Cadastral valuation is carried out once every five years, and each time under new rules. From the start of 2020 the rules change again. For many business people, the latest calculations of the value of agricultural land, industrial land, land of the water fund and specially protected areas, made under the new methodology of the Ministry of Economic Development of the Russian Federation, were disappointing. In 2018, in the Chelyabinsk Region, the average price of plots for industrial production rose by 80%, and of plots for agricultural needs by 68%. In some cases the value increased tenfold.
Already today, cadastral value determines the tax on a sale of the property and the notary's fee when it is inherited. Pilot regions have paid tax calculated under the new rules since 2016. How the amount of the payment will change, and what functions the institution of the state valuer will perform, is explained by the partner and head of asset valuation at Consul Group, Alexander Verein.
What were the reasons for the law on cadastral valuation?
Views differ, but the most credible are these:
- the state's wish to monopolise the market for setting the base on which property is charged to tax or on which rent is charged;
- the intention to make the results as reliable as possible by bringing into a single information field data on properties that are scattered across different agencies.
Only the combination of these two factors can start a new round of the reform. The wish to control the collection of tax, and the intention to bring order to the present information chaos in the real estate register, may in the end produce an excellent information system. It would bring together reliable data on properties, and on that basis a better cadastral valuation is possible.
From 2020, state cadastral valuation in every constituent entity of the Russian Federation will be carried out under the new rules. Why does that matter?
Regions that managed, before 2020, to carry out more than one state cadastral valuation saw in full how unsystematic that valuation was under the rules of the Federal Law "On Valuation Activity". Time after time it was carried out with no reference to the results of the previous cadastral valuation. It was often done by a new valuation firm that did not have enough experience, or enough time, to prepare for work on that scale.
Under the new rules the valuation is carried out by a state budgetary institution established in the region. Unlike a private valuation firm, such an organisation has greater powers and greater capacity, including access to various databases on real estate. The body will also revalue real estate in the region later, which gives reason to expect more reliable results.
Will this affect the value of real estate?
The law cannot have a direct effect, because value is formed mainly by market factors. The return on commercial property may, however, fall substantially if the tax burden on the owner rises.
On which land may the tax increase several times over because of an incorrect cadastral valuation?
The difficulty of determining the value of agricultural land, and the wide spread of prices according to the characteristics of the plots and the attractiveness of the region, make errors in a mass valuation highly probable, and to the owner's disadvantage.
Is the creation of a state valuer a negative trend or a positive one, and why?
Phenomena of this kind always have two sides. In the ability to collect information on real estate, in its volume and quality and, as a result, in how systematic the valuation is, a state institution has a clear advantage. With a clear methodology and systematic processing of information, state valuation will improve over time and may well produce results that are as close to the market as possible.
On the other hand, the means of manipulating the tax base are concentrated in the hands of the state. Given the trend in tax policy towards higher collection of tax, that is an additional non-market risk.
In our view, the introduction of state cadastral valuation in present conditions is inevitable. The possibility of adjusting its results with the help of private valuers will keep the system in balance.
What will happen to the layer of small and medium-sized business that used to carry out cadastral valuation?
Cadastral value under Law No. 135-FZ was determined mainly by companies with no connection to traditional small business, so the introduction of state cadastral valuation will not affect traditional small business. For medium-sized business, this kind of work was never the main activity and was done on a one-off basis. Given the potential liability of medium-sized business for the results of determining cadastral value, the fact that valuation has passed to the state is, on balance, a benefit.
On the other hand, for many valuation firms a large market, sometimes the main one, is the opportunity to challenge the results of state cadastral valuation. If that opportunity is prohibited by legislation, there will be reason to speak of a substantial contraction in the market for valuation services.
How long will it take for every region of the country to move fully to the new system of cadastral valuation? Are the regions ready?
It depends on whether the region has the specialists to form the staff, and a budget to maintain an institution of that kind. The position is specific to each region.
What is the essential difference between the calculation of cadastral value and of inventory value?
