Money-Growing: Manors Going Under the Hammer

The historic buildings of Russia – once occupied by nobility and merchants – are likely to become a profitable business. Some have already grown to realize that fact, although most market participants are only beginning to come round to the idea.

Available Options

Architectural monuments can serve a variety of purposes. Countryside and city manor houses can be redeveloped as luxury hotels, for example. Such projects are suitable for cities frequented by tourists, says Ivan Sinyushkin, co-founder of UTS-Hotel. His company has turned a virtually ruined mansion in Rostov Veliky (Rostov the Great) into a prime hotel.

A mansion can also be redeveloped for office use with a view to accommodate a company’s head office, which is especially popular nowadays with many banks occupying historic mansions, or to rent it out to other firms, says Vissarion Alyavdin, president of the Russian Estate Revival National Foundation.

The head of another foundation for the revival of Russian historic estates, Sergei Potapov, believes that for investors considering redevelopment of historic buildings it would be appropriate to turn them into either corporate head offices or hotels.

“Private ownership poses no hazard to estates and mansions,” Alyavdin says. “Historically, they have always been privately-owned. The attitude towards them is the same as towards exclusive property items developed through the centuries. The position of our foundation is as follows: many monument homes may become part and parcel of modern life if used, for example, as tourist centers. We believe such an approach is the most preferable in all respects.”

Market Players Appear

It is possible to hold forth for hours on end about whether the market for monument homes exists in Russia. But the fact is still a fact – rival firms are already involved in competition for particular properties. The primary market of monument buildings is now being formed.

The reason for that is simple, says Vissarion Alyavdin, almost all of them are government-owned and, hence, can be sold or leased out by the title-holder. Even where some private firm offers a mansion for sale, behind the seller there are usually government bodies, says Oleg Stetsyura, head of Gelos Auction House. But on the whole the market is still quite narrow, and, it appears, its participants are not getting on very well.

Vissarion Alyavdin’s Russian Estate Revival National Foundation is one of the public groups who act as middlemen – and to a certain extent as real estate agents – between the seller in the person of a federal or municipal government body and a potential buyer.

The foundation has a large database on nearly 1,000 historic estates across Russia. In addition to providing data on properties available for sale or rent the foundation also offers consultation services to investors and developers on the reconstruction of monument buildings.

Sergei Potapov claims that his organization, too, has a database just as large and is ready to offer similar consultations. Alyavdin, however, does not mention any other public group during the conversation. Potapov says his foundation was established five years ago, in 2000, as stated on the group’s official website. Alyavdin’s foundation says on its website that it was registered in 2005 as a successor to the Russian Estate Foundation, also launched in 2000.

Companies and individuals active in that sector form a motley group, ranging from public organizations to heirs to estates. They include people like Olga Troitskaya-Mirkovich who has set about redeveloping her family estate near Tula, or Mikhail Lermontov, descendent of the poet who has brought order to the Serednikovo country estate outside Moscow.

Others are private entrepreneurs, such as Ivan Sinyushkin, major investors, such as Konkor Group or Coalco, auction houses represented by Gelos, and banks, such as Bank of Moscow or Impexbank, willing to finance projects involving historic monuments.

A Tempting Yet Thorny Path

“Theoretically, running a mansion or an estate as a commercial property is interesting,” believes Leonid Belaga, head of advertising and communications at Krost, the group that acted as a general contractor in projects for reconstruction of monument buildings at 15/18 Solyanka, 8 Bolshaya Ordynka, 20, Sadovaya Triumfalnaya.

“Any company would be interested, because this means prestigious and exclusive experience. And it does not really matter whether a private firm holds a freehold title to such a building or rents it, as in each specific case any of those titles may prove to be appropriate. What is far more important is getting to know the government’s stance on the issue.

“Being a full-cycle development company, like a management company, we would like to see firstly, the rules of the games for the market laid down in law that would remain unchanged at least for two or three generations ahead, and secondly, a hundred years of stable work under unchanging rules, if it is possible to put it that way.”

