Market Know-how: A Complex Category of Land

However the majority of land actively being developed in the Moscow suburbs is not intended for either the construction of residential real estate, or for the creation of commercial real estate. But correspond to the land category of agricultural purpose. On such land it is necessary to change its status before something can be built.

"Practically all premises in the Moscow suburbs have been built on land that has changed category. More than 90 percent of the free land in the Moscow region is categorized for agricultural purposes. All prestigious cottage settlements that have been built or are under construction on former agricultural land or in immediate proximity to collective farm forests," Igor Sim, head of the project development department at Masshtab, says.

The same can be said about commercial real estate projects. "More than 90 percent of commercial real estate projects situated near Moscow are being developed on previously agricultural land. I even know of warehouse real estate projects, which legally are "vegetable storehouses" to reflect the agricultural purpose of the project. Although such a situation concerning the documents can be assessed as extremely risky," Ilya Shershnev, director of development at Swiss realty group says.

Seven Ways

In transactions after 2002, a lot of agricultural purpose land has already been re-categorized or the purpose of its use changed," Irina Gunchenko, general director of Land Consulting, says. According to her, the main law regulating this process, is federal law dated 21.12.2004 No. 172-FZ "On the conversion of land or land plots from one category to another."

According to this law there are seven exclusive reasons for changing agricultural land to another category. First, it can be connected with the preservation of the land or the creation of especially protected natural territories. In this case former farmland turns into land on which nothing can be built. Secondly, in the establishment of new features of settlement, for example expansion of the city or a settlement. Thirdly, the category of land can be changed in connection with the construction of industrial premises but only in the event that the given site is unsuitable for agricultural purposes. Fourthly, if the land is unsuitable for agricultural purposes it is possible to include the land in the category of wooded or the water fund. Sixthly, the land can be changed if roads will be built on it, transmission or communications lines will be laid, or for oil and gas mains, or railroad lines.

And the seventh possibility is connected with performing international obligations. For example, farmland can change category if it is necessary for the safety of the state or for the maintenance cultural heritage.

currently, in the opinion of experts, the second and third ways whereby agricultural sites become either land for settlements, or for industrial capacities, are the most popular in the Moscow region. In the first case it is possible to build residential real estate premises, and in the second it is possible to build commercial or industrial real estate, for example warehouses or factories.

"When converting land it is necessary to consider the losses from agricultural production," Yulia Kondratenko, general director of Berger & Partners, says.

According to her the procedure is as follows. The applicant submits a application to convert the land to an authority agency or institution of the local government. After considering the application the regional authorities make an act about the land changing category or refuse to convert it. According to the law applications can be considered for a total of three months, and the decision on the conversion or refusal to convert should be received by the applicant within 14 days. Changing a land's category is subject to state registration.

However it is only possible to change the category of land if the cadastral value of the site exceeds the average regional cadastral value by no more than 30 percent, and if the land is note especially valuable farmland.

"As a rule, changing the category of land from an agricultural purpose to another category is done by the buyer, especially in cases where the buyer is a foreign entity. If the seller does not incur the given functions it is better to address in the specialized company as at times to the investor most it will make difficultly," Gunchenko explains.

According to her, each category of land and, accordingly, the framework of its use has corresponding town-planning norms, which should be observed by the developer when constructing premises. The list of documents necessary for decision-making on the conversion of land from one category to another for the Moscow region is defined by the governmental order of the Moscow region dated 17.02.2005 No. 103/6.

Aside from this a number of changes concerning a reduction in the length of time for housing construction has been brought into force in land legislation in the form of federal law dated 18.12.2006 No. 232-FZ "On the modification of the town-planning code of the Russian Federation and separate acts of the Russian Federation." In particular, these changes allow for the expansion of borders of settlements and consequently, to change the category of land more simply. However these norms and simplifications do not concern industrial land in any way.

