the law and economics of historic preservation in st. petersburg, russia

RURDS Vol. I I, No. I, March 1999

THE LAW AND ECONOMICS OF HISTORIC PRESERVATION IN ST. PETERSBURG, RUSSIA

Stephen B. Butler, Ritu Nayyar-Stone and Sheila O’Leary’

The Urban Institute, Washington, DC, USA

St. Petersburg’s architectural heritage makes it one of the most beautiful cities in Russia. However, as government subsidies continue to dwindle, the city is increasingly dependent upon private sources of financing to restore and preserve the many se- riously deteriorated monuments and buildings. This article considers whether the economic and legal environment in St. Petersburg provides sufficient incentives for private investors to undertake historic rehabilitation projects. A pro forma model is used to analyze a developer’s return on investment in new residential construction on the outskirts of the city versus rehabilitation of an historic residential building. The results show that the costs associated with historic preservation are significantly greater than for new construction and for a developer to make a reasonable rate of return on historic preservation the square meter price of residential space would be affordable by only a small segment of the population. Simultaneous changes to multiple legal and economic policies are recommended to encourage additional private investment in historic preservation.

I. Introduction

The rich cultural histories of many cities in the Newly Independent States (NH) are displayed in the architectural monuments that survived the tragedies of this century. Nowhere is this more evident than St. Pe- tersburg, Russia, a city that in this century endured revolution, civil war, two World Wars, famine, the destruction and now, slowly, the rebuilding of its economic and political life. For years the central govem- ment financed most routine maintenance and capital repairs necessary to prevent residential and commercial historic buildings tirn falling into disrepair. Today, however, all levels of government in Russia are operating under severe economic constraints; it is un-

likely that historic preservation on a significant scale will be supported from public budgets. Without participation of the private sector in rehabilitating the deteriorating historic building stock, the city is in danger c& losing a vital part of its cultural heritage.

Policymakers believe that rehabilitation ofthe city’s rich architectural heritage could be the cornerstone of a city revitalization project which will attract foreign and domes- tic investment. Such investment would boost St. Petersburg’s capacity to be a hub for business activity and tourism, create new employment opportunities, and generate revenue for municipal projects, particularly much needed infrastructure improvements.

Research for this article was conducted in summer 1996 as part of the United States

* Sheila O’Leary is currently at Peabody & Brown, Boston, MA, USA.

0 The Applied Regional Science Conference (ARSC)/Blackwell Publishers Ltd. 1999 Published by Blackwell Publishers, 108 Cowley Road, Oxford, OX4 IJF. UK and 350 Main Street, Malden, MA 02148, USA.

Butler, Nawar-Stone and O’Leary, The Law and Economics of Preservation in St Petersburg 2!i

Agency for International Development pro- gram of technical assistance to the Russian Federation on housing reform and develop- ing real estate markets. It was designed to complement ongoing World Bank urban redevelopment efforts in St. Petersburg aimed at attracting private investment to the city center. This article examines many of the practical legal, financial and political impediments that investors are likely to en- counter undertaking development projects in St. Petersburg’s historic areas. It attempts to answer three questions of interest to potential investors and city policymakers:

Is there effective demand for residential and commercial units in rehabilitated historic buildings at current prices?

Do current legal and economic conditions in St. Petersburg provide an incentive for private developers to undertake the rehabilitation of historic buildings?

Are there policy measures that local government can institute to make historic preservation more viable for private developers, and more affordable for a larger segment of the population?

This article concludes that currently rehabilitation of center city historic buildings for commercial or residential uses may be a relatively unattractive investment opportunity in comparison to new construction outside the city center. Historic rehabilitation is generally more costly than new construction, has a smaller market, and presents in- creased risks and uncertainties. However, with targeted legal and policy interventions the city may significantly improve the feasibility and profitability of privately-fmanced rehabilitation projects.

