SHARED REAL ESTATE SITUATION IN RIGA Renate Muskate 1,Mg.oec.; Tatjana Tambovceva 2, Prof., Dr.oec. 1,2 Riga Technical University (Latvia) Abstract. The topic about shared real estate and ownership of landed property has become important only in the latest years. In connection with the rise of estate tax, the land s cadastre value and the lease of land, the contradictions have also become more aggravated in shared real estate s situations, which had occurred at some point when land reforms and privatization took place. Land owners cannot fully actualize their rights because of the land constraints, while apartment owners cannot fully cover disproportionately steep land lease payments of their apartment buildings, which, most often, have been attached to unreasonably big land units. The goal of this research is to analyse the most common situations regarding land, land under apartment buildings and compulsory land lease and their connection with the methodology of the real estate valuation, tendencies of the apartments` market values and crediting. The results were compared in order to define the differences of the lease payments, which are also affected by different peculiarities of the real estate parameters and structure. Key words: real estate, valuation, divided ownership, municipal land rent, cadastral value. JEL code: R31, R38 Introduction client, the additional land lease monthly payment The aim of this article is to disclose different may affect significantly the solvency of the client. compulsory land lease cases in Riga, under legal In order to achieve the aim of this article such framework, in shared real estate situations. The tasks were established: examples reflect current situations in connection 1) to summarize the sources that justify shared with shared real estates and diverse compulsory real estate historical formation in Latvia; land lease payments for apartments with similar 2) to describe the fragments of the current features and similar location, and the impact of legislative acts in Latvia that define the charge these situations in regard to apartments market of the compulsory land lease; value. As well as the aim of these examples is to 3) to calculate the most common compulsory give suggestions regarding the evaluation of the land lease payments for the land and land apartments in such situations. under apartment buildings to reflect the The housing is one of the main end-products possible situations by examples; in construction field it is the main element that 4) to analyse, compare and make conclusions corresponds for human existence and safety and from the gained results. is considered to be one of the indicators of the Following research methods have been used in state s welfare (Henilane, 2015). the article: By the increase of the cadastral value and land lease payments, the discrepancies have also 1) historical method description of the arisen in situations that were allowed during the historical development of the shared real time of the land reform and privatization estate situations; processes. Therefore the situation of the land 2) monographic research method summarizing unit not being in the property`s ownership leaves of the theoretical aspects of the literature; more significant effect on the evaluation 3) mathematically statistical method the methodology of the real estate, because there calculation and comparison of different has not yet been done any probe research aspects and formulas; regarding the evaluation system of the shared 4) logically constructive research method ownership situations (Anspaks, 2012). several conclusions and suggestions were As the banks` crediting system assesses the made. proportion of the income and expenses of the 303
Research results and discussion guidelines for a reorganization of the ruling of the In the last decades, Europe underwent national economy: irreversible political, social and economic 1) transformation of a part of the state processes, which have significantly affected properties to municipalities ownership; development of cities and regions. The key 2) denationalization of state's and municipality's element of these processes was the falling apart property, by giving priority to the restitution of Union of Soviet Socialist Republics (USSR) in of former owners' rights; the 1990. Due to that, in wide range of Europe, 3) privatization of state and municipalities socialism was ceased and major corrections were properties; implemented in economic and social processes 4) exemption of privatization certificates in order (Liepa-Zemesa & Baldwin, 2016). to provide a possibility for residents to take The break-down of Soviet Union started in the part in property privatization process (Ozols & 80s and for the people in Latvia it was as a Bisinieks, 2010). dream coming true, who had never voluntarily Soon after declaration of state independence, joined that state. This dream to renew state s on 21 st November 1990 new legislative act came sovereignty was conveyed in August 1991. The into force Law On Land Reform in the Rural next important and one of the most difficult tasks Areas of the Republic of Latvia. It is important to was to form a normal and functional market mention that land reform in the rural areas had economy, in order to avoid of Post-Soviet begun sooner; on 6 th of May 1989, a legislative economic chaos (Åslund & Dombrovskis, 2011). act came