"To convert land from one category to another there needs to be a reason. This can be a general plan for the development of a territory in the Moscow region. If the land plot is quite large, and the owner of it is financially well-off, as a rule, it acts as an investor in the concept of development of the general plan. The customer In this case is the administration of the municipal constitution. Thus, working on the development of the general plan for development of the territory, they take into account all the wishes of the investor, which is the basis for converting a land plot from one category to another," explains Sim.

According to him, a land plot is changed by a resolution of the regional government, in this case - the Moscow region, and how it should be used is established by the local administration. The reason for changing the category can be, in particular, the impossibility of using the chosen site for agriculture. However it is still necessary to prove this, i.e. to collect plenty of documents.

"While converting land from one category to another it is necessary to carry out a significant number of examinations, coordination is a complex, labor-consuming and expensive process. In some cases converting land is impossible, therefore before purchasing land plots with the prospect to later convert them to another category it is desirable to carry out even legal examination of documents on land plot," Gunchenko says.

To change the category of land, it is necessary to write an application addressed to the governor of the Moscow region. Copies of documents proving the identity of the applicant if it is a physical person, or an extract from the Uniform state register of individual businessmen or an extract from the Uniform state register of legal entities should be provided. Besides this, it is necessary to prove that the applicant can deal with the specified land plot. For this purpose it is necessary to give an extract from the Uniform state register of the rights to the real estate and transactions with it, and also copies of documents affirming the legal rights to the land plot.

The next step is to get acknowledgement that such a conversion in general is possible. For this it is necessary to receive permission from the coordination counsel for belongings in the Moscow region about the possibility of changing the land from one category to another. It is necessary to have the conclusions of several bodies in this document: the Federal agency for cadastral objects of real estate, sanitary-and-epidemiologic supervision, the Central administrative board of architecture and town-planning of the Moscow region, a state ecological examination, and also if needed, the ministry of culture of the Moscow region.

While converting agricultural land to another category, additional documents proving the unprofitibility of the agricultural plot are more often added. In particular, the Moscow region Ministry of Agriculture and Foodstuffs should carry out complex soil and cadastral valuation inspections, study plans on the organization of rational use of the land and calculate the losses of agricultural production. If land improvements have been made, it is necessary include these agreements. If transmission lines, power cables or communication lines are on the land, consent from these services is also necessary. Only after all these documents are collected, it is possible to expect a governmental order of the Moscow region.

"In some cases to collect and give the necessary documents for converting land it is impossible, as, for example, not all sites have passed the cadastral account. Frequently data of various departments about a site are inconsistent, and process of registration of the documentation is tightened in connection with necessity of reception of additional information. For example, it is rather difficult to receive sanctions on the re-profiling of agricultural land under the building of RosRealEstate," the executive director of the company says. According to Irina Gunchenko if for the preparation of documents you hire state institutes specializing in examinations, then the conversion will cost less, but will take a year or longer.

Time and Money

According to Litinetska under the law the procedure of converting land from one category to another takes half a year though in practice can take anything from eight months to a year and a half. Officially the consideration of documents consists of several stages. It takes about 2-3 months to study a package of documents for land conversion, 14 days to send the certificate to the necessary official, 17 days are required to make changes to the real estate cadastral, and seven more days are necessary to enter the data into the Uniform state register of rights. Though in reality this all takes much longer.

"Converting land from an agricultural purpose to other categories is very selective and problematic. The process takes one year or more," Svetlana Kondachkova, head of out-of-town real estate at MIAN, confirms.

According to Vasily Tsap, chief of the department for out-of-town real estate at Peresvet Real Estate, the biggest problem is infringement of the period of consideration. "It takes about a month for any document to be registered, but because of the huge quantity of necessary signatures the exact length of time is impossible to specify," the expert notes. In connection to this, according to Shershnev, having to change the category of land means additional risks for the developer.

Developer's financial expenses will be big as well. "Today the price for converting land from one category to another ranges from $500 to $800 per sotka. Everything depends on the location of the land plot, its size, its configuration and other characteristics. $1,000-$1,200 extra per sq.m is a guide for calculating how much the conversion of land will add to a project," notes Sim.