The data for this study were completed in late 1996, when the economic outlook ti Russia and its cities was at worst ambiguous, and at best sanguine. The almost complete collapse of the Russian economy during September/October 1998 may make the

issue of private investment in rehabilitation of historic buildings largely academic for the foreseeable future. While detailed analysis cf the effects of the collapse on development activity is not possible for this paper, several consequences can be suggested. While before there was very little commercial financing available for reconstruction, now there is none-due to a breakdown in the banking system. In July 1998, immediately prior to the collapse, the city adopted several laws providing tax concessions to private investors (discussed later). While the city is more anxious than ever to spur investment activity, it now may be less able to af%rd such concessions. Finally, while the effect on demand for housing and commercial space IV mains to be seen, the sudden deflation in wages, rise in unemployment and flight cf foreign capital, which spurred redevelopment of many of the commercial buildings in the center, are not positive developments.

Section 2 gives a brief profile of St. Petersburg. Section 3 analyzes the demand for residential and commercial space and the ability of the present occupants to afford the costs associated with ownership of rehabilitated historic buildings. Section 4 briefly summarizes the legal factors governing the process of historic preservation. Section 5 analyzes the economic factors which impact historic preservation in St. Petersburg via pro forma models (case studies) of two projects: (1) rehabilitation of a historic residential building located in the city center; and (2) new residential construction in a non- historic zone, typically in one of the city’s close-in urban neighborhoods. Section 6 contains a sensitivity analyses of the historic project to determine how changing specific variables affects project feasibility. Conclu- sions and policy recommendations are contained in Section 7.

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26 Butler, Nayyar-Stone and O’Leary, The Low and Economics of Preservation in St Petersburg

2. Profile of St. Petersburg

Contemporary St. Petersburg, with a population of 4.8 million, is divided into 18 administrative districts. The greater part af four of the 18 districts (Petrogradski, Admi- ralteiski, Central, and Vasileostrovsky) located in the downtown area were designated by the United Nations as a single world heritage site in 1989, and comprise perhaps the largest urban heritage site. The four districts span across three historic areas, known as the City Core, Protected Zone 1, and Protected Zone 2, that are governed by special zoning and building regulations. These districts am almost completely built up, and most of the buildings designated as historical are in a0 tive use, primarily as multifamily residential buildings. Some estimates suggest that there are as many as 5,000 historic buildings and objects in the central districts (Drobyshev et al., 1996). Most new construction in the city takes place outside these zones while the bulk of reconstruction or rehabilitation takes place within the protected zones and is subject to historic preservation legislation.

The amount of rehabilitation required in the protected zones is substantial. It is estimated that 21% of the city’s residential stock is located in the historic city center and over half of it needs capital repairs or restoration (Drobyshev et al., 1996). 18.5% of the non-residential stock and 32.6% of the residential stock is considered to be in “substandard” condition, substandard mean- ing that the building is more than 40% deteriorated (Istomina, 1995). According to the Leontief Center, a research institute in St. Petersburg, in three of the major regions in the downtown area-Petrogradski, Admiral- teiski, and the Central District-50%, 47%, and 44%, respectively, of the housing stock is communal apartments. Other estimates place the percentage of communal apartments in the city center as high as 70% (Drobyshev et al., 1996). Communal apartments were created during the early years of the Soviet

era when the government expropriated many single family residences and turned them into multifamily dwellings. In a typical communal apartment several families share kitchen and bath facilities, although living space is separate for each family.

3. Demand for Commercial and Residential Space

In 1995, of the 100 banks operating in St. Petersburg, 65% were located in the historic center even though rents in this area am the highest in the city. The center city also appears to be the preferred location for other commercial vendors such as insurance com- panies, legal offices, and travel agencies (Drobyshev et al., 1996). 25% of the leases for city-owned non-residential space are located in the historic center although it com- prises only 2% of the total area of the city.

