The problem of long—term construction: new help for regions, new responsibilities for developers

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The government will provide subsidies to the regions for the completion of unfinished facilities from the federal register. At the same time, developers may be required to demolish long-term buildings at their own expense and return the land plot to the landlord in its original form

Проблема долгостроев: регионам — новая помощь, застройщикам — новые обязанности

Prime Minister Mikhail Mishustin signed Resolution No. 909 dated July 3, 2024 “On Amendments to the Decree of the Government of the Russian Federation dated December 30, 2017 No. 1710”, according to which the regions will be assisted in reducing the number of long-term construction projects. The document approves the rules for granting subsidies to the subjects of the Russian Federation for the completion of construction or reconstruction of facilities that were not commissioned on time.

As the telegram channel of the National Association of Builders (NOSTROI) reminds, this work is being carried out within the framework of the state program “Providing affordable and comfortable housing and communal services to citizens of the Russian Federation.” Subsidies will be allocated on the basis of applications received from the heads of regions, which will be considered by the headquarters of the government commission for regional development. The funds will be provided on the basis of co-financing. Thanks to them, it is planned to complete work on sites listed in the federal register of unfinished capital construction projects.

But another initiative related to long-term construction caused a much bigger wave of discussion. According to the telegram channel “Laws of Construction”, a bill is being prepared obliging developers to demolish long-term buildings on their own, and the State Duma may consider the document this autumn.

“Amendments are being made to the Civil and Land Codes, obliging developers to demolish facilities that have not been completed on time. The land plot must be restored to its original condition and returned to the landlord. We hope that the document will be worked out in detail by autumn, because, on the one hand, the bill is certainly useful, but, on the other hand, there are nuances. For example, the obligation to demolish will not affect long—term buildings erected according to the DDA: the issue with shareholders has already been determined by law – if it is advisable to complete the house (technically and economically), then it will be completed. Otherwise, it is transferred to the ownership of the Territorial Development Fund (FRT), and the residents are resettled, including with the participation of the developer, if he has concluded an agreement with the government of the region, pledging to provide housing in other houses to the affected shareholders. It is also necessary to take into account the lack of funds for the demolition of the facility from the bankrupt developer. In this case, it is easier to find an investor and complete the facility, which most often happens in practice,” the telegram channel writes.

Проблема долгостроев: регионам — новая помощь, застройщикам — новые обязанности

Construction of the stadium on Krestovsky Island in St. Petersburg, 2014. Its construction began in 2007, and the official opening took place in 2016. Photo: Ruslan Shamukov/TASS

Now in order. The new bill does not affect apartment buildings being built according to the DDA. And how acute is the topic of long-term construction in this segment? And are there many MKDS in Russia that are still being built without equity agreements and therefore (theoretically) may fall under the scope of a “tolerable” law if it is adopted? About this I talked with Anton Glushkov, President of the National Association of Builders (NOSTRA).

How do you assess this initiative in general? What, in your opinion, are its main advantages and disadvantages?

Anton Glushkov: The initiative is quite difficult to implement. In my opinion, it is theoretically quite difficult to oblige a developer to demolish an object of unfinished construction, because the issues of construction economics cannot be considered so linearly. If a building is considered an object of regulation of multi—apartment residential construction, then we have a special regulatory document for this, which defines the rights of shareholders, banks, the law on participation in shared-equity construction. At the moment, there are only a few objects that would have been built without borrowed funds in the regions. If the developer does not fulfill his obligations for any reason, the citizens’ funds are “insured” because they are stored in escrow accounts. The property, including a land plot and an object of unfinished construction, is the subject of collateral from a credit institution, and the issue of the sale of collateral is a matter of the bank’s attitude. It is practically impossible to withdraw mortgaged property without good reason today. Moreover, if these amendments are adopted, it will significantly complicate the problem of collateral and project financing. For facilities that are being built without using escrow accounts, such an initiative is possible. The possibility of transferring an object of unfinished construction to the ownership of the Territorial Development Fund (FRT) is quite logical, because most of the “problematic” assets are already under the jurisdiction of the fund, which fulfills obligations to complete the construction of such facilities or pay cash.

What does demolition of long-term construction mean for a developer in financial, technological and all other plans?

Anton Glushkov: I think such a situation is generally not possible for a developer, because the developer is interested in the early implementation of any project due to the fact that he usually uses borrowed credit funds, and for him time has a very significant impact on the economy of construction. Most of the problems in long—term construction are not developers, it is some kind of property complex of copyright holders who at one time began to build commercial, administrative or office facilities and incorrectly assessed their capabilities. Now, if we talk about the MKD, then this is a separate law, and we will eliminate long-term construction by the end of 2024.