Market players still disagree in their evaluation of estates as realty properties. On the one hand, city manor houses and countryside estates are exclusive properties. On the other hand, securing a title to such a property or renting it is not easy, especially if the building is placed under federal government protection

While vacant properties in Moscow are extremely scarce, monument buildings carry too many encumbrances, most investors and developers are convinced.

Under the law protecting cultural heritage (which is quite well written, says Vitaly Mozharovsky, partner with Pepeliaev, Goltsblat & Partners) landlords or tenants are obliged to restore the monument and maintain it in accordance with a protection certificate. The main act governing the market is the 2002 law on cultural 1heritage of the peoples of Russia.

Vissarion Alyavdin agrees, emphasizing that certain legal provisions used by the authors of the law were drawn up in the hard-line Soviet era. At the same time, the law still bans registration of freeholds to properties placed under federal protection, he says. Thus, investors cannot be entirely sure that tomorrow the government will not demand the property back, after money and efforts have already been poured into it.

For example, according to the foundation’s report, restoration of the main house alone at the Znamenskoye Raek estate in Kalyazin is likely to require several million dollars, at least $1.5 million, while the payback on such projects can last as long as a decade.

Oleg Stetsyura is convinced that as soon as Russia is able to guarantee the inviolability of ownership in such properties and succession rights, investors and developers will literally fall on that market.

“We can sell an estate for $400,000 [today]. But will that pay off? Nowadays we sell original paintings at the same price,” Stetsyura says. The regulations on the maintenance of valuable buildings should clearly state the cases where the government interferes in the process and where it has no right to do so, he says.

Freeholds to municipally-owned buildings are available. Over the past twelve months Moscow city hall, regional administrations and federal authorities have been involved in a heated dispute on the transfer of a number of federal properties to Moscow and other Russian regions. The federal government has still not decided on whether or not to give the go-ahead to the sale of federally-owned monuments.

Both the federal government and authorities in the provinces are short of funds to maintain them, of which much has been said in the past. This means investment is necessary. For the time being, those mansions and palaces can either be leased out or gradually fall into ruin.

The law on cultural heritage reads that historic monuments are not subject to sale until it is established whether their owner is the federal government or a municipality, Alyavdin says.

“Perhaps, the solution is to let municipal authorities take over most monuments,” he says. “I believe that the [federal] government fails to honor its commitments to protect monuments. Anyway, the state has never maintained all the historic buildings itself, even in the times of the rich Russian Empire. At least, they should let the local authorities operate those properties, even if their federal status is preserved.”

“Where a monument enjoys regional status everything is easier, as it is enough to unearth a protection certificate and observe the set rules,” says Vitaly Mozharovsky.

“But if the property is an estate surrounded with a landscape park more problems arise because it is also necessary to set the borders of the territory. We have more than once encountered difficulties when defining the borders of areas under protection because the documents where they could be set are often hard to find.”

Mozharovsky advocates the idea of letting private proprietors take over historic buildings. On the whole, the laws governing those relations are not that bad, he says. Moreover, the Civil Code of Russia has established the procedure of seizing properties from negligent owners. Summing up the practice of maintaining historic estates by banks, for example, one can see that while using those properties as their head offices, they keep them in perfect order, with Moscow a perfect example.

If monuments are to be taken over by private owners, the obligations to protect and maintain those buildings must be part and parcel of such deals, holds Alyavdin, so that no one could buy or rent a mansion without having to put their signature to those obligations.

Those obligations are to be drawn up by the seller, i.e. the government. Importantly, those conditions should remain in force for a long period of time, even after the property enters the secondary market. The agreement should clearly define what property is placed under protection – the building, its interiors or any park around it – what measures are to be taken regularly to maintain it, etc.

Market players agree that Russia has developed a fairly good legal base for the development of that sector, although, of course, certain gaps in legislation remain. Meanwhile, entrepreneurs are waiting for the government to clarify its position on the issue.

Trading Begins

Still, against all odds, the market has already seen a number of deals, and each year it is growing more active. Even more so as the federal government is currently working on legislation expected to speed up the mass privatization of historic buildings, including those that enjoy federal status, says Sergei Potapov.