The number of enterprises registered in St. Petersburg is a good proxy for the level of economic activity in the city which in turn at?” the demand for office space. Ac- cording to the St. Petersburg Registration Chamber, a total of 22,501 enterprises were registered in the city from 1992-1995 (Sinochkin and Yasinskaya, 1996). As m- ported by the St. Petersburg Foundation for Development of Real Estate, Table 1 summarizes a study conducted by ST Inter- national Company that calculates the demand for commercial space.

Though accurate figures are hard to find, the consensus is that there is also a shortage of adequate housing in the city. It is estimated that as many as one in four St. Pe- tersburg citizens resides in communal apartments, which are notorious for their substandard conditions.’ As of November 1, 1994

’ From a different perspective, it is estimated that 43% of all households reside in communal apartments, perhaps reflecting the large number of elderly one and hvo person households living in communal apartments. Data from the Leontief Center, September 1996 (report produced for the Urban Institute). This is 4.8


there were 328,060 families-18% of the city population*-on the waiting list for social housing.

Clear information on the population’s ability to pay for housing is also difficult to find. Data from the Leontief Center reported in Table 2 shows the distribution of 2,504 individuals across an income range of $20 per month to over $160 per month based on an survey conducted in June 1996. It is well- accepted that incomes are underreported in official statistics. Individuals frequently un- derstate their primary source of income and often do not include any additional or secon- dary income sources. Assuming that household income is at least 50% higher than re ported, and that all households have at least two wage earners, it can be estimated that almost 90% of city households earn less than $480 per month.

As Table 3 on sale prices illustrates, considering official income data, even when inflated under the assumptions described above, it would appear that the majority of St. Petersburg residents would have difficulty affording newly constructed or existing housing.3

The figures in Table 3 should not be used to overgeneralize the situation regarding real estate prices in St. Petersburg. The data reported here are not the result of systematic data collection and analysis, but are repro- duced from reported sources that collect data

times greater than the number of communal households in any other Russian city other than Moscow, and 2.6 times higher than in Moscow.

* According to 1989 Census data there are 2.6 members per household. As of 1996 the total city population was 4,801,500 according to the St. Peters- burg Statistics Committee.

3 This conclusion is based on the premise that loans available for acquisition of housing are repay- able over a reasonably long term, and that purchasers are not able to devote more than a reasonable portion of their income (50%, for example) to housing costs. In reality, mortgage loans are, and will be for the foreseeable future, at high interest rates and for short terms. The best hope for such families is perhaps in equity received from privatization and sale of another housing unit, or from another source.

through regular conversations with real estate brokers.4 Not reported here are sales prices for rehabilitated structures. However, anecdotally, prices for rehabilitated residential historic structures in the center city range from approximately $1,000 to $2,400 per m’.

It may be noted that a potential major source of funds for purchase of housing not evident from income statistics is sale of privatized residential apartment units. However, although housing privatization may create demand for mid to high priced rehabilitated historic structures in center city locations, its significance in determining demand for new and reconstructed housing should not be overstated. As of 1997 less than 30% of the housing stock had been privatized in St. Petersburg. Moreover, considering that privatization was free of charge in St. Peters- burg since 1993, there is no direct correla- tion between a household’s income and the value of the housing it occupies. The most valuable housing is often occupied by pen- sioners with extremely low incomes who, even if they do sell, are unlikely to create much demand for new high priced housing.

4. Legal Procedures Governing Historic Preservation

4. I Government Agencies Involved in Historic Preservation

Several federal and local agencies play a role in historic preservation. Their decisions to categorize a building as an historic monument, and various agency regulations governing the acquisition, development, and ownership of historic properties all ail&t the feasibility of rehabilitation projects.

4 The model used in this paper calculates a sale price of $925 per square meter for residential space in a new construction. However, this is based on a 30% after tax return on total investment and also a high quality brick building with modern amenities (Table 5).

