Money Growing: Freedom for Tenants
The St. Petersburg authorities have announced plans for the targeted sale of commercial premises to small and medium-sized businesses. According to provisional estimations approximately 5,000 current tenants can take advantage of the right to buy their premises from the St. Petersburg Committee on the Management of the City’s Property (KUGI). The local law which regulates the order and the conditions of privatization should come into force by the end of year.In order to do this FZ "On the features of estrangement of real estate under the state ownership of subjects of the Russian Federation or municipal property and rented by subjects of small and medium-sized business," which came into operation on August 5, must be fulfilled.
Businessmen have been waiting for this law for three years. The right by the premises has been given to them for two years - until July 1 2010.
Not all tenants can expect the privatization of premises without tenders, but only those who on the date the law was introduced, occupied the premises for not less than three years and made rental payments on time. Assignation of the privilege is not permitted.
If a building rented by a small or medium-sized enterprise is on the privatization list, the authorities are obliged to notify them and offer them a primary repayment. If they refuse, they loose the right to buy the premises and the premises goes to tender. An option whereby a businessman himself makes an application for the targeted sale of a premises is also possible. Officials are obliged to consider it.
The sale price should be market level. It is defined by an independent appraiser. And with a targeted sale tenants acquire the right to pay by instalments. If a businessman is not ready to pay it all off at once, the premises is sold on a mortgage. The state promises to include in the price of the building all costs of inseparable improvement if the tenant has approved them with a landlord.
Also the State has given the regions the right to establish parameters of privatized premises and the financial conditions of transactions themselves.
What is under the hammer?
Until now in St. Petersburg, the tenants of the city’s commercial real estate had only one way to become the owners of the premises - to buy them at tenders, organised by the Property Fund. The St. Petersburg Committee on the Management of the City’s Property has been actively selling premises since spring 2005. The list of premises that are due to be privatized at auctions is gradually increasing (for details see order of the Committee № 233-р). However first of all it concerned premises which were under lease and were bringing very low income to the budget. That is premises with a bad location, i.e. located in basements or on lower floor levels, with windows facing a backyard, etc. In other words, premises that were rented mainly by small business.
The St. Petersburg Committee on the Management of the City’s Property without fail would auction premises with a rental rate not exceeding a certain sum. For premises in the center it was 3,150 rubles per sq.m a year, for former semi-industrial and residential areas (Vyborgsky, Kalininsky, Krasnogvardeisky, Moscovsky, Nevsky, Primorsky, Frunzensky) 2,625 rubles, and for the suburbs (Kolpino, Kronstadt, Petrodvorets, Pushkino and etc) 1,750 rubles.
The majority of tenants, if they had wanted, had the opportunity to initiate tenders on the occupied premises themselves. In particular, this concerned companies, which were carrying out (or had carried out) major repairs with their own funds. In order to receive approval for privatization, a businessman should sign an additional agreement to the rental contract with the St. Petersburg Committee on the Management of the City’s Property, which exempts the tenant from rental payments for at least a year due to the tenant’s expenses on repair work. Under such a scheme any premises, irrespective of the rental rate and location, could be auctioned. The main thing was that the premises needed serious investment, sufficient for yearly exemption from rent.
Those tenants who didn’t carry out major repairs could also apply to buy their premises. But there is a restriction: their premises should not be located on the 11 main streets of the city (an exception is made for basement and below ground levels). The list of such streets includes Nevsky Prospekt, Bolshoi Prospekt Petrogradskoi Storoni, Zagorodny, Kamennoostrovsky, Moskovsky prospekt, Leninsky prospekt, Bolshaya Morskaya ulitsa and Malaya Morskaya ulitsa, ulitsa Savushkina, Sadovaya ulitsa on the site of Voznesensky prospekt, and also Sredny prospekt on Vasilevsky Ostrov and from Makarova Naberezhanay up to 18th Liniya.
