"Real Estate and Investments. Legal Regulation", the journal

Issue 2-3 (3-4) 2000

State and Municipal Property Sale: Problems and Experience

Mosunov Y.G., head of the Specialized state unitary enterprise for state and municipal property sale of Moscow, Schegolevsky V.A., candidate of economic sciences, assistant professor, The Russian Academy of Economics Named after Plekhanov G.V., Zaika I.L., Finance Academy under the Russian Federation Government

The legal and organizational aspects of organizing the sale of state and municipal property are very important in the asset management system in Russian Federation and its subjects. The government of Russian Federation by the decree from September 9, 1999 ¹1024 " On the Concept of the state-owned property management and the privatization in Russian Federation " has approved the Concept and recommended the executive bodies to organize the work on the Concept realization.

The state policy of state-owned property management has the following goals:

• Increase of the federal budget incomes on the basis of efficient management of the state property;
• Optimization of property structure (from the point of proportions on macro and micro-levels) in order to ensure steady reasons for economic growth;
• Involving maximum quantity of state property objects in the process of management improvement;
• Usage of state assets as the instrument for committing the investments in real sector of economy;
• Increase of competitiveness of profit -making organizations, improvement of their financial and economic indexes by promoting their interior modification and ceasing the execution of unusual functions.

The concept provides further improvement of the arrangement of property sale in the subjects of the Federation.

Let's consider some aspects of legal regulation and organization of sale of state and municipal property in Moscow.

The privatization of Moscow state and municipal property is an important element of economic development of the city, reforming the national economy, transformation and complication of property relations.

In the question of property, the city acts in two aspects: as a government structure of the subject of the Federation, which establishes standards and rules of property sale and management, organizes interaction of all executive and legislative authorities of managing subjects; and as a managing subject and owner, which actively acts on the market. The sale of property is realized according to the orders of Moscow Government.

At the first stage (during 1992-1994) the sale of city property was carried by the criteria and standards of Law on the privatization from 03.07.91 and Decree of the President of Russian Federation from 29.01.92 ¹66 with rapid methods of property sale under the residual book value. The sales were organized as an obligatory privatization. As of 01.07.94 8017 sale contracts were made, including 3079 agreements by Moscow property committee, and 4938 sale contracts by Moscow property Fund.

At the second stage of the privatization of state and municipal property the Moscow Government included significant corrections into the system of organizing the sales process. The order of the Moscow Mayor from 30.05.94 ¹264-ÐÌ "On the privatization of the real property in Moscow" reconsidered basic sales rates of untenable property and turned to the market prices of selling property to the banks and commercial organizations. The initiative of the Moscow Government reflected in the Decree of the President of Russian Federation from 06.02.95 ¹96 "On the second stage of the privatization in Moscow" and decree of Moscow Duma from 02.10.96 ¹85. At the second stage of the privatization (since 1995 till the present time (for 01.04.2000)) 12150 sale contracts were made. Annual volume of property sold has numbered 1650-1950 mln. rub., thus the amount of sold spaces has decreased from 2-2,2 mln. sq. m. at the first stage down to 450-550 thousand sq. m. at the second.

The differentiation of asset of the federal and city property was effected. According to the city program of privatization the normative - legal base that regulates the order of pricing and the process of sales was created.

The organization of sale of untenable property to the leasers is based on four schemes: on the affirmed plans of privatization, applications of the leasers (under the contract prices), inclusive of social significance of the subject and the investment scheme (including the investments in cost of premises).

The introduction of the differentiated approach of pricing, distinct from the federal, changed the process of privatization of the state-owned property on the territory of Moscow. With the introduction of new approaches, the privatization in Moscow became systematic, the incomes from the privatization became more stable. It favorably effected the investment climate of the city. Banks, financial, and large commercial structures actively made the redemption of the leased real estate, participated in conducted tenders.

In total, the finance earned from the privatization of untenable property amounted (since 1992) to 10,5bil.rub or $1,5bil.. Now, Moscow property numbers 46,4 mil. sq.m. of space (besides 4 mil. sq.m. require coordination with federal departments).