Butler, Nayyar-Stone and O’Leary, The Law and Economics of Preservation in St Petersburg u


28 Butler, Nayyar-Stone and O’Leary. The Law and Economics of Preservation in St Petersburg

Table 1. Demand for Commercial Space in St. Petersburg: Forecast for 1997”

Type of Company

Large foreign

Large Russian

Wholesale

Consulting

Financial

Non-profit and State

Share of Leasing Rental Space Sought Market (%) Average Seeking (square meters)

Rental Time Option for Total De- Average 1997 2000 (years) Purchase mand Size

27 31 2-4 No 16,000 150 - 200

5 12 1-2 Yes 3,000 80 - 200

41 19 3-6 Yes 24,000 80 - 150

1 4 nlab n/a 1,000 50 - 200

20 23 Less than 5 Yes 13,000 200 - 350

6 11 Lessthan No 4,000 100 - 200

Source: St. Petersburg Foundation for Development of Real Estate Market. “Analysis of Real Estate Market in Center (Historic Part) of St. Petersburg.” Study Report. 1996. Russia: St. Petersburg.

Notes: ’ All estimates are for 1997, except for share of leasing market which is projected for the

year 2000. b n/a = Not available.

Table 2. Sample Monthly Income Profile of the Residents of St. Petersburg, June 1996

Monthly Income

Rubles (thousands) Dollars

Number of Individuals % of Total

up to 100 up to 20 31 1.5

100 - 200 20 - 40 124 5.0

200 - 300 40 - 60 326 13.0

300 - 400 60 - 80 523 20.9

400 - 500 80 - 100 540 21.6

500 - 600 100 -120 317 12.6

600 - 700 120 -140 203 8.1

700 - 800 140 - 160 156 6.2

Over 800 Over 160 278 11.1

Total 2.504 100.0

Source: Leontief Center, St. Petersburg. Based on June 1996 Gosk- omstat survey.


Butler, Nayyar-Stone and O’Leary, The Law and Economics of Preservation in St. Petersburg 29

Table 3. Sale Prices of Residential Property in St. Petersburga (US% per m*)

Location

City center

City ccnter periphery

Industrial and residential belt

Notes:

New Construction Existingb

508-757 480.600

446-635 460-570

42 l-622 480-5 10

B

b

Figures not available for room sizes. The range of prices represents the minimum price for the least expensive type of housing (panel construction-137 Series) and the maximum price for the most expensive (brick). Source: Real Estate St. Peters- burg No. 36 (154) September 16-23, 1996. Figures are reported by the Agency for Urban Research and Consulting, Ltd. (AUREC), St. Petersburg. for Quarter I, 1996. Existing housing is in “as is” condition prior to rehabilitation.

The main federal agency responsible tbr monuments protection in the Russian Fed- eration is the Ministry of Culture. The Min- istry approves all designations of historic buildings, maintains archives of registered buildings, approves all privatization decisions, and, to a decreasing degree, approves all decisions to rehabilitate or modify historic structures. The State Inspectorate for Monuments Protection (GIOP) is the St. Petersburg city agency that regulates all a0 tivities related to development of the St. Petersburg historic center, including privatization and plans for rehabilitation or modifi- cation of historic buildings. GIOP also ap proves all historic building designations (although the Ministry of Culture reserves the right of fmal approval), maintains archives of building registration information, ensures owner compliance with monuments protection laws, and levies sanctions against violators of preservation laws.

The City Property Management Com- mittee (KUGI) is responsible for leasing all city-owned land and buildings, overseeing building management, performing appraisals on federal and municipal buildings, and co- ordinating with GIOP on the terms and conditions of leasing buildings subject to historic preservation regulation. The Commit- tee for City Planning and Architecture

(KGA) approves the technical and design plans for all new construction and rehabilitation projects, including historic buildings, and issues construction permits.

