Despite the president’s explicit instructions, company proprietors are unable to become legal owners of their land for the present. Officials are not going to part with their prerogative to be in charge of land

Andrei Lazarevsky, Expert at RSPP, or Russian Union of Industrialists and Entrepreneurs

In late September, the State Duma approved amendments to the Land Code of the Russian Federation. Under these amendments, land occupied by projects for religious and charity purposes should be granted to religious organizations free of charge. The land under buildings will be become property of the religious organization. By the highest standards, this decision is correct, and it has finally started the creation of full-fledged real estate units made up of both the building and the land under it. However, this should be the right of all organizations, not only religious ones.
The government had stated repeated that land should be handed over to the owners of the buildings and enterprises on it. When addressing the delegates at the Eighth Congress of the RSPP, the president also called the secondary sale of land under privatized enterprises unfair. However, the problem has yet to be solved.

The Economic Development and Trade Ministry’s new project

Last summer, the Economic Development and Trade Ministry forwarded to various agencies a document providing for a minute reduction in the cost of buy-out by enterprises of their land by a mere 30% instead of the fourfold decrease approved at a July 2003 cabinet meeting. The numerous administrative obstacles officials put in the way of land buy-out are not being removed, either. Often, these obstacles are even worse than the exorbitant buy-out prices. Under current regulations, a landowner is allowed to freely choose any authorized form of land use. According to the new draft, any future changes in the form of authorized use of land would incur a levy of 5-30% of its cadastre value (we’ll elaborate on it below). The imposition of this levy implies abolition of the Land and Urban Planning Codes regulations concerning legal (territorial) zoning. This is an attempt to introduce a sort of new tax on “future investment” that will raise a new barrier to investments. For example, in the town of Verkhnyaia Pyshma in Sverdlovsk Province, the Ural Mining Company would have to pay 1-5 million rubles for the right to use its own land for a new office block. The draft prescribes under the threat of penalties to close deals on re-execution of land titles before 2006. The state proposes that proprietors of buildings and enterprises should accept one of the two offers that are obviously unprofitable: either buy out the land at an exorbitant price and pay land tax based on pseudo-market cadastre estimates afterwards or to give their consent and replace their right to permanent (termless) use with time-limited lease. At that, the rental fee could be twice as much as land tax. According to estimates made by non-ferrous metallurgy enterprises, when re-executing lands on lease, land charges could increase by 6-13 times their 2003 levels.

A cadastral puzzle

The notorious cadastral valuation is rightfully the subject of debate. It is calculated under departmental methods as the “market” value of land (Article 66, Land Code of the Russian Federation) but… there is no actual market, as the land the cadastral agency is manipulating are not privately owned. The methods lack adequate primary data to make evaluations. The list of sources is indistinct and includes mass media outlets (!), as well as cadastral accounting bodies. Market value should be determined via “the land’s consumer value (utility).” It is clear that every consumer has his own perception of this value that differs from others’. However, it’s the opinion of a particular official in charge that will be “correct”. The variation is further increased, because its value is determined according to 14 (!) types of functional use. Although under the international appraisal standards, there should only be one type and it should reflect the price when land is used most productively.  The methods have produced amazing results: lands in Khanty-Mansyisk and in Sochi were appraised at the same value.
It will be simply impossible for a taxpayer to challenge the outcome. Alexei Overchuk, Deputy Head of the Federal Land Cadastre Service, stated that they would only check whether the established methods were being followed. However, the methods themselves serve as a basis for arbitrariness. Thus, the government will create financial liabilities for land owners and tenants on the basis of vague cadastral value.

A dispute with the city administration

The Economic Development and Trade Ministry’s stance changed after the Federal Land Cadastre Service became a part of the EDTM and the Moscow authorities joined the discussion. Moscow officials are calling for excessively high prices for buy-outs. Their main argument is to prevent speculation. Indeed, land speculation is a serious problem for Moscow. However, the city administration itself is the only speculator, as the sole seller of lands and interests in them. Because of the artificial land shortage, the prices for Moscow real estate are incredibly high, which increases the expense of doing business in the capital and inflates the cost of new housing.
Meanwhile, there are enough opportunities to develop areas in the city. In Moscow, industrial enterprises occupy 14% of the land in Moscow. The world experience shows that this is three times the permissible rate for the capital to develop efficiently. It’s enough to mention the “industrial belt” around the city’s center alone. Under the Land Code, enterprises are entitled to buy out their lands and then manage the real estate in the most efficient manner. However, Moscow authorities are blocking the buy-out option, thus maintaining their land monopoly. Only a handful of businesses have bought out their land to date.
Moscow’s Law “On Land Tenure and Development” is still at variance with federal legislation. The imposition of the new bill will produce an interesting effect. The extra charge for a change in authorized land tenure in Moscow, required under the new draft, will result in payment for the change twice:  first, under the law drafted by the EDTM, and second, in accordance with the Moscow Act on Authorized Land Tenure. This Moscow law distorts the very concept of authorized use set in the Land and Urban Planning Codes. Instead of public legal act for all land, officials have cooked up an administrative act for individual land plots. Moreover, each applicant has to pay for its development at his own expense. The Moscow authorities involved in drafting the federal legislation should first try complying with federal laws already in effect.
The way out is evident. Lands should be handed over free of charge to owners of buildings and facilities located on them, as was decided with respect to religious organizations. Afterwards, competition between the many owners would turn the government speculation in land into market turnover. And only then can normal real estate tax be introduced. Leases will only remain where ownership is not profitable. 

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