The modern history of deals in historic properties dates back to the pre-crisis 1990s when the Korallovo estate near Moscow was sold to Yukos without its federal status being downgraded. Famous entrepreneur Vladimir Bryntsalov secured the title to the Nikolskoye Uryupino estate in the prestigious Moscow countryside near Rublyovskoye Shosse. Bryntsalov succeeded in having the government issue an order downgrading it to municipal status. They were high-profile but somewhat mysterious deals as nobody would elaborate the terms of the deals.

Vissarion Alyavdin does not rule out that both buildings could soon be put up for auction again, as faults that may serve as grounds for invalidating the sale may be found in some of the documents, of which certain officials would gladly take advantage.

The only legal means of selling a historic property is putting it up for auction, says Alyavdin. Such auctions are sometimes staged, at the request of businessmen wishing to take over the building. According to the law on privatization, when a property is put up for auction, its price is declared. If, in the course of four weeks, the property fails to attract any bids the initial price drops 10% each week until the property finds a buyer.

According to the data provided by the Russian Estate Revival National Foundation, a mansion can also be transferred to an interested party for free use, as happened recently with the small estate of Troitskaya-Mirkovich near Tula.

The 800,000-square-meter property was transferred to Olga Troitskaya-Mirkovich, a descendent of an aristocratic family. The property could make a profit if put into use as a hotel or a tourist center. The title can be secured by an investor who will undertake to provide money for its redevelopment, while the descendent will be entitled to a share of the profits.

Gelos Auction House first showed interest in historic monuments in the early 2000s. So far, the House, specializing chiefly in the sale of antiques, has succeeded in selling only one historic building – a palace estate of the Stroganov-Golitsyns near St. Petersburg.

The starting price was $1.7 million. Oleg Stetsyura says there is no such thing as an average market price for such properties because each case is unique. The price may range from $100,000 to as much as $2 million, says Alyavdin.

Not long ago Gelos put up another lot for sale – the Vsesvyatskoye estate in Tver Region – but failed to sell it, and gave up trying, Stetsyura admits. On the one hand, the sale via auction appeared convenient, because, in theory, any monument can thus be sold at a price higher than that set by the valuers. On the other hand, auctions have failed to take root, Stetsyura says. At the same time his company believes such sales have good prospects and they do not plan to abandon the practice for good.

The Auction House plans to act as a consultant and intermediary on this market. “We have failed to realize that the sale of monuments is different from the sale of, say, paintings, and requires a different approach, as buyers are not ready to pay for real estate properties without having at least checked the history of title,” Stetsyura says.

Alyavdin believes that auction houses could work chiefly on the secondary market as they lack the resources to restore monument buildings, many of which are falling into ruin. There are plenty of factors determining the sale price of historic buildings, he says.

Those include the book cost (often set arbitrarily), depreciated cost for half-ruined buildings (which may be quite low, $20,000 for example), a price set by a government valuator, architectural value, the market price of the plot of land, proximity to tourist centers or to the capital, availability of convenient approach roads or development of the local market, as well as any other external factors.

Investors are guided by various motives. Some are patriots, others are descendants of nobility or patrons of the arts, business corporations looking for head offices, or resourceful entrepreneurs seeking high profits. Public organizations are not wanted on that market, says Vissarion Alyavdin, while abroad such groups are quite active.

Russian Estate Revival National Foundation is ready to assist buyers to find properties that would suit them and prepare all the necessary documents, and to carry out a historical and cultural examination.

Sergei Potapov of the rival foundation believes that the task of such organizations is to prepare the public for the impeding privatization of monuments and to work out the procedure for trust management of historic estates with a view to boosting their capitalization (where the government hires a public organization to manage monuments).

Across Russia

Five years ago entrepreneur Ivan Sinyushkin bought the city manor Pleshanov House in Rostov. The former bank employee says that once upon arriving in Rostov Veliky he saw a derelict mansion that turned out to be an architectural monument. Then an idea occurred to him to open a hotel here. The hotel came in handy as Rostov, albeit being a part of the Golden Ring of Russia, suffers an acute shortage of hotels.