into force about farms in Latvia. Latvia s way to independence and Although the lands were still under state s democratization was different, especially ownership, however they were assigned for comparing this process to the neighbouring Baltic usage to farmers with a land s succession rights. countries Estonia and Lithuania. Latvia s The particular legislative act generated several geopolitical status and demographical structure, difficulties for the further process of the land as well as changing history and culture, caused a reform, because such farms were formed number of unique problems, including shared independently, not taking into account, who real estates. owned the particular land previously when Latvia Privatisation processes continued, and local was a free country (Blite, 2000). governments sacrificed many properties for To the contrary of the land reform in rural privatisation. Planners lacked experience and use areas, which first part was regulated by the Law of planning tools based on mutual agreement. In On Land Reform in the Rural Areas of the addition, there was no regulatory basis for Republic of Latvia, the law about urban lands effective private public partnerships, which was dilatory, it came into force one year later further hampered development (Henilane, 2015). on 20 th of November in 1991 Law On Land After the 1990, new democratic governments Reform in Cities of the Republic of Latvia in Post-Soviet countries wanted to renew private (Pichler-Mianovic, 2001). property system and form a market economy Divided ownership situations arose from the (Pichler-Mianovic, 2001). On 20th of March in land reforms, when housings were given for 1991, by a legislative act, the decision of the privatization, meanwhile the ownership of the Supreme Council of the Republic of Latvia about lands under these buildings were renewed for State and Municipalities Properties Privatization previous owners and their heirs. And these lands came into force, in which there were described were also assigned for usage to other persons to legal and private persons, with a possibility to 304
get full ownership of the particular land. Moreover, additionally to the renewal of previous ownerships and new usage assignments, within the land reform the privatization of state s and municipalities properties, as well as apartment buildings took place. Compulsory divided ownership also was formed in connection with the land reform when the housings were assigned for privatization, but the ownership of the lands under apartment buildings was renewed for previous owners and their heirs. Due to this reform and its contradictory results, a new legal framework arose, which was labelled as a compulsory land lease. Even historically in Section 968 of a Civil Law, there has been defined a principle that land and structure on it is a combined concept: A building erected on land and firmly attached to it shall be recognised as part thereof (Civil Law, 2013). Therefore, the fact that structure that is located on the land could be a separate real estate seems illogical. Taking into account Latvia s land reform s historical process, which was connected with economical and, mainly, political changes, the result shows that there have been taken a significant step aside from the core principles described in the Civil Law. By renewal of ownerships of the previous owners and their heirs of the land, on which was a building under other person s ownership, due to the clause 12 of the Law On Land Reform in Cities of the Republic of Latvia (1991) these owners had rights to choose: 1) to renew ownership and to receive land lease charge from the owner of the apartment building; 2) to ask for equivalent land property; 3) to ask for a compensation. Similar situation arose in rural areas as well, when the ownerships of lands were renewed. There are 3677 apartment buildings that are involved in compulsory land lease payments, it is 110 970 apartments altogether that are located on 7354 land units that belong to other persons. These particular 7354 units of land form a cadastral value approximately from 130 000 000 to 180 000 000 EUR. All of these buildings are located on a land that is owned by a different person and 30 % of these buildings are located in Riga (Pazinojums, 2015). Moreover, especially complicated are situations with joint ownerships of the apartments buildings, because there are many persons involved (apartment owners and tenants), who must come to an agreement with the land owner of the land lease payment amount. The count of apartments under compulsory land lease system in Latvia at the end of the year 2015 is described in Fig. 1. Upon calculation of apartment s market value, very often the real estate valuers come to conclusions that even market situation and closed deals do not show any resemblance, which is the specific deduction of market value (for particular apartments and in particular parts of the city in percentages) due to fact of the land unit that is not included in the ownership. In such situations, the valuer is forced to assume one approximate correction by specific percentage that reduces the market value, but this tactic not always corresponds to market situation, because it is based on assumptions. Standard evaluation strategy for all apartments, without differentiating them by some compulsory land lease features can give inaccurate results, because of the following aspects. In the same location, two neighbouring apartment buildings may have different owners of the land unit under the building it may belong to private person, legal entity or public person 1 and it depends, which one of these persons is the owner, because the land lease charge also changes, because of different legislative regulations. Public person shall act in accordance with the principles of public law 305