In 2005, the city’s property fund sold 374 premises at auctions, in 2006 sold 741 premises, and in 2007 sold 699 premises. In 2008 slightly less premises have been sold at auction: as of September 1, only 232 premises had been sold. The problem is not only that the city has gradually depleted its stock of low budget lots but one of the most significant problems is the clamor around the infringement of the rights of small businesses. Tenants can not always find funds to participate in tenders and win. Especially because it was impossible to start the mechanism of a mortgage with an auction transaction (even under guarantees of the city). Attempts to adjust cooperation with leasing companies also failed. Although according to the conditions of the tenders the new proprietor becomes the assignee of the St. Petersburg Committee on the Management of the City’s Property under a lease agreement and has no right to raise the rental rate or evict a respectable tenant, public organizations representing the interests of small businessmen repeatedly addressed the governor of the city with the requirement to protect their interests and stop the tenders.
So-called black brokers, who put pressure on participants of tenders interested in a specific lot, became more active at auctions. Before an auction they would tell applicants that they are ready to stop competing for a certain amount of compensation. When they were not paid they actively bargained, increasing the prices to the heavens. As a result, an interested company was forced to buy the premises at a price considerably exceeding the market value or lose the auction. In such cases unfair buyers, as a rule, refused to sign the sale contract, endowing the deposit, and the tender was considered to have not taken place: tenants did not get the premises, and the State did not get the money.
As a result in the summer of 2007 the St. Petersburg authorities entered a moratorium on the sale of premises occupied by diligent tenants. Under its action were companies and businessmen observing four conditions: having rented a premises for the last five years (including where under more than one contract, but at the same address); no more than two delays in payments in a year (for the last two years), and each delay no more than five days; that the tenant has done no autocratic re-planning of the premise; and that any subrental contarcts have correctly legalized papers.
In August 2008 small and medium-sized businessmen got a new chance – targeted sales. And the city authorities have shown enviable liberal views in light of this.
Sale amnesty
Using the definition of small and medium-sized businesses in legislation of the Russian Federation (a firm should have no more than 200 staff, and its annual income should not exceed 1 billion rubles), about 90 per cent of tenants of all premises that belong to the city fall under these criteria. The government of St. Petersburg suggests selling by target sale premises with an area of up to 500 sq.m. According to the estimations of the St. Petersburg Committee on the Management of the City’s Property that is about 98 per cent of all premises which are rented for three years and more (i.e. that fall under the federal law on targeted sales).
If a small or medium-sized business occupies a larger area it should still be rented. An obligatory condition of targeted sale is the absence of debts on rent and interest on the day the federal law come into force. The St. Petersburg Committee on the Management of the City’s Property is ready to forgive buyers for former carelessness in calculations, the presence of unapproved building, subrenting, etc.
"The Federal law does not have a concept of conscientiousness, but the following is literally told: "A tenant properly acted on rental payments." This means that the tenant should pay all rental payments on time during a three year period. We apply this rule rigidly, and the right to buy without a tender would receive not more than 200 companies. During the last three years almost everybody has made a late payment at least by one day. However parties of the rental contract can define the criteria of execution they recognize as appropriate. We have decided that the city may take a liberal position," says vice president of the St. Petersburg Committee on the Management of the City’s Property, Dmitry Kurakin.
Exempt tenants (for example, public organizations and so forth, who use essential discounts on rent) will not receive the right to buy. There are also other restrictions. The city authorities are not going to give away the most profitable premises – on the main streets (some of which are listed above), that have entrances onto the street. According to the estimations of the St. Petersburg Committee on the Management of the City’s Property, such premises in the city make up no more than 20 per cent of the total, but they bring the treasury about 80 per cent of the total rent income. The privatization of premises reserved for business-incubators, used for public services, social public catering, etc, and also premises located in so-called development zones stipulated by the general plan of the city also cannot be bought.
As a result, taking into account all nuances, by the rough estimates of the St. Petersburg Committee on the Management of the City’s Property, about 5,000 tenants can take advantage of targeted sale, bypassing an auction. (In total in St. Petersburg there are 19,398 commercial rental premises, i.e. ones that are not under the right of State enterprises). A tenant can make an application to buy itself or can wait for an initiative of the St. Petersburg Committee on the Management of the City’s Property. A target sale will occur at market value which will be defined by a valuation firm chosen on a competitive basis. However, their reports will pass an obligatory examination in the municipal department of inventory and valuation of real estate.