“I went to the town administration (as the monument has a municipal status) and asked them to arrange for a sham auction,” Sinyushkin says. As a result, he secured the title to Pleshanov House for 60,000 rubles. The businessman spent 15 million rubles on the redevelopment of the 600-square-meter estate into a 1,500-square-meter hotel.

Earlier the house belonged to the Pleshanov family, first guild merchants. The exterior of the building was restored. For three years now Sinyuskhin’s project has been making a profit. The payback period was four years.

Pleshanov House was Sinyushkin’s pilot project. These days, he and his associates have set up the company UTS-Hotel and are set to build a chain of hotels on the sites of historic estates around Moscow, in Uglich, Yaroslavl, Murom and Tver. Mansions and estates in the provinces are much cheaper than in Moscow and the Moscow Region, Sinyushkin says.

In the meantime, Alyavdin’s foundation acts as a consultant in a number of deals in several regions of Russia. In particular, the foundation is mediating the sale of the Voronino estate in Yaroslav Region. The heir to the estate, Sergei Leontiev, has purchased the freehold of the 800-square-meter estate for $46,000.

Alyavdin suggests the estate be turned into a multifunctional tourist complex. The private owners of the Batyyevo estate in Ivanov Region plan to use it either as a personal residence or a multifunctional commercial property.

Potapov’s foundation would not elaborate on its deals. Sergei Potapov said only that his foundation maintains a database on 1,300 historic properties in central Russia and has about half a dozen clients.

Konkor Group is known for its dealings in real estate, development of health resorts and restoration of historic buildings. Konkor’s track record includes the development of the Yakhroma ski resort on Dmitrovskoye Shosse, the Petrovskiye Dali park and the Sosny 7 countryside community. Konkor has been involved in the restoration of historic estates since 1998.

The group has secured a leasehold to the federally-owned palace estate Znamenskoye Raek in Tver Region and plans to redevelop it as a hotel and an arts museum. The tenant does not rule out that the estate will be used as a venue for chamber music concerts, exhibitions of paintings and antique auctions, Konkor’s spokesperson, Natalia Selinskaya reports.

Another Tver estate restored by Konkor – Belystino – now houses the company’s offices. Sergei Potapov sets the cost of reconstruction of an estate such as Znamenskoye at $1,000 to $1,500 per square meter (only the reconstruction of the main building). Completing the restoration of the famous Arkhangelkoye residence near Moscow would require at least $10 million, he says.

Provincial monuments are more run down than Moscow mansions, says Alyavdin, as they are less attractive economically. The farther they are from the capital the more difficult it is to attract investment for their restoration.

Exclusive Moscow

In certain cases the Moscow government has succeeded in registering its title to historic properties, says Vitaly Mozharovsky. But, of course, the federal government wants to claim them back, especially after they have been restored. For example, today, Moscow holds the title to the historic Tsaritsyno estate.

The Lenin Museum building on Red Square, on the contrary, has been taken over by the federal government. Before the revolution the property was the seat of the Moscow City Duma and belonged to the city. Altogether, there are about 3,000 architectural monuments in the capital and some 1,000 of them belong to the city government, the Institute of Natural History and the Ministry of Culture reports.

Many historic mansions in Moscow are now occupied by major companies or government agencies. For example, the city’s Directorate for Construction Investment Programs – DIPS – is located in the mansion at 8/1 Vozdvizhenka.

The city’s Main Directorate for Monument Protection occupies a manor house at 19 Pyatnitskaya Street; the Moscow city hall’s offices are situated at 13 Tverskaya. Konversbank’s head office is at 12/1 Goncharnaya, S-Holding occupies a historic property at 6 Stoleshnikov Lane.

In one recent deal involving a historic mansion, the Bank of Moscow purchased a 11,500-square-meter business center at 9 Tryokhprudny Lane. The preliminary price set by market analysts stood at $32-33 million. In a separate development, the Coalco investment firm purchased the Petrovsky House at 1/7 Krasnoarmeiskaya Street (7,000sqm).

Both mansions will undergo redevelopment whereupon they will be offered for sale or lease. The Interfax news agency has also reported that the city government has moved to allocate 5 million rubles for the restoration of the historic estate at 16 Milyutinsky Lane, currently occupied by the House of Children’s Public Organizations.