Criteria have been approved that, when met, allow funds of the participants in shared-equity construction to be raised without escrow accounts being used
Law firm Pepeliaev Group advises that on 1 May 2019, the Russian Government’s Resolution No. 480 dated 22 April 2019 (“Resolution No. 480”) comes into effect. Resolution No. 480 establishes criteria which, when met, allow a developer to raise funds from the participants in shared-equity construction without escrow accounts being used.
Resolution No. 480 also approves the methodology for determining whether the construction project[1] meets such criteria and the list of documents to be submitted to the authority responsible for state control over (supervision of) shared-equity construction (the “Supervisory Authority”) to obtain an opinion confirming the degree of readiness of the construction project.
Please be reminded that, on 25 December 2018, amendments came into effect to Federal Law No. 214-FZ[2] to significantly change the rules for financing the construction of real estate with the funds of the participants in shared-equity construction[3]. The new regulation, in particular, provides that it is permissible to raise funds from such persons, provided that such funds are deposited on escrow accounts[4]. The provision concerning the corresponding procedure for settlements between a developer and a construction stakeholder must be included in shared-equity construction agreements (“SCAs”) to be submitted for state registration after 1 July 2019[5].
Yet, the above requirement to use escrow accounts is not to be applied if the construction project meets the criteria set out in Resolution No. 480 and if the Supervisory Authority confirms that such criteria have been met. The criteria include the following:
The developer independently calculates the degree of readiness proceeding from the actual construction costs based on its financial accounts and submits the calculation to the Supervisory Authority, attaching accounting ledgers and quarterly reports which substantiate the calculation.
The general rule is that cadastral engineer must calculate the degree of readiness of construction elements. A regulation of a constituent entity of the Russian Federation may establish that the above calculation be performed either by the cadastral engineer or by the developer itself. A calculation performed by the developer itself must be confirmed by the executive authority of the Russian constituent entity authorised to exercise regional governmental supervision over construction.
а) whether funds of participants in shared-equity construction should be raised without escrow accounts being used;
б) if this is so, whether the construction projects they implement comply with the above criteria.
If necessary, developers should prepare a statement of the readiness of the construction project and the documents to be attached to such statement. The statement and the documents must be submitted to the Supervisory Authority to obtain an opinion on the degree of readiness of the project.
Resolution No. 480 also approves the methodology for determining whether the construction project[1] meets such criteria and the list of documents to be submitted to the authority responsible for state control over (supervision of) shared-equity construction (the “Supervisory Authority”) to obtain an opinion confirming the degree of readiness of the construction project.
Please be reminded that, on 25 December 2018, amendments came into effect to Federal Law No. 214-FZ[2] to significantly change the rules for financing the construction of real estate with the funds of the participants in shared-equity construction[3]. The new regulation, in particular, provides that it is permissible to raise funds from such persons, provided that such funds are deposited on escrow accounts[4]. The provision concerning the corresponding procedure for settlements between a developer and a construction stakeholder must be included in shared-equity construction agreements (“SCAs”) to be submitted for state registration after 1 July 2019[5].
Yet, the above requirement to use escrow accounts is not to be applied if the construction project meets the criteria set out in Resolution No. 480 and if the Supervisory Authority confirms that such criteria have been met. The criteria include the following:
- the degree of readiness of a construction project;
- the number of SCAs concluded with respect to a construction project.
The Supervisory Authority confirms that the criteria have been met by issuing to the developer an opinion on the degree of readiness of the project[6]. The Supervisory Authority prepares the opinion within 15 business days after the following are submitted to the Supervisory Authority: a) a statement of the readiness of the construction project[7], and b) documents confirming that the project meets the criteria[8].
The degree of readiness of a construction project
The general rule is that the degree of readiness of a construction project should be at least 30%. The figure may be at least 15% or 6% for certain construction projects.
The degree of readiness of a construction project must be at least 15% if the relevant project is implemented:
The degree of readiness of a construction project must be at least 6% if the project is implemented:
The degree of readiness of a construction project must be at least 15% if the relevant project is implemented:
- within the scope of agreements the developer concludes to improve a built-up area and for the integral development of a territory;
- within the scope of agreements between the developer and a government authority (local authority), provided that under such agreements the developer is obliged to transfer into the ownership of a public entity social and/or utility infrastructure facilities or to demolish dilapidated and hazardous housing;
- in accordance with the development plan of the land plot or territory planning documentation which provides for the construction/reconstruction of social and utility infrastructure facilities designated for kindergartens, schools and hospitals.
