In recent years St. Petersburg has earned a reputation as an investment center with numerous greenfield projects. Greenfield projects involving the construction of industrial and sports facilities, transportation infrastructure, and residential developments, are underway. In the auto industry alone, four assembly plants have been built recently or are under construction (Toyota, Hyundai, General Motors, Nissan), and component and parts suppliers have a number of greenfield projects in progress. St. Petersburg has also established a technical-innovational type special economic zone, where a number of greenfield projects relating to the creation of innovative products are underway.

Underlying this success is the program of regulatory legal acts developed and implemented in St. Petersburg, which provide a clear and detailed framework for investment projects (many St. Petersburg laws have been taken as models by other regions). In particular, special (beneficial) procedures and conditions apply to projects of particular social, economic, cultural or other significance, known as “strategic investment projects”. (There are currently 21 strategic projects at various stages in St. Petersburg, including the automotive projects mentioned above). City officials have also acquired significant experience in commercial negotiations and show a willingness for open dialog with developers.

Practically all the investment projects in question are taking place on state land, as historically land has been and continues to largely be in state ownership. The most commonly used procedure for non-residential greenfield investment projects on state land is targeted allocation with prior site approval (Residential greenfield projects follow a different scheme – with allocation of the land plot under lease or into ownership by auction). This procedure has two main stages: (i) the developer conducts a survey of the site (in practice, the survey involves the collection of documents determining the ownership/legal status of the land plot, and engineering surveys), and (ii) the actual design and construction process. Legally, these two stages are covered by separate land plot leases concluded on the basis of a St. Petersburg Government Resolution allocating the land plots for the above purposes and on the terms in the Resolutions (usually up to one year for surveying, and up to three years for design and construction). Upon completing construction and obtaining a commissioning permit, the developer registers its title to the new building and has the right to buy out the underlying land plot from the city at a regulated price (the price is determined by a special formula based on the cadastral value), or to conclude a long-term lease agreement (up to 49 years).

Nevertheless, despite the well developed and smooth-running greenfield project system in St. Petersburg, there are a number of issues investors should take into consideration when deciding whether to proceed with a greenfield project in St. Petersburg. Among these questions are the following:

Limited choice of sites. The large number of investment projects has inevitably led to a shortage of suitable sites for greenfield projects. This is related both to the limited territory of St. Petersburg itself, and the specific site requirements for certain projects. The City Government is therefore lobbying for a merger with the neighboring region – Leningradskaya Oblast – and reclamation of additional territory from the Gulf of Finland (at least two major projects are underway on reclaimed territory).

Payments to the St. Petersburg budget for the right to implement an investment project. These payments can be significant (except strategic projects, which have large discounts and exemptions) and are calculated on the basis of the market value of the planned building. The market value is determined by an independent expert chosen by the developer, but must be approved by a special city institution.

Insufficient external infrastructure. Although St. Petersburg spends significant funds each year on developing and enlarging its utilities infrastructure, developers are often faced with non-existent or insufficient utilities capacity for their projects, particularly with regard to power. This issue is also complicated by the connection fee, which can be considerable. Where infrastructure is insufficient developers may be required to build the required capacity and hand it over to the operating companies as the connection fee.

Actual impediments. Often, greenfield project investors encounter the situation where the chosen site has vegetation, bodies of water or other features of indeterminate status (such as trees not in city woodland records, unregistered bodies of water). The indeterminate legal status of these features can significantly delay the process of determining the risks for the project, and steps to be taken to mitigate the risks.

These problems are, of course, not the only ones. At the same time, after more than 15 years of experience on the St. Petersburg real estate market, we can see that St. Petersburg is ready to go to developers and discuss how to reduce and/or redistribute the risks involved in projects. This does not, however, make it any less necessary for developers to ensure they have sound legal, technical and financial advisors for each greenfield project in St. Petersburg.

By

Karina Chichkanova, Partner, Co-Head of Real Estate Practice and Maria Kaidanovskaya, Senior Associate, Salans St. Petersburg

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