In-Depth: Share Catalyst

The problems that every developer-land owner has to deal with are always a popular subject of discussion by the market community. But the legal component, usually, is the least discussed, while without relevant Information on the aspect of this problem the understanding of the main mechanisms by which leading players of the market are guided is impossible.

I agree with the urgency of the problem of the significant volume of undeveloped land resources in the Moscow region. Part of the problem was disclosed in Irina Mogilatova's article (Headache of Landlords in the September Issue of Zhiloi Fond), but my position differs radically from the opinion of the respected expert.

In our opinion, the principal cause of low activity of development of large land properties Is by no means the highly competitive environment of the cottage real estate market or the conceptual lack of information of land owners, but the elementary absence of effective tools In attracting investments for the preparation and development of large allotments and the legal uncertainty of documentation.

Conceptual solutions for today's market situation are already available: It Is now not only lazy people who speak about a deficit of supply in the economy class. What Is more, market leaders are not those companies that build individual elite premises and sell mainly empty fields with a promise to build a cottage, but builders who competently defined the most attractive niche of supply several years ago.

The examples of the realization of land plots without a contract, given by Mogilatova as proof of the passivity of large players, are more likely an effective response to the tendencies of demand, a significant share of which Is guided by such supply, but not a compelled measure because of fear to be mistaken conceptually. Otherwise there would not be about 30 companies in the market (among which are Bolshaya Zemelnaya Kompaniya, Sistema-Gals, КМ-Development and Stroiinvesttopaz), engaged quite successfully in this business.

Sources of problems

Having consolidated land resources at the end of 1990s to the beginning of the 2000s, a number of players faced the problem of its effective development. As practice has shown, preparing conditions for the construction and development of land premises is a much more complex process, than buying up the shares of collective farm members. Moreover, during the active buying up of allotments the overwhelming majority of players made a number of legal mistakes, the specificity of which on some occasions completely excludes or considerably complicates the possibility of realizing construction projects.

During the consolidation of land assets the speed of the transaction was put above the efficiency and reliability of the mechanism of changing the proprietors of the land, therefore many companies are now waiting for the expiry of the statute of limitation on the possibility to contest the documentation of the latifundiums. Other companies are actively involved in litigations.

Such a situation has developed because of the specificity of the privatization process of agricultural enterprises at the start of the1990s - only in isolated instances did it happen in full conformity to the law.

In parallel with the process of privatization of agricultural enterprises citizens were given certificates confirming their "certain" rights to "certain" landed properties without precise borders and areas. In such conditions some large landowners have rushed to buy up such certificates, which are frequently just candy wrappers, not confirming any rights. And others bought up assets and shares of enterprises, which had fallen into decay from farmers.

The most competent large landowners bought up both. Nevertheless even this approach in most cases did not guarantee landowners the legal liquidity of their possession in the future. All of them have followed a long road of land surveying and the appropriate registration of land, and also a reduction of their status in any conformity with the current legislation, which has repeatedly changed in recent times. Even the federal law "On the use of land with agricultural purpose" has not managed to eliminate all the legal difficulties which arose before its acceptance during the making of legislation for new Russia, regulating civil-legal relations including land relations.

Notorious disputes and court cases, which have arisen during the change of proprietors of large land possession, have considerably caused a decrease in the investment appeal of certain undeveloped land plots, which put the majority of market experts in bewilderment.

Accepting market statistics as objective information, it is possible to declare with confidence, that from the volume of land resources belonging to large landowners, appearing in the market, there is only an insignificant share that can be considered as liquid from a legal point of view. Whereas the development of other sites demands essential investments of finance and time.

Two positions

Today there are two main positions in the market that large landowners follow. The first Is the preservation of land until the best time, or In other words the organization of a kind of land bank. It is clear that land in the Moscow region will only rise in price: the constant inflow of migrants who need to live somewhere, dynamic development of infrastructure - all these factors influence the Increasing cost of land.

And within the limits of the given model some players are engaged in the effective development of separate high liquid land plots that usually are ideally suitable for the construction of large infrastructural complexes: hypermarkets, branches of stores, entertainment parks, etc.

The second position is more interesting and is currently considered the best trend of the cottage real estate market of the last 2-3 years. A number of large landowners, in some cases have concluded alliances with development companies and announced the complex development of large territories.

The specificity of such projects implies a multistage realization process taking 5-10 years.

Nevertheless today only one mega-project can boast real successes and that Is А101 on Kaluzhskoye shosse: at least here transactions for the land to be under the necessary purpose designations has been completed. Other projects have not even reached this level. Moreover the realization of some projects has become slower because of court cases connected with contesting the rights of certain land plots.

Things that are not talked about

Processes in force in the land market, first of all, are legal processes, and only then have an economic character. In connection to this I want to pay attention to the fact that in the statements of active players there is rarely information on the legal components of projects. And as a whole the share of legal information is insignificantly small in comparison with consumer and economic data, which, in turn, tells us that real market players either withhold Information, or are simply incompetent in the given subjects.

Such an observation can be made concerning the statistics given by market players on the sizes of landed properties of Moscow region landlords, and to be more precise, on the parameters of the given landed properties. In some cases any construction is simply not possible because it is a disputed land plot, and a court case has being going on for several years In order to establish the proprietor of the plot.

Where does the money come from?