Source: State Land Service, 2015 Fig. 1. Count of apartments under compulsory land lease in Latvia Based on a legislative act Law on Land Reform in Cities of Republic of Latvia (1991) Section 12, Clause 2: If apartment residential houses are located on such a land, the fee for land lease shall be determined upon agreement of the parties in writing. If the parties cannot agree, the fee for land lease shall be specified in amount of 6 % per year from the cadastral value of the land. On the other hand, based on the Regulations on Public Persons Land Lease (2007) Section 2, Clause 7 issued by the Cabinet No.735 states that built-up land plot annual fee of the land lease is determined by: 1) until 31 st of December 2009 1.5 % of the built-up land plot value defined by the State Land Service of the Republic of Latvia for privatization reasons; 2) since 1 st of January 2010 1.5 % of cadastral value; 3) lessee in addition to the land lease pays to the lessor taxes defined by the law. Taking into account the corresponding law of the Republic of Latvia and Regulations by the Cabinet, apartment building located on a land plot in Riga at address Krisjana Valdemara Street 145, k-5, potential apartment lease models are described below (example No.1). Land plot under building at address Krisjana Valdemara 145, k-5, Riga, apartment No.4, cadastral value in 2016 781 575 EUR. Apartment at address Krisjana Valdemara 145, k-5, Riga, apartment No.4, corresponding undivided share cadastral value 7 815 EUR. Land lease amount at rate 6 % annual fee from cadastral value 468.90 EUR per year, 39.08 EUR per month. Land lease amount at rate 1.5 % annual fee from cadastral value 117.22 EUR per year, 9.77 EUR per month. The position of the land and apartment`s building is shown in Figure 2. 306
Source: State Land Service, 2017 Fig. 2. Map of the State Land Service of the Republic of Latvia The position of the real estate is shown in Fig. 3. Source: Balticmaps, 2016 Fig. 3. Map of Riga 2. Cadastral value of land plot in one location but for two neighbouring apartment buildings can differ (example No.2). Apartment at address Krisjana Valdemara Street 145, k-5, apartment No.4, area 42.6 m 2, with 10/1000 undivided shares of a shared property of an apartment building and land plot. The cadastral value of the land plot in 2016 is 781 575 EUR, cadastral value in correspondence with undivided shares 7 815 EUR. Land lease payment is calculated assuming that the fee for land lease is 6 % per year of cadastral value: 7 815 EUR 0.06=468.90 EUR/per year (1). Apartment at address Krisjana Valdemara Street 143, k-1, apartment No.3, are 41.3 m 2, with 4125/231805 undivided shares of a joint property of an apartment building and land plot. The cadastral value of a land plot in 2016 was 160 367 EUR per year, the cadastral value according to undivided shares 2853.75 EUR. Land lease payment is calculated assuming that the fee for land lease is 6 % per year of cadastral value: year (2). 2 853.75 0.06=171.23 EUR/per 3. In the same location with two neighbouring apartment buildings with similar are of a land plot under the building, the number of apartment count might differ; therefore, the land lease payment might differ as well. The less apartments are located in the building, the bigger is the undivided share of the corresponding land plot that is under ownership of a different person, therefore the land lease payment will be more significant as well (example No.3). On a land plot at address Kastranes Street 4, Riga there is located a two-apartment-building. Land plot is under ownership of a private person, the land lease is 6 % of the land s cadastral value. Compulsory land lease is divided between to apartment owners. The cadastral value of a land is 82 571 EUR, that means it is a compulsory land lease of 4 954 EUR per year; therefore, 2 477 EUR for each apartment owner. 4. The land plot area under two seriate buildings may also differ; therefore, the amount of land lease payment will differ as well (example No.4). Real estate, located at address Krisjana Valdemara Street 151, with land area 1.8181 ha. Cadastral value is 1 784 974 EUR and there are three buildings on this land. Most of the land consists of common use roads, pathways, green area, which is being used not only by the residents of the building that is located on the particular land plot, but also by the residents of the local area as well. Upon situation, if the plot of land would not be included in the ownership of the real estate property, the residents of these apartments buildings would be obliged to pay compulsory land lease for a whole land area 307