The degree of readiness of a construction project must be at least 6% if the project is implemented:
- by a developer included in the list of what are referred to as core Russian 'backbone entities' or the subsidiary of such a developer as well as an entity that such developer controls, provided that permits are issued to the above entities[9] to construct apartment buildings whose total floor area is at least 4 million sq. m. and where the above persons raise funds from participants in shared-equity construction with respect to facilities that are located in at least four constituent entities of the Russian Federation;
- in accordance with an agreement for the completion of construction and fulfilment of developer’s obligations towards the citizens included in the register of aggrieved citizens which is concluded between the developer and a local authority or executive authority of Russian constituent entity;
- by a person who has acquired the developer’s right to the construction project under the procedure for which articles 201.15-1 and 201.15-2 of the Federal Law “On insolvency (bankruptcy)” provide[10];
- on the land plot to which the developer has acquired title on the grounds established by articles 39.6(2)(3) and 39.6(2)(3.1) of the Russian Land Code[11].
The degree of readiness of a construction project is calculated by using a formula that is approved by Resolution No. 480 and that takes into account the actual construction costs incurred and the readiness of the construction elements of all real estate facilities indicated in the construction permit.
The developer independently calculates the degree of readiness proceeding from the actual construction costs based on its financial accounts and submits the calculation to the Supervisory Authority, attaching accounting ledgers and quarterly reports which substantiate the calculation.
The general rule is that cadastral engineer must calculate the degree of readiness of construction elements. A regulation of a constituent entity of the Russian Federation may establish that the above calculation be performed either by the cadastral engineer or by the developer itself. A calculation performed by the developer itself must be confirmed by the executive authority of the Russian constituent entity authorised to exercise regional governmental supervision over construction.
The number of SCAs concluded with respect to a construction project
The number of SCAs must confirm that at least 10% of the total floor area of residential and non-residential premises and parking lots indicated in the disclosure statement of the construction project have been completed for participants in shared-equity construction. To confirm the figure, the developer must submit to the Supervisory Authority an extract from the Unified State Register of Real Estate regarding the SCAs registered. The Supervisory Authority will check whether this criterion is met by comparing the data in the Unified State Register of Real Estate and the data in the disclosure statement of the construction project.
What to think about and what to do
With Resolution No. 480 being adopted, developers are advised to assess the following:
а) whether funds of participants in shared-equity construction should be raised without escrow accounts being used;
б) if this is so, whether the construction projects they implement comply with the above criteria.
Help from your adviser
Pepeliaev Group’s specialists are ready to provide full-fledged legal support to developers where an opinion on the degree of readiness of a project is being obtained and to represent such developers in their dealings with a Supervisory Authority.
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- “Construction project” or “project” in Resolution No. 480 is understood to mean an apartment building and/or another piece of real estate or several apartment buildings and/or other real estate within the framework of the same construction permit.
- Federal Law No. 214-FZ “On shared-equity construction of apartment buildings and other real estate and on amending certain items of Russian legislation” dated 30 December 2004 (“214-FZ”).
- Federal Law No. 175-FZ “On amending the Federal Law ‘On shared-equity construction of apartment buildings and other real estate and on amending certain items of Russian legislation’ and certain items of Russian legislation” dated 1 July 2018.
- Article 3(1.2)(2) and article 15.4 of 214-FZ.
- Article 8(16) of Federal Law No. 478-FZ “On amending the Federal Law ‘On shared-equity construction of apartment buildings and other real estate and on amending certain items of Russian legislation’ and certain items of Russian legislation” dated 25 December 2018.
- Clauses 11 to 13 of Resolution No. 480 determine how the opinion is issued.
- According to clause 2(a) of Resolution No. 480, the Russian Ministry of Construction, Housing and Utilities approves the form of the opinion.
- Resolution No. 480 has approved the list of documents.
- The Governmental Inter-Departmental Committee for Economic Regulation and Integration to be set up in accordance with the Russian Government’s Resolution No. 480 dated 22 April 2019 will approve the list by its decision.
- When property of the developer that is involved in bankruptcy is transferred subject to a fee to another developer that fulfils novated obligations to the participants in construction to deliver housing facilities.
- For the purpose of placing social and cultural and utility facilities, implementing large-scale investment projects and completing ‘problematic facilities’ in accordance with an order of the most senior official of a Russian constituent entity.