Western Realtors Shun Land Leasing

For over a year now, Moscow authorities have been granting private companies long-term leases on prime land through city tenders, but Western firms have so far failed to take advantage of the program, a city official said Thursday.Alexander Isachenko, deputy head of the city department that organizes the lease tenders, said that potential Western investors had simply lost to higher bids in the 25 tenders held to date. Western realtors, however, blame the situation on corruption, legal uncertainty and the Moscow government's reluctance to give up control of the leased land."I don't trust the auction process," said Mike Oster, managing director of the realty firm Oster and Co. "I don't see dealing with the Moscow government as a reasonable legal and political risk."The government may want to take away all or some of the ownership rights after a few years. The returns would not be good enough if a developer had to share his profits with the government."He said that the city government's policy of evaluating bids not only on the basis of the prices offered but on the merits of proposed projects was too arbitrary."If you have a use that will employ a lot of people and hand control of the project to the city government, they will view you favorably," he said. Isachenko defended the city's policy, saying that the same reasoning was behind the government's decision to lease the land rather than sell it."It's harder for the government to manage the land resources if land is privately owned," he said candidly. "If the authorities tell the private owner that a highway is going to run through his plot, of course he's going to ask for exorbitant compensation."The tenders are organized by the Moscow commission for land relations and city planning. Participants submit their bids in sealed envelopes which are opened simultaneously during a public meeting of the commission in the presence of journalists. One Western real estate manager, who spoke on condition of anonymity, said that he had been put off by the auction rules that require 10 percent advance payment from bidders. According to Isachenko, the money is returned if the company fails to get the property. "They seemed to be charging before they delivered the service," said the manager.Oster said that before one of the tenders he was contacted by a broker who promised to fix the result if Oster was interested."The result is often known before the auction takes place," he said.Isachenko ruled out the possibility of bribes affecting the outcome of the tenders, though he admitted that the land does not always go to the highest bidder. He said "special conditions" were often attached to the rules of an auction, forcing bidders to go around city offices canvassing support for their projects.Companies from the Commonwealth of Independent States have won all of the 25 tenders held since May 1993, Isachenko said. He declined to name any of the companies.According to Isachenko, the Moscow government is planning to offer 49-year leases on 150 land plots in the near future. The leases are often offered on plots that already have buildings on them, in which case the winner of a tender undertakes to renovate the building and sometimes improve the public areas bordering on the plot, planting trees and fixing pavements.A plot with a derelict building will soon come up for auction at 29 Arbat, Isachenko said. The starting price of the 49-year lease will be $6 million. Another tender, for a lot on Ulitsa Pokrovka in central Moscow, will be held Friday with the starting price set at $714,000.