consisting of 1.8181 ha, although the useful land area would have been significantly smaller and, moreover, they would be obliged to pay for the land lease for a land that was being used by other local residents as well. The position of the land and apartment`s building is shown in Fig. 4. Source: State Land Service, 2017 Fig. 4. Map of the State Land Service of the Republic of Latvia Conclusions, proposals, recommendations 1) Compulsory payment amount for land lease gives a significant influence on apartment s market value, because potential buyers nowadays pay more attention to the costs regarding to apartment s exploitation, including the costs for a land lease. The employees of the banks, upon consideration of the credit applications, assess the solvency of the client the proportion of the income and expenses. In addition, the land lease in several places in Riga can significantly raise the expense position of the client; therefore, there is a greater risk for the client to receive from the bank a decline for the credit or worse credit terms. As a result of this, the fact of the land unit not being in the ownership is considered to be a major factor that affects the property itself. 2) Currently, there are several indicators that show that apartments that do not have land unit in the ownership become cheaper. Meanwhile, the evaluation of the property, when the information about land unit s being in ownership or not, is not taken into account, gives a false market value of the property. For example, in order to make a precise market value calculation, the content of the comparing objects for evaluation must be differentiated. If the land unit is not in the property s ownership, then deeper analysis is needed about the particular property. It is essential to investigate, who is the owner of the land, what is the area of the corresponding land unit for a land lease payments and other factors that might affect the amount of these costs. Based on the example No.1 we can come to conclusions that lease payments can differ by 25 % (in this particular case) depending on the owner of the particular land unit under the corresponding apartment building. 3) Example No.2 shows that even for neighbouring apartment buildings the annual land lease charge for a land that is not included in the property ownership can differ by 36 % (even if the lease charge fee is similar 6 % per year). Wide land area under apartment building that has rather small number of apartments is considered to be an exclusive real estate. It also means that the amount of land lease charge is divided among less apartments than usually; therefore, for such real estates it is essential to pay attention to the amount of land lease charge. 4) The example No.4 shows that disproportionately big land units, which are included for compulsory land lease payments, can leave a significant impact on apartment s market price, because the potential buyer can choose an apartment in one of the neighbouring apartment buildings that has land unit included in the ownership or the charge for the land lease is proportionally accurate to the particular apartment building. 308
Bibliography Proceedings of the 2017 International Conference ECONOMIC SCIENCE FOR RURAL DEVELOPMENT No 46 1. Anspaks, R. (2012).Dalita ipasuma problematikas izpete un analize (Shared ownership problematic research and analysis). Rīga: Latvijas Republikas Tiesībsarga birojs. p.52 2. Åslund, A. Dombrovskis, V. (2011). How Latvia Came through the Financial Crisis. Washington, US: Peterson Institute for International Economics. p.200 3. Balticmaps (2016). Retrieved: http://balticmaps.lv/ Access: 18.12.2016. 4. Blite, J. (2000). Zemes reformai Latvija 10 gadi. 1990-2000 (Land reform Latvia 10 years. 1990-2000). Riga: Valsts Zemes dienests, p.160 5. Civil Law (2013). Retrieved: http://vvc.gov.lv/index.php?route=product/search&search=civil %20law Access: 08.11.2016. 6. Henilane, I. (2015). The Evaluation of Housing Situation in Latvia. XVI Turiba University Conference Towards Smart, Sustainable and Inclusive Europe: Challenges for Future Development. Riga, Latvia. pp. 93-106. Retrieved: http://www.turiba.lv/f/xvi_konf.raksti_final.pdf Access: 15.12.2016. 7. Law On Land Reform in Cities of the Republic of Latvia (1991). Retrieved: http://www.vvc.gov.lv/image/catalog/dokumenti/land_reform_in_the_cities.doc Access: 15.12.2016. 8. Law On Land Reform in the Rural Areas of the Republic of Latvia (1990). Retrieved: www.vzd.gov.lv/files/on_land_reform_in_the_rural_areas_of_the_republic_of_latvia.doc 9. Liepa Zemeša, M., Baldwin, D. (2016). Effects of Public Perception on Urban Planning: Evolution of an Inclusive Planning System during Crises in Latvia. The Town Planning Review, Volume 87, Issue 1, pp. 71-92 10. Ozols E., Bisenieks J. (2010), Quantitative and Qualitative Results of Privatization in Latvia. In: Human Resources the main Factor of Regional Development: Journal of Social Sciences, No.3 pp 355-360 11. Pazinojums par lidzdalibas iespejam tiesibu akta izstrades procesa (2015). Latvijas Republikas Tieslietu Ministrija. Retrieved: https://www.tm.gov.lv/lv/cits/likumprojekts-piespiedu-dalita-ipasuma-tiesisko-attiecibu-privatizetajasdaudzdzivoklu-majas-izbeigsna. Access: 01.08.2016. 12. Pichler-Milanovic, N. (2001). Urban Housing Markets in Central and Eastern Europe: Convergence, Divergence or Policy Collapse. International Journal of Housing Policy, Volume 1, Issue 2, pp.145-187 13. Regulations On Public Persons Land Lease (Noteikumi par publiskas personas zemes nomu) (2007). Ministru kabineta noteikumi Nr.735. Retrieved: http://likumi.lv/doc.php?id=165950 Access: 12.06.2016. 14. State Land Service (2015-2017). Access: 18.12.2016. https://www.kadastrs.lv/ 309