But are you personally in favor of what methods of combating long—term construction – primarily administrative or economic?

Anton Glushkov: I am sure that it will be very difficult to solve the problem of long—term construction using administrative methods, it is advisable to use economic methods – for example, to use progressive rents. That is, every year the cost of renting a land plot increases by some fixed amount in accordance with the lease agreement. Many subjects of the Russian Federation, in relation to plots that are not provided for ownership, but for lease for the construction of facilities, are now introducing such a scale in order to motivate the developer to build faster.

In the segment of commercial real estate, which the “tolerable” bill already directly affects, the issue of long-term construction is called difficult, but relevant. “In the regions, you can often find unfinished buildings that have been abandoned for years. The reasons for this are different: from legal and technical difficulties to the bankruptcy of the developer. And in principle, to return the site in the same form in which it was provided is the right practice,” said Pavel Lyulin, Vice President of the Union of Shopping Centers (STC).

Pavel Lyulin, Vice President of the Union of Shopping Centers, “A building that has been standing for a long time without a closed circuit, becomes unusable after years — building structures lose strength, for example. It is often cheaper to demolish and rebuild such facilities. In such cases, it is logical to assign this to the developer: yes, for the developer it is fixing losses and exiting the project, but for the city it is an opportunity to revitalize this site. On the other hand, if it is possible to complete it — for example, in cases when the building is in the final stage of construction — then it is worth doing it. It is logical to work out the issue of transferring an object of unfinished construction to a developer who will be able to resume construction. In my opinion, there are fewer such facilities than those that are impractical to complete, but they also exist. The most difficult case is when the building can no longer be completed, but must be demolished, and the developer is bankrupt. The law, of course, will not help much here. But in general, the initiative is useful, the main thing is to work out the details when implementing it.”

Continuing the topic, Denis Kolokolnikov, managing partner of RRG, emphasizes: long-term construction is certainly an urban and state problem, but here it should be noted that long-term construction often does not appear by chance. As a rule, there are two reasons for this.

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“First, the facility, which began to be built without an appropriate market analysis and the involvement of specialized consultants, turned out to be inappropriate, that is, the economy and concept were incorrectly calculated. And the developer who built it, at some point realized that it was pointless to build something (the market changed or something else happened). Of course, there are more such objects in commercial real estate. The second circumstance is that the developer turned out to be bankrupt during the construction process or ran out of money, did not have enough resources, and for this reason the object stopped,” the expert explains.

Denis Kolokolnikov, Managing partner of RRG, “From the point of view of residential shared-equity construction, the procedure is more or less clear, but with commercial real estate there is a question. The problem of long-term construction is well known to the market. A striking example is the Moscow Hotel in Olympic Sochi, which was not commissioned in 2014, almost at the final stage of reconstruction. Only now, ten years later, movements on this project have begun, and in fact it is, in fact, an iconic facade object on Kurortny Prospekt. And there are quite a lot of such facilities in the country — both in Moscow and in the regions. It is not always logical to demolish them, especially at the expense of the developer, since, for example, the developer may be bankrupt and not have sufficient finances. Another thing is that it is necessary to regulate the procedures for redemption, withdrawal and bidding, including with the participation of municipal authorities. Rather, this approach is appropriate here, and “going to demolition”, I repeat, is not always correct: the object is partially built, the money has been spent, and from the point of view of sustainable development — if you can come up with a new meaning, if you can, by preserving or changing the concept, redevelop the unfinished building and fill it with other functions, then this is necessary to do. It remains to be decided at whose expense to legally and technically implement this. It is also possible that some clear deadlines need to be introduced: for example, if an unfinished building costs more than two years, then some kind of procedure for its transformation, change of ownership, auction, and so on should begin.”

Of course, in the event that the object has no semantic meaning at all and, in principle, should not have appeared in this place, it should be demolished, including, possibly, putting up for auction as a free site, the expert says. “Although the responsibility here is not only on the developer. The authorities who issued the permit for this facility are often responsible: they could also not competently approach the examination of the feasibility of its construction. Therefore, the responsibility may be combined. But the fact that the problem needs to be dealt with is obvious, and the sooner competent and fair schemes that take into account all legal rules and subtleties appear, the better,” sums up Denis Kolokolnikov.


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