In the context of quick pace of the real estate construction in districts of mass building in Moscow, for the first time in Russia since 1994, the idea of sale of the real estate, as incomplete construction was realized. The introduction into the practice of privatization of such system has allowed to earn finance into the city treasury even during the construction in progress, and afterwards to spend it on the construction of urban infrastructure. For the realization of construction in progress, which is not sold on tenders for a long time, the system of incomplete construction sale was introduced.

The privatization was carried not only by direct redemption of the real estate, but also by selling blocks of shares of the privatized firms. The sale of the shares was realized on a privileged basis to the employees. The free sale shares were sold on open tenders and pecuniary auctions, according to the privatization plan conditions. In total, 1610 blocks of shares were realized, including 986 blocks of federal firms.

Simultaneously, on the instructions of federal departments (State Committee of property of Russian Federation, Russian fund of federal asset), the city departments carried out the sale of federal property on the territory of the city.

During the period of1992-1999 the amount of finance in main directions of privatization of state and municipal asset numbered:

Sale of untenable property- 8,9bil.rub.;

Sale of incomplete construction - 1,1bil.rub.;

Sale of the blocks of shares - 0,52 bil. rub.

Together with earning money from the sale of property, the city has received the investments for the sum of 10,3bil.rub., including the investments into the rented untenable property of 3,92bil.rub., into the incomplete construction of 2,2bil.rub., into investment programs of joint-stock companies of 4,1bil.rub.

70% of plant spaces of the consumer market were reconstructed, more than 250 thousand workplaces were organized.

Organization and effectiveness of sale of city property were periodically discussed on the meetings of Moscow Government; the process of sales organization was edited in the context singularities of the time frame. In 1998 the Moscow Government conducted structural modifications: the Department of state and municipal asset and the State unitary firm specialized on the sale of Moscow state and municipal property were created, the organizations on sale of incomplete construction, which were built at the expense of the extra-budgetary fund were also established.

The sale of untenable property provides more than 84% of earned amount of finance from the privatization of state and municipal property in the city. With that in the structure of the untenable property sale dominate direct sales to the leasers. The leasers while preparing the documents on the redemption of rented areas pass through necessary coordination in prefectures of administrative districts and territorial agencies of ÄÃÌÈ.

In the case of sale of the untenable property rented by privatized firms, the price is established according to the formula, where the base parameter is cost of 1 sq. m. of construction in the residential panelized house.

Ñp=Ññ*Odb*Im*It*Iz*Ia*Iup*Ip*S*Inf

Where:

It is necessary to mark, that for the leasers who have obtained the right of rent with the right of the following redemption during the competition, one more boosting index (up to 1,3) can be applied on the solution of the untenable property sale Commission of Moscow. The remaining indexes are defined on the basis of the information of BTI.

Using the system of indexes, which takes into account the depreciation of the object, kind of the company’s activity (reducing indexes), the convenience of commercial site and other conditions, the final price of 1 sq.m. is set.

The next direction. The sale of the leased units, which right of rent (without the right of redemption) was obtained during the auction or competition, and also under all other rent contracts is carried out for contract prices, which minimum boundaries are defined by the Moscow Government: within the limits of Sadovoye Koltso — $1200 for 1sq.m., from Sadovoye Koltso up to the Okruzhnaya railway — $800 for 1 sq.m., outside the Okruzhnaya railway — $480 for 1 sq.m.

The indicated price boundaries were affirmed in January 1999 and now frequently exceed current market prices.

However Moscow local law provides possibilities of lowering the affirmed prices.

So, for example, with reducing indexes are sold basements, earth-shelted structures, ground floors, roof spaces and desolate buildings.

Appreciable redemption privilege of the leased untenable property is the offset of investments into the state asset on account of the redemption sum, that allows to reduce the price of redeemed premise to 50%.

Investments include expenses on the capital repair, reconstruction of premises and the repair of engineering mains compounded with the lessor (ÄÝÇ, ÏÐÝÎ etc.).