The property fund believes that appraisers will assume the price level of that developed at tenders as a cost basis for premises. In 2008 the average cost of premises by the results of auctions was about 47,000 rubles per sq.m. In the central areas of St. Petersburg this parameter reached 53,500 rubles.
The city authorities are prepared to give a buyer the opportunity to pay by instalments over two years on favorable terms. The interest will be one third of the actual rate of refinancing of the Central Bank of Russian Federation. "No bank has such terms today, even western ones," specifies Andrei Stepanenko, general director of the Property Fund of St. Petersburg.
Accrding to the calculations of the St. Petersburg Committee on the Management of the City’s Property, the procedure of will take about three months, two of which will be spent on valuing the premises. The Property Fund will be responsible for concluding contracts. The fund will also supervise the observance of the schedule of payments.
For premises that are not subject to sale, they will create a specialized fund. Vacant premises included in this fund will be leased only on a competitive basis. Winners of rental auctions can conclude contracts with the St. Petersburg Committee on the Management of the City’s Property for 10 years. An obligatory condition is to use the premises for certain purposes without a right to subrent.
At the same time, tenders on premises which the St. Petersburg Committee on the Management of the City’s Property privatizes under order 233-р will take place (for example, vacant premises; indivisible premises with more than 500 sq.m; the sale of premises initiated by firms that don’t have the opportunity to take advantage of the new law, etc.). And the list of the bases for such privatization in the near future is expected to be expanded.
Not enough
At present the parameters of sale offered by the St. Petersburg authorities have not been approved yet as a city law, which should be done by the local parliament. However, Petersburg deputies recently showed a little unanimity with the executive authority.
Meanwhile businessmen are still trying to bargain with the authorities. In September at a session of the Public bureau on the development of small businesses, they demanded from the governor to increase the period of instalments, referring, in particular, to experience in Chelyabinsk and Yaroslavl where they had approved instalments for seven and five years accordingly. The St. Petersburg authorities are not ready for such concessions yet. Officials emphasize: no one is forced to buy their premises – you can carry on renting them.
"The decision to sell a significant share of the city’s commercial fund is absolutely correct. Every private proprietor has a certain strategy: some own business centers, some buy up logistics complexes. In St. Petersburg, the Committee on the Management of the City’s Property manages all property which it historically inherited. I am assured that such a large proprietor as the city should limit itself not to 500 sq.m, but to 5,000 sq.m," argues president of Becar Realty Group Alexander Sharapov. “For a small business the ownership of real estate is a clear advantage reducing enterprise risks. Another point is that the time for the mass sale, objectively, is not the best. The international liquidity crisis has come to Russia. Banks are reluctantly giving loans. Prices for real estate have stopped growing. Therefore the prime value is in the valuation of the premises intended for target sale. On average such areas cost from $1,500 to $2,000 per sq.m. This price level in many respects is generated by the tenders of the Property Fund. I think that the city should give some discount to tenants who will decide to go with privatization."
“We constantly work with the property fund and are planning to take part in a tender for the right to value premises for target sale,” says president of Avers group Michael Zeldin. “The commercial real estate market is experiencing a recession. Therefore in valuing premises it is necessary to consider previous auctions or give a discount to tenants. I do not think that a transition of such a significant amount of premises into private property will seriously stir up the secondary market. The majority of premises will be bought by businessmen for their own needs and will not go on for further sale. Our firm also, by the way, is planning to buy rented premises from the city."
“As a representative of a medium-sized business I positively assess the decision of the authorities. Because even with the opportunity to pay by instalments, not all companies will be able to afford the privatization, and in these cases the assignation of the most attractive premises will certainly take place. But the city itself is interested in businessmen becoming proprietors of premises: it is a passport to success in terms of the stability of their business. Therefore a 20 per cent discount on a target sale - especially in conditions of the present unstable market - would be appropriate," says general director of Adveks Vladimir Gavrilchuk.
"In my opinion, there is no need to be afraid of a mass entrance of privatized premises onto the market,” believes executive director of Praktis CB Yulia Gotovskaya. “The premises that will be bought are of no interest to speculators – you won’t make much on them. It is hardly possible to receive serious income from renting out such premises. It is a certain category of real estate which is an interest mainly to small businesses. For them the new law can become a real outlet."