4.2 Designation of a Building as Historically Significant

Buildings in St. Petersburg are sub- jected to historic preservation legislation in two ways: (1) an individual building is designated as an historic monument, and/or (2) the building is located within an area designated as an historic zone. Individual historic buildings may be of “federal historical significance” or “local historical significance.” Estimates horn historic preservation experts in St. Petersburg place the total number of historic objects at approximately 2,500 ti federal significance and 2,500 of local significance. The criteria for designating a building as either of federal or local significance am not always clear. In general, the criteria and procedures for historic designation do not differ markedly for federal or local buildings and a good deal of discretion is left to the evaluations of preservation experts. For any- one seeking to acquire a historic structure, the primary significance of categorization as federal or local significance is that local gov- ernments have the authority to privatize


30 Butler, Nayyar-Stone and O’Leaty, The Law and Economics of Preservation in St Petersburg

buildings of local historical significance, not buildings of federal historical significance.5

Buildings may also be subject to preservation legislation because they are located within regulated protected areas. City planning norms divide the protected regions cf St. Petersburg into three zones, character&d by a broad mix of uses, which the preservation regulations seek to maintain. Buildings in each of these zones are protected because the architectural ensemble formed by the layout of the buildings is deemed to be of historical or cultural significance, although there are often individual buildings within the ensemble which are of little or no historical or cultural value.

4.3 Procedural and Legal Issues

The procedural and legal issues involved in rehabilitation of an historic structure may be broken down into three steps: (1) acquisition; (2) development; and (3) ongoing compliance with preservation standards.

4.3. I Acquisition

The ability of a developer to acquire an historic building will often turn on two issues: how and if the building may be privatized and how to deal with the relocation of sitting occupants.

Residential Space. Since 1992 residential tenants have had the option to privatize their individual apartment units. However, privatization is subject to the approval of local authorities and is not considered a right, unlike privatization of residential units in non-historic structures.

5 This is not to say that buildings of federal historical significance cannot be privatized. There is currently no law which explicitly prohibits privatization of federal buildings and there are several privatized federal buildings in St. Petersburg. However, authority to privatize these buildings rests with the Ministry of Culture, not local government.

Acquiring property rights to an entire residential building often requires relocation of the sitting tenants, most of whom would not be able to afford the costs of rehabilitation or ongoing maintenance in the rehabilitated residential structures, or need to be moved because the use of the property is changed from residential to commercial. Whenever possible, developers prefer to acquire vacant buildings, often in worse condition than those requiring relocation, because the expense (sometimes as high as 50% cf project cost) and time (six months to one year) associated with relocation are so great.

In cases where individual apartments have already been privatized or are occupied by persons having beneficial rights to privatize, developers or brokers negotiate directly with the residents to purchase the apartment. Where the apartments have not yet been privatized, in many cases the developer’s offer to purchase provides the incentive for the residents to privatize and improve their living situation by moving to another, non- communal unit. The issue of holdout tenants, demanding excessive relocation pack- ages, is commonly encountered by developers, and occasionally the demands of one or a small group of holdout residents result in developers abandoning a project.

A developer or broker may also receive by mayoral decree the right to relocate the municipal housing tenants, and in return acquire ownership of their units and the building’s common areas conditioned on successful relocation of all of the current occupants at the developer’s expense. This approach is used when the building is on the municipal list of buildings in need of capital repair, a designation which theo- retically, but not practically, prevents sitting tenants from privatizing their units. The developer otten receives a reduced purchase price, or infrastructure fee to compensate ti the cost of relocation.

Privatization of an historic residential building always requires the approval


Butler, Navar-Stone and O’Leary, The Low and Economics of Preservation in St Petersburg 31

of GIOP as well as the ORice of Housing Privatization. When any unit in an historical building is privatized the owner, city and GIOP sign a privatization agreement and a Protection Agreement, which enumerates the owner’s rights and obligations relative to the protected historical property.

Commercial Space. Only since enact- ment of a presidential decree in November 1994 has privatization of non-residential local historic structures been permitted.6 A St. Petersburg law on privatization of commercial structures outlines a procedure fcr privatization of non-residential property that resembles the procedure for residential property and culminates with the execution of a Protection Agreement. The sales price is usually strongly influenced by the level of rehabilitation the building requires, the cost of ongoing maintenance, and the cost of relocation.