According to Vladislav Danshin, a land expert at Vesco Consulting, this parameter is much more. "The cost of converting agricultural land to an industrial category in the Moscow region varies from $1,000 to $2,000 per sotka depending on the location of the land plot and the quality of the ground. For example, the cost of converting a land plot with adverse soil for agriculture, located near a gas station, will be $600-700 per sotka, whereas the price of changing the category of water meadow land in the Novorizhsky or Kaluzhsky areas can reach $2,500 per sotka."

The charges to change the category land are reflected in the capitalization of a land plot. "The increase in value of a land plot strongly depends on its location and the developed market condition: land converted for industrial construction from agricultural near to a railway line, will become more expensive. However increases in capitalization from converting land into industrial purpose does not bear such fabulous returns, as land-development settlements. “The profitability of purchasing a large agricultural purpose land plot to convert into a category for the construction of cottages, creating convenient access roads can be more than 400 percent,” Danshin notes.

According to Gunchenko, 20 km from the MKAD in the Kiev direction the cost of agricultural purpose land on average is $4,000-$6,000 per sotka, and the cost of converting the ground for settlements with all communications is $18,000-$25,000 per sotka. On industrial land it is not possible to make such returns, in the opinion of experts. Therefore converting land to industrial purposes is more often a means for constructing on the chosen site industrial or commercial real estate.

Examples of Conversion

"Demand for land plots for commercial real estate now makes up about 50 percent of total demand for land in the Moscow suburbs. Demand from developers for land plots suitable for construction are first of all for logistic centers, manufacturing areas and warehouses, says Sim.

According to Danshin, "the majority of realized logistic terminal projects logistical terminals in the Moscow region involved the conversion of land into the industrial category." "A typical example is the Kulon Baltic industrial park on Novorizhskoye shosse: the premises is located far from settlements near the highway, which, as a matter of fact, is an optimum place for the construction of a warehouse complex. Conversion of such a site is the most convenient variant for the developer," Danshin says.

“All large new projects that have been announced – Bolshoye Domodedovo, А101, Rublevo-Arkhangelsk – and also built large hypermarkets (IKEA, Mega etc) are under construction on the former land of agricultural purpose, which has been converted into the corresponding category,” Kondachkova adds.

A shining example of the conversion of land to an industrial category, according to Ruslan Suvorov, head of the warehouse and industrial real estate department at Praedium, is the Kulon Istra industrial park. "This project was part of the program of development of industrial parks in the Moscow region. However even with the full support of local authorities conversion of the ground took more than one and a half years," he explains.

In view of such complexities, experts and advisers frequently advise developers to change a category of land not to industrial, but to land for settlements as commercial real estate premises can also be constructed on this category. However much depends on the arrangement of the land plot. "When building individual housing it is possible to convert land plots located either in settlements, or in neighborhoods with them. Whereas under the industrial category to convert land plots it is necessary for their removal from existing settlements. Therefore, basically, under the industrial category it is possible to convert practically any land plot, whereas to convert a land plot removed from settlements, the creation of a new settlement is required, which will considerably raise the volume of investments in the project and so lower its competitiveness," Danshin explains. Besides on the grounds of settlements it is impossible to create objects.

Moreover, reminds Tsap, settlements have protected sanitary zones, and not every buyer will want to buy housing near a processing factory.

Therefore converting land into the category for settlements will more likely be chosen by a developer who is not interested in the development of industry." For the developer converting land to the category for settlements is more preferable in comparison with converting it to industrial category, as profit is made faster. In addition the conversion process of such land plots is easier. For example, to coordinate the construction of a factory instead of residential housing is much more difficult. For this purpose it is necessary to collect additional ecological studies and many other documents.

However those who build industrial premises are not going anywhere. The majority of industrial zones in the Moscow region under construction are on land plots of this category and consequently, developers again and again will change the status of the land.