The main difference is that the inventory value of a property has no link at all to market value, whereas cadastral value, even given its mass character, is meant to come as close to market value as possible.
In the way it is determined, inventory value is hopelessly outdated: it is based on replacement cost. That cost is fixed at 1969 prices and then indexed by parameters that are no less outdated.
Cadastral value, for all its shortcomings, is calculated by much more modern methods, on the basis of market data. In addition, the possibility of setting it at market value gives a quite reliable way of determining a fair tax base.
Do the new rules pose a threat to the construction and real estate market?
Developers face real threats: the risk of a change in the cost of finance, in regulation and in the price of building materials. Set against those, the new rules for determining cadastral value are unlikely to pose a tangible danger to the construction market.
A further risk of higher costs of owning real estate does make investment in it less attractive, so on the whole the new rules are unlikely to help the market develop.
The concept of cadastral value has existed for a long time, and there is nothing new in this for the construction industry either. In my view, therefore, the introduction of the new rules for calculating cadastral value poses no threat to the market.
In your view, does the new system have shortcomings?
Like any new and complex system, it has shortcomings in abundance. The principal one, and it cannot be removed, lies in the nature of cadastral value: it is a mass valuation, which makes it practically impossible to take account of the individual characteristics of a property.
Judging the system by its shortcomings is an unrewarding exercise. No one has yet been able to offer another system, more reliable and acceptable to every party to the tax relationship, for determining the value of a huge number of properties in a short time.
In my view, the only effective way to offset distortion in the results of determining cadastral value is the procedure for challenging it. The balance of every party's interests can be kept by using state cadastral valuation together with an assessment, by private market participants, of the actual market value of the property.
What does "preparation for a state cadastral valuation" involve?
Preparation for a state cadastral valuation consists of collecting and processing the information needed to determine cadastral value. At this stage, state budgetary institutions request all the necessary information from federal executive bodies and from the organisations subordinate to them.
One point should be noted separately: the owner may lodge with the state budgetary institution a declaration of the characteristics of the property. That option allows the owner to provide the maximum amount of information for the valuation, and that information will be taken into account when cadastral value is determined.
An obvious advantage of the new system is the duty of the state budgetary institution to take into account information on properties whose cadastral value has been challenged. How effective that option is has not yet been tested in extensive practice, but the possibility itself of taking the results of past disputes into account is a positive change.
Will the rules for challenging valuation results in court change?
For the moment, everything remains as it was: the state budgetary institution is not the defendant in cases challenging cadastral value. That may change soon. A bill is now before the State Duma at first reading. The drafters propose to restore a mandatory pre-trial procedure for a challenge before the budgetary institution. If the authority refuses, the next step is to go to court, to challenge not the cadastral value itself but whether the budgetary institution's decision was well founded. Amendments of that kind may make access to justice substantially harder for property owners.
How does the law provide for the right holder to avoid extra expense when errors in cadastral value are corrected?
The right holder, as before, may apply to the budgetary institution with a statement substantiating the error. Previously such questions were decided by a commission for disputes over cadastral value, or by a court. In regions where the calculations were made under the old rules, the commission still issues decisions at no cost to the applicant.
Under the new rules, if a budgetary institution finds an error in the cadastral value of a property or a group of properties, it may correct the error itself, without an application from the right holder.
Is a single system of fair taxation a myth or a reality?
Mechanisms that can find a balance between myth and reality do exist. We expect that balance to be found within the next 10 years.
A NOTE
When the law entered into force, a new concept appeared: "federal state supervision of the conduct of state cadastral valuation". The point of the change is to check that the characteristics of properties are recorded correctly, and to monitor whether the budgetary institution follows the methodology for valuing cadastral value. The powers are vested in the federal executive body that organises the unified system of state cadastral registration of real estate, the state registration of rights to real estate and of transactions with it, and the spatial data infrastructure of the Russian Federation: Rosreestr. Supervision will be carried out when the official report is submitted.
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