In the context that the price is defined in US dollars, the investments are also enumerated in US dollars on the moment of their importation, that allows to take into account inflation and the financial crisis losses of the leasers.

If necessary, independent auditor corporations and appraisers (including accredited at ÑÃÓÏ) can be attracted to the defining of expenditures.

Special attention requires the problem of monuments of architecture privatization, which can be privatized. In the case of adoption of positive solution about sale of the monument of architecture, the redemption of the premise is carried out on the basis of the final pay effected by the Senior Department of monument conservation in Moscow.

The privatization contracts are not put by the value-added tax.

Under the total of sales for 1999 the average price of 1sq.m. for commercial organizations amounted to 10990 rub. or $447.

The strategy of the city concerning the sale of rented premises should be based on the definition of optimum volume of the sold real estate remaining in the property of the city, outgoing from a complex approach to the asset management, current and future interests of the city budget. It is necessary to save a steady correlation at the nearest future while stuffing the budget by non-tax revenues from the collection of rent payments (the main source of income) and the sale of state-owned property. Thus annual sales volume should not be lower than 60% from the amount of rent payments; and the amount of space demised by the city, should not be lower than 8min.sq.m. At the same time, the policy of sales should stimulate the investments in the development of the city infrastructure, and take into account the social parameters in the contract strategy.

An important direction in the strategy of asset management is the monitoring of sale contracts of untenable property. The system is based on the order of Moscow Government from 04.06.96 ¹461 "On ordering the control process of the execution of sale contracts of municipal (state) property and the preservation measures of a profile of firms of the consumer market". It is based on monitoring the execution of buyers’ duties, which are specified by sale contracts of municipal property, in usage of premises. On the facts of violating the conditions of the sale contracts, the privatization Commission makes a decision of rescission of the agreement, or the modification of the agreements’ conditions. Thus the modification of the profile of premise usage by the privatized firms can be carried only with the agreement of territorial executive bodies of the city.

Only for 1999 State Committee of inspection, the prefectures, the Department of state and municipal asset and the Department of the consumer market and services conducted 400 inspections of exploitation of untenable property by commercial structures. By the results of the inspection it was detected, that 122 firms have carried out the re-shaping of used premises. Among them about 15% have paid in addition for the modification of the profile of premises. At the expense of this city budget an extra sum of about 10mln.rub. was earned. For 25 firms the City privatization commission made a solution about the modification of the primal plan of privatization. On the remaining inspected firms the pretension-claim operations are carried on. The analysis of the inspection in the given direction has shown both positive role of monitoring, and problems linked with the errors of legislative base, inadequate precision of the system of monitoring the usage of untenable property by the privatized firms (collection of surcharges in the budget of city, installation of the exemption order of premises for the owners, who were not operating the real estate for a long time etc.).

It is necessary to install the liability of owners of the untenable property on a legislative base, even down to rescission of the sale contracts and exemption of the real estate into the city property for long-term (more than 12 months) non-use of premises.

It is required to install a precise system of coordinating the re-shaping of the object in the prefecture of administrative district, Justice of district, subdivisions of the consumer market. Thus the approval of re-shaping should be given only on the conditions of surcharge and preparation of appropriate additional agreement to the earlier concluded sale contract.

The territorial executive bodies, Moscow license chamber should issue appropriate admittance for the accomplishment of this or that aspect of activity, and also licenses only in the case, when the stated aspect of activity corresponds with the assignment of the premise indicated in the sale contract.

By the sale of incomplete construction according to the conditions of competitions it is obligatory to direct the time of constructional completion and the start-time of operation of the firms in the bought premises in the sale contracts. In the case of violation of the indicated conditions it is necessary to install liability of the owners, down to rescission of the sale contracts and exemption of premises.

The organization of monitoring should be based on the coordination of action of departments, which participate in the inspection.