Nevertheless the legal component is only part of a more significant barrier to the mass development of territories. The main problem concerns the absence of available assets for the preparation and direct building of land plots. As a rule, structures, for which the real estate market is not Its profile field of activity, prefer to focus their assets on the expansion of clearer, from their point of view, business, putting aside decisions on their own allotments.

On the other hand, active development of land plots is hindered by Russian legislation, which rigidly limits the sources of investments in landed premises.

Foreign companies or legal entities registered in the Russian Federation in which there is more than 50 per cent of foreign capital, cannot be proprietors of land plots. The only opportunity to invest in cottage real estate for foreigners is to purchase minor shares in projects. Such a scheme is not very profitable for foreign partners, and precedents are isolated.

During the development of the cottage real estate market a universal tool for attracting Investments has not been effectively developed. Also this market has kept the status of the most opaque market that influences the positions of foreign investors, paying significant attention to the given component of projects.

Funds as a solution

Having assessed the market situation from the legal side, we have come to the conclusion that such a tool exists in the form of closed share real estate investment funds, which possess significant advantages over other ways of attracting investments. However the majority of operating companies functioning now, for example Troika Dialog, UralSib, Concordia Asset Management, are oriented towards the developed market of commercial and residential real estate whereas a small group of operating companies, among which are Veles Management, Vitus, Solid Management, Renaissance Capital and Victory Asset Management are engaged In activities connected with investment in land resources.

Today closed share real estate investment funds are the most balanced and modern tool of attracting investments for the further development of large allotments with a purpose to increase their capitalization and market price due to a change In the category and purpose of use, supplying communications, zoning, carrying out analysis for the most effective use and receiving permission for further construction.

The specificity of the legal procedures of a share investment fund, being a property complex and not a legal entity, complicates the presentation of legal claims because they can only be filed against the proprietors of property. Since owners of a closed share real estate investment fund are a set of owners of investment shares, which have nothing to do with offences probably made by a former proprietor of the land plot, they are conscientious participants of civil-legal relations. In this connection none of them can answer third party claims connected with the land of a share fund, including its property in the form of registered undocumented stock (shares). Closed share real estate investment funds cannot be a defendant in a case, as it does not hold the status of a subject of rights.

An operating company is not the owner of a closed share real estate investment fund hence, it also cannot answer to legal claims that are not connected directly with the management activity of someone else's property. The law obliges you to answer claims only in connection with activities of the direct function, but not the activities of shareholders in the past.

Even in recognizing a breach of rights of the potential claimant in the amortization of a land plot in a closed share real estate investment fund, the infringer of the rights will take responsible for damages only by way of recovering losses. It should not reflect the property of the closed share real estate investment fund simultaneously belonging to a set of owners. In our opinion, vindicatio (withdrawal) of property from a share investment fund is currently extremely difficult - it is practically impossible, if, of course, legislators will not make the respective alterations to current legislation. Or if court practice will not be in the broad interpretation of the law.

Any land plot that has not been seized or under other court bans can act as payment in a closed share real estate investment fund. Whereas the category, the special-purpose designation, and other characteristics of a land plot, and also the presence of charges (rent, servitude) or even the presence of legal claims which have not entailed seizure and other restrictions concerning the plot, are not restrictions that hinder the acceptance of the plot as a payment in a closed share real estate investment fund.

Land plots introduced in a closed share real estate investment fund and that are subsequently sold by it, possess greater appeal to large buyers and a potentially greater selling price due to the complete transparency of the sale-purchase transaction and unambiguity concerning the rights of the seller - the closed share fund. According to current legislation during the sale of a property which is assets of a closed share real estate investment fund a delay In the payment of profit tax is given until the moment the profit will be taken from the share fund.

Moreover, the realization of a project in the form of a closed share real estate investment fund gives serious protection of assets against corporate seizures to which legal entities are subject to, and also guarantees of safety and specific purpose of funds invested in the project. This position is reached by the specificity of the control over the activity of share investment funds, the main state regulating body of which is the Federal Service for Financial Markets. At the same time independent special depositaries hold control over transactions with property share investment funds. An independent registrar conducts the register of shareholders. Also, for the realization of transactions with property share investment funds the Involvement of an independent auditor and appraiser is required. Using a closed share real estate investment fund of as a tool for attracting funds solves the problem of the legislative restriction which forbids the transfer of land resources to the ownership of foreign companies or companies with significant participation from foreign capital. There are no restrictions on the structure of shareholders in a closed share real estate investment fund at a legislative level.

Nevertheless today such a variant of project realization in the cottage real estate market is complicated by a number of nuances: for example, current legislation does not allow for Investment In the property of a closed share real estate investment fund which grades the possibilities of project realization in the market with the use of a real estate loan. Also there is an ambiguity concerning who pays property tax on the property of a closed share real estate investment fund.

In any case legislation regulating the activity of closed share real estate investment funds, will be modernized and, by our estimations, even in the case of the tax policy being made stricter, the mechanism of collective investment will remain an attractive position for the development of projects in the cottage real estate market and, quite possibly, will be an effective tool in the creation of an accessible low-level Moscow suburb area.

The author is a legal consultant at BG-Development (Bolshoi Gorod - Development).

The article was written specially for Vedomosti. Materials under the Point of View heading do not necessarily coincide with the opinion of the editor.