Valuers will be required to file reports with state systems

In 12 years of Consul Group's work we have many times seen the same story. The state changes the rules, the consequences for the market are real enough, but neither the professional communities, nor the various "helpers of business", nor the market participants themselves step in in time, even to soften those consequences.

This is that situation now.

A bill is under discussion that would oblige real-estate valuers to enter valuation reports, and expert opinions of self-regulatory organisations, in state information systems. The draft itself expressly allows not only the information in a report, but also the final value stated in it, to be used for the purposes of state cadastral valuation.

Every report valuing real estate, whatever the purpose for which it was prepared, will therefore have to be entered in state information systems: the Federal State Geographic Information System "National Spatial Data System" (FGIS NSPD) and the state information system for state cadastral valuation. And this will be not a right, but a direct duty of the valuer.

At first glance this may look like a story "about valuers". It is not. It is a story about the whole market.

In commercial property, valuation reports are most often prepared not for a cadastral valuation but for banks, for collateral, for transactions, for the revaluation of assets and for internal corporate tasks. The state is, in effect, creating for itself the possibility of using those reports for tax purposes.

What risks does this create?

1. The risk of a higher tax burden.

The most obvious risk is the use of "inflated" reports prepared, for example, in order to obtain a loan. In practice the value shown for a bank is often higher, because the amount of the financing and the quality of the collateral depend on it. If such data are later used in state cadastral valuation, the owner may be left not merely with an "inflated" market value in a report for the bank, but with an inflated cadastral value and, as a result, a higher property tax.

2. The risk of problems with the bank and the loan agreement.

If different reports on one and the same property begin to build up in the system, the bank will see the discrepancies quite quickly. One report is for the loan, and states a higher value. Another is more conservative, an internal report, or one prepared for a different purpose. The bank then inevitably asks which value is the real one, and how reliable the information was on which the decision to grant the loan was taken. For the market, that is already a risk that the terms of the financing will be revised, that additional security will be required, or that early performance of the obligations will be put in question.

A comment by Sergei Pivovarchik, managing partner of Consul Group:

At first glance, for the state this is an almost ideal solution. It supplies an additional body of data for cadastral valuation and, at the same time, can be used as a means of clearing unscrupulous valuers from the market. For property owners, the same arrangement can turn into a serious trap.

The most dangerous thing is that most owners will not even notice the moment at which the noose starts to tighten around their own neck. In taking out a loan, agreeing collateral, revaluing an asset or preparing a property for a transaction, an owner may himself create documents that will later be used against him: in tax, in his relations with the bank, and in a possible dispute about whether the information submitted was reliable.

The legal problem with this bill is wider than tax alone.

The draft does expressly open to the state budgetary institutions that carry out state cadastral valuation access to the reports and to the values in them. It does not, however, answer the basic questions without which an arrangement of this kind becomes dangerous: who checks that a report is reliable before it is used, and how; which report has priority; whether an owner can exclude a report prepared without his participation or for a different purpose; and whether anyone is obliged to notify him at all that such a report has been entered in the system.

In other words, the state obtains a new body of sensitive data for state cadastral valuation, and the owner does not obtain comparable means of protection.

And that is not all. There is a second block of risk, which the draft does not deal with at all: the banking block.

As a general rule, a later change in the market value of the collateral does not of itself change the collateral automatically. For commercial transactions, however, the legislation and the Supreme Court allow a contract to tie a change in the value of the collateral to a duty to provide additional security, to other adverse consequences for the pledgor, and even to the creditor's right to demand early enforcement.

In addition, the Civil Code separately gives a lender the right to demand early repayment of a loan if the security has been lost or its conditions have deteriorated. Once such reports are disclosed, or even information about the value alone, the dispute therefore already goes beyond "valuers holding different opinions" and can become a full trigger for the bank to revisit the entire lending structure.

Such a conflict can move into criminal law as well as into civil law.

The Supreme Court has expressly explained that knowingly false or unreliable information about property that is the subject of the collateral may be treated as a means of deception in obtaining a loan.

• Where there is an intention to steal, there is already a risk of the conduct being classified under Article 159.1 of the Criminal Code.

• If there was no intention to steal, but the loan or the preferential terms were obtained on false information and large-scale damage was caused to the creditor, the Supreme Court points to a possible classification under Article 176 of the Criminal Code.

The potential risks here may therefore arise not only for the valuer, but for the business itself: for the borrower and its management, if unreliable information is knowingly submitted to the bank in order to justify the value of the collateral.

That is why this bill is not a technical matter of valuation work. It is one more future source of tax disputes, of conflicts with banks, and of pressure on the commercial property market, and for the moment it is passing too quietly.

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