC Stabilnaya Linia had planned to spend $2.5 million on restoring the architectural monument.

However, a geological survey revealed that the 0.05-hectare site was overloaded with communication lines, including a water pipe of the city’s main police directorate and a pipe supplying gas to the Eternal Fire on the Tomb of the Unknown Soldier. Resulting from those and some other surprising discoveries the estimated cost of the project grew by another $1 million.

In Various Ways

All the monuments that are capable of making a profit have long been snapped up, says Vladimir Sokolovsky. Those that fail to attract investors are rarely of any interest to anyone at all. In October the Moscow city authorities submitted a package of draft regulations for consideration by the Russian federal government, proposing, among other things, to grant discounts on rental charges to investors who inject funds into the restoration and maintenance of monuments. The drafts were rejected.

Nonetheless, every now and then investors do show interest in some historic buildings. Then, the city holds a tender where the winner is named. Before the tender the city authorities draw up a package of documents later to be bought by the investor. GUOP plays the key part in preparing the necessary paperwork and negotiating the project with the winner. After the tender the tenant enters into a protection and lease agreement with GUOP. Construction usually begins 12 to 18 months after the tender is held.

Investors usually address architectural monuments when looking for a building or a location for a head office or a new project. Sometimes the opposite happens, with investors looking for monuments, thinking what kind of business could be launched from their premises. This is what happened with Stabilnaya Linia.

The Moscow government’s 1993 decree No.1092 “On the Restoration of Monuments of Architecture” prompted the company to draw up a plan for the development of a chain of mini-hotels in the capital. Stabilnaya Linia intends to restore up to ten architectural masterpieces investing its own and borrowed funds, whereupon they will be taken over by GUOP, with the company security 49-year lease rights to the buildings.

The restored monuments will house 3-star hotels with the number of rooms not exceeding 30. The company submitted its plan for the restoration of architectural monuments and the hotel chain to GUOP in 2001. The plan received the mayor’s approval the same year.

After that the parties entered into an investment agreement whereby Stabilnaya Linia promised to restore historic buildings at five locations – in Kropotkinsky, Gagarinsky, Merzlyakovsky lanes, and in Bolshaya Nikitskaya and Malaya Dmitrovka streets. However, despite the acute shortage of economy class hotels in the city center, the parties have still not agreed on the reconstruction of architectural monuments by Stabilnaya Linia in other locations.

The problem is that in line with a decree from the Moscow government “On tenders and auctions held for the selection of investors for the implementation of investment projects” all properties, including those protected by the state, have to be sold by tenders held either on the municipal or, if the property is less than 1,500sqm, on the district level. Purchasing the rights for the monuments through a tender renders the project for building a 3-star hotel chain unprofitable.

Investors have learnt that companies involved in the reconstruction of historic buildings are often confronted with a variety of problems, most of which arise from relations with the landlords – the federal and municipal authorities. Quite often it is unclear who holds the rights to a historic building.

The federal authorities believe that the title to those properties should be held exclusively by the federal government, Dmitry Aratsky, deputy head of the Federal Property Management Agency (FAFI) said on 22 October. The agency will seek to reassert property rights over about 1,000 historic buildings currently held by the city authorities. If FAFI succeeds, all deals and investment contracts will be nullified, Aratsky said.

With the property dispute having dragged on since 2000, tenant companies have found themselves between the devil and the deep blue sea. For example, the SKholding corporation has rented space at 6, Stoleshnikov Lane since 1994.

In 1997, in line with the Moscow government decree No.829 of 1 October 1996, reconstruction of the buildings partially financed by the corporation was launched never to be completed, because in the year 2000 the work was suspended after the main investor – Aktiv Bank – went bankrupt. Today, says Oksana Basova, buildings 1, 2 and 5 of the complex are in a very poor condition.

In accordance with decree No. 4427-r of the Russian Property Ministry issued on 25 December 2002, the title to the estate situated at 6, Stoleshnikov Lane – the former Kozhin Mansion – is held by the Culture Ministry’s agency for management and exploitation of historic and cultural monuments. In April of 2004 SKholding signed short-term lease agreements for buildings 1,2 and 5 with that agency.

Also the parties “agreed to enter into long-term lease agreements on those buildings subject to registration in line with the established procedure”. “But lately we received a strange letter from the department for humanitarian policy and public relations of the presidential administration, notifying us that we ‘are relieved of our obligations under the lease agreements’ on buildings 1 and 2,” says Oksana Basova.

And although SKholding still holds the entire package of permission documents, the corporation is unable to continue reconstruction of the mansion. “In these circumstances we do not understand what will happen to our lease,” she says.

City investors tend to stay out of projects for the reconstruction of historic monuments of federal importance namely because ownership issues remain unresolved and it is unclear how future profits will be distributed. No investor is willing to take part in a project where property rights are disputed. The main question is: who will hold the title to the property after the reconstruction is completed?

Another problem investors often face is protests from local residents. For six months now Stabilnaya Linia has been arguing with the residents of 1/12, Gazetny Lane situated near a historic building currently being restored by the company.

Following their claims that the investor lacked permission from the authorities and had inflicted damage to their building – although the builders have never approached the building – the company underwent numerous inspections and the condition of the house was checked three times. It is worth noting that every inspection entails a suspension of the reconstruction work.

In a separate development the owners of a building at 22, Malaya Dmitrovka Street engaged in a real battle with GUOP and the development company Krost. Earlier the disputed property was not on the list of cultural and historic monuments, but in the era of mass privatization it was taken over by a society of artists residing nearby.

Only recently was the building recognized as a historic monument whose title could only be held by the city authorities. Krost was awarded an investment contract for the reconstruction of the building with a long-term lease right. But some of the former owners have refused to vacate the premises, putting forward conditions the concern could not fulfill, says Leonid Belaga, head of advertising and communications at Krost.

In particular, they asked for 100 square meters of class A office space in Ostozhenka with a parking area for 3-5 cars. GUOP, for its part, filed a legal suit against the artists citing unlawful privatization. As a result, they will be evicted from the building in Malaya Dmitrovka without any compensation, Vladimir Sokolovsky says.

Krost has abstained from the litigation, but is unable to continue reconstruction. “Until there is a court ruling any deal can be nullified,” Leonid Belaga explains

It is highly likely that by December all the property disputes will be settled, because as of 1 January 2005 regional authorities will no longer have the right to finance properties of federal importance. Changes to that effect were introduced to the federal law on the general principles for government bodies in 2003.

That will mean that many reconstruction projects of historic buildings will be stalled because of a lack of financing. The city government will no longer finance the historic estates at Kuskovo, Kolomenskoye, Tsaritsyno, Ostankino; otherwise, it would violate the provisions of the Budget Code. City officials believe that the status of cultural monuments will have to be addressed by the president of Russia.