Practice shows that the effectiveness of the privatization process increases considerably with the involvement of territories in the process of drafting the terms of sale, in the process of monitoring the keeping of conditions of the sale contracts by the owners. The main strategic line of developing the privatization policy of the state-owned property in Moscow should become associate interaction of the departments of control and sale of the state-owned property with prefectures and district administrations of the city. It will allow to accept reasonable and interesting solutions for the city. The specialized firm realizes the sale of objects (conducts competitions, auctions, tenders) with the involvement of the representatives of territories, and with the direction of part of finance earned from the privatization of property into the trust funds of territories.

It is necessary to harden the interaction with the federal departments. The agreement from 24.06.98 ¹4-19-9792/8 on the differentiation of terms of reference and authority between public authorities of Russian Federation and public authorities of the city of federal value of Moscow should be supplemented with preparation and realization of federal target programs of development of Moscow city, lay out of investments from the federal budget and compensation of expenditures on executing the metropolitan functions by city.

The specialized firm on the sale of the state-owned property should become a commercial agent on the territory of its subject of Federation both for the remaining subjects of Russian Federation, and for the federal center.

The Moscow city, as the subject of Russian Federation, should be transmitted the shares of Russian firms of federal subordination, thus the Specialized firm should have the authority of accomplishing the agreements with the state federal asset on the territory of Moscow with the installation of appropriate allocation of finance from the privatization, both in Moscow, and in the federal budgets.

The city policy on the sale of urban property is carried out in tight interaction of the Department of state and municipal asset of Moscow and ÑÃÓÏ with Moscow Duma, branch departments of city authorities. It allowed to improve constantly the normative base of the organization of sales and to make appropriate correctives in it in the context of the changed situation and proposals of branch departments of city authorities.

The representatives of the land-property complex of Moscow Government are directly involved in the work of joint commission of ÌÃÄ and Moscow department of the normative base of land and property legal relations, budgetary-financial commission and the commission of economic policy. The practical activity of ÄÃÌÈ and ÑÃÓÏ for the last five years was realized according to the basic decrees of Moscow Duma from 20.09.95 ¹61 on the program of privatization in Moscow and ¹85 from 02.10.96 on the order of sale of untenable property in Moscow, other normative documents.

The rule-making and legislative activity of Moscow Duma was carried out in tight contact with the Department of state and municipal asset on the preconcerted plan. Only within the last year on the basis of accrued experience the following law drafts were designed and construed in commissions of Moscow Duma: "the Concept of Moscow property management and interaction with other owners on the territory of the city till 2005" (order of Moscow Government from 26.10.99 ¹997); "On the privatization of state and municipal property in Moscow"; "On the program of privatization of state and municipal property in Moscow" (order of Moscow Government from 20.04.99 ¹350); "On the rent of state and municipal property of Moscow"; "On the land relations in Moscow" and other documents.

The Department of state and municipal property of Moscow and ÑÃÓÏ carry out joint preparation of solutions in the sphere of control and sales of the city property with the Department of finance, the Department of economic policy and development, Moscow land committee, the Department of the consumer market and services, the Department of science and industrial policy, the Department of support and development of small business, Moscow committee of registration and other branch departments of city authorities.

On the main directions of the city policy in the field of sale of the city property more precise coordination of action of all municipal departments is required (in preparing the documents, accomplishment of interaction during the preparation of sales and organization of control of sale contracts).

The solution of problems of property management requires the involvement of scientific subdivisions in preparing project solutions and references.

On March 29, 2000 in the Department of state and municipal property of Moscow a scientific - practical conference "On the concept of sales of the state and municipal property in Moscow during the period of 2000-2002" was hold.

In the discussion of these problems participated the representatives of the executive authority of Moscow and Russian Federation (deputy minister — the secretary of the Ministry of the state-owned property of Russia S. V. Molozhavy.), representatives of scientific organizations, bank commonwealth, enterprise organizations — estimation, consulting and realtor corporations.

On the basis of discussions are prepared the recommendations on developing the strategy of sales, perfecting pricing and the process of sales, information supply, introduction of the new schemes of redemption by installments, involving of banks, usage of the deposit and warranty system, institution of independent rating. The institute of independent rating should permanently participate in developing the price strategy of sale of property. The ways of legislative improvement of main operations on the market of the real estate are specified.