Features, INVESTMENTS

How to buy an apartment and become a shareholder

Moscow real estate market has long been characterized by the deficit of solvent demand, which is why the developers keep devising new marketing schemes to attract the clients. A unique arrangement is offered by the developers of the Vavilovo residential complex in the south-western part of Moscow, located at the Architect Vlasov Street.

“This is an inappropriate use of dwelling stock!” © Drawing by Yuri Aratovsky

Become a shareholder

At Vavilovo, each apartment buyer receives an additional property in form of a stake in the property management company JSC Vavilovo that will manage the residential complex. The shares are divided so that after all apartments are sold, 100% of the property management company will be resident-owned. The size of the stakes is calculated in proportion to the apartments’ floor space: 100% of shares in the company are equivalent to the total number of square meters of the building’s residential properties.

“There won’t be a separate payment for the stake. The advertised apartment price is final and includes the apartment itself, shares in the property management company, the parking spaces dedicated for each apartment, and a storage space,” JSC Vavilovo’s deputy general director for development Maxim Sorokin explained to Invest Foresight.

Importantly, JSC Vavilovo doesn’t just operate the building, but owns all of the non-residential properties, which form a part of the compound — a business center, a sports and fitness center with a pool, and an underground parking — altogether about 49,000 sq.m. of premises. Consequently, apartment owners de facto buy a stake in the building’s non-housing stock.

An option or a burden?

This can be viewed differently, of course. From one perspective, the buyer is given an additional option, from another — an extra burden. One way or another, the plan envisions that the property management company will rent out the commercial space and collect the payments. These payments will be used to pay for the residents’ utility and housing expenses. In this way, although the residents are forced to buy a stake, there’s hope that they won’t have to pay the utilities and may even receive some dividends from the company’s activities — if there’s anything left after making all the mandatory business payments and covering the maintenance fees. Maxim Sorokin assured Invest Foresight that the utility costs are standard and similar to such costs in other residential compounds of this class, as there are no special markups with this arrangement.

Moreover, being shareholders, apartment owners can participate in the residential complex’s management, such as selecting commercial tenants, determining the most effective use for the different premises, and much more. Curiously enough — and quite suspiciously, too — Vavilovo’s charter doesn’t envision such natural attribute of a joint-stock company as a board of directors. The shareholder agreement makes it impossible to sell shares to the person who doesn’t own an apartment in the building.

Looking for the authors

And who came up with this idea? Beneficiaries of JSC Vavilovo are kept secret. Today the company is owned by the Cypriot offshore company Advantage Bionomics Investments. But some inferences about persons affiliated with the company can still be made. In particular, the company’s subsidiary structure Vavilovo Property Management Organization LLC is co-owned by Vladimir Martynenko, who cofounded a whole number of property management companies such as Paraskeva, Parask, Dokom. Martynenko has some connection to the banking sector as well, as in the past he was the founder of the now-defunct Russian Bank of Property Custody. The general director of JSC Vavilovo is Sergei Golovchenko, who used to be in charge of Martynenko’s other project, Academia Publishing House (a subsidiary of Paraskeva).

In answering the question of such program’s purpose, Maxim Sorokin told Invest Foresight that the program’s goal is to provide the buyers with an opportunity to purchase the apartment with guaranteed future upkeep.

“Basically, this is a property insurance of the future loss of income that could otherwise prevent the buyer from living in a luxury residential complex, – says Sorokin. – Such arrangement also guarantees the continuous high quality of the building’s maintenance, because all utility payments are collected on time and in full, and consequently the property management company performs all maintainance on time and in full.”

Representatives of Vavilovo claim that there are no precedents in Russia of a similar arrangement between the residents and the property management company, although around the world such arrangement is already used and known as a condominium.

What’s the catch?

Naturally, the difficult memories of financial pyramids and “hoodwinked investors” compel one to look for the catch. In this case it can be found in the fact that by selling all of its shares the developer de facto “disappears” — and if any claims arise, the residents/shareholders will have to deal with them on their own (as the company’s new owners). On the other hand, there’s nothing special in such arrangement when it comes to the Russian construction market — the developer firms are often liquidated after construction project is finished.

The experts polled by Invest Foresight have been reserved on the new arrangement. Lawyer Yulia Verbitskaya-Linnik, PhD in Law, believes that this is a “terrific commercial and promotional move” — and here’s why. The subject of high utility tariffs arbitrarily set by the property management companies is one of the hottest topics on the market. There are developers who view the building’s maintenance as a separate business (which can be even more profitable, and undoubtedly more long-term than construction itself). In the meantime, the existing judicial practice often supports the property management companies in their disputes with the residents, forcing the latter to pay for all of the company’s operations and expenses (many of which are only done on paper or at inflated prices). Theretically speaking, the residents could control the property management company.

But the same Verbitskaya-Linnik is pessimistic on the prospects of such ownership. As she says, “200-350 residents and owners of the property management company cannot and will not exercise control over the company’s activities and validity of its expenses. Plus, it would be clearly uneasy for such large group to reach a unanimous decision, and achieving quorum will be difficult or impossible.”

Will there be dividends?  

Andrei Komissarov, the head officer of the Komissarov and Partners law firm, also admits that the developer’s offer is interesting and innovative and confirms that Vavilovo serves as a trailblazer in this regard. At the same time, the lawyer says that the suggested arrangement is “nothing more than an interesting marketing move.”

“Developers claim that the owners will avoid the burden of their apartments’ maintenance, AND receive some dividends, – the expert says. – Such situation seems rather utopian. I doubt that a developer is ready to be a good Samaritan and share with people the profits from the lease of thousands of square meters of commercial property. The dividends are paid out based on results of company’s business activities. Most likely, the shareholders will be provided with information that the company’s expenses are equal to its income, and no dividends will be paid. As for the compensation of utility payments, these payments are the apartment owners’ responsibility by law, so they shouldn’t expect the property management company to pay for them — such compensation envisions distribution of dividends, which, as I already said, are unlikely to be paid to the shareholders.”

Yulia Verbitskaya-Linnik agrees with uncertain prospects of the dividends.

“Since the profits are the difference between income and expenses, and expenses are controlled by the management, and not the shareholders, it’s easy to envision the company breaking even or becoming loss-making. As a result, the company will have no obligations to pay dividends to the shareholders,” the lawyer believes.

Written by Konstantin Frumkin

Previous ArticleNext Article

Leave a Reply

Your email address will not be published. Required fields are marked *