The process by which commercial occupants are relocated depends upon whether the occupant owns or leases the space. Much of the ground level retail space found in mixed-use buildings in the historic center is occupied by small businesses that acquired ownership of the space as a result of the city’s small scale privatization campaign. A developer interested in acquiring a non- privatized commercial space may also encourage the occupant to privatize under the favomble purchase price enjoyed by lessees, and then pay the occupant several times what the occupant paid the city to purchase the space, but less than the market value of the property.

Where the current occupant leases the space Corn the city the developer may

6 There is some contusion regarding implementa- tion of the law because it stipulates that privatization of buildings of local historical significance will only be permitted once a list of all federal and historical buildings nationwide is compiled and approved by the Min- istry of Culture, a process that could take months or years. Meanwhile, although not clearly in compliance with federal law, the Ministry has been approving requests from KUGI and GIOP to privatize buildings of local historical significance.

purchase the space from the city and continue to lease the space to the current occupant, at least until the end of the current lease term. Alternatively, the city may find grounds to terminate the lease with the existing occupant and sell the property to the developer.

4.3.2 Development

Rehabilitating an historic structure requires a number of approvals and permits I?-om a variety of city offices. The two most important steps in this process are acquiring development rights and obtaining design approvals, and getting the construction permit. This process can take from six months to a year depending on the prior experience, staff capabilities, and political contacts of the firm and include the following steps: l If the developer has not already acquired

rights by purchasing private apartments, negotiation and execution of an Invest- ment Agreement between KUGI and the developer. This is finalized by mayoral approval and contains detailed conditions for development of the site.

l Developer (at his own expense) performs a detailed historical, architectural, technical and financial assessment of the historic property, and submits a pre-design building analysis and studies to KGA and GIOP for review and approval.

l The city grants property lease rights only for the period of construction, ac- companied by a contractual commitment to grant a long term lease once construction of the building is complete and put into operation.

l Developer applies to KGA and GIOP for project design approval.

l Developer applies to KGA for construction permit.


32 Butler, Nayyar-Stone and O’Leary, The Law and Economics of Preservation in St Petersburg

4.3.3 Compliance with Preservation Standards and Regulations

Preservation requirements are found in several general laws of the Russian State Duma and St. Petersburg city legislature; normative documents of the federal and local architectural, construction and planning bu- reaucracies containing construction and TV construction standards for buildings generally; and a host of Federal Ministry of Con- struction and GIOP advisory guidelines on preservation materials and methods. Upon designation of the historic structure GIOP may prepare a “building passport” which, if available, contains a great deal of information on the building’s original design and can be expected to play an important role in the discussion of preservation requirements.7

GIOP often uses its technical, historical, and architectural analysis of an individual building to set the requirements for developers on the standards to be used in reconstruction. In negotiations, GIOP’s starting point has been to require preservation of the building strictly in accordance with the original building design. However, GIOP appears increasingly willing to compromise its standards to address issues of practical and financial feasibility.

The building materials and construction techniques which must be used on a historic rehabilitation project are not formalized but depend upon the requirements that GIOP imposes on a building-by-building basis. GIOP relies on the individual building passport, expert analysis conducted on the building, and a large number of advisory guidelines on historic rehabilitation materials and

7 According to the World Bank, GIOP is in the process of preparing building passports for all historic buildings of federal and local significance, but the process is proceeding slowly. As of December 1995, 60% of federal buildings had completed passports, but only 5% of local buildings. Therefore, in most case where a developer seeks to privatize a local buildings, the developer must pay the expense of conducting the research necessary to produce the passport.

techniques which while not legally binding, may serve as the basis for reconstruction requirements imposed on a developer.

The Protection Agreements that owners of privatized residential and commercial structures are required to sign as a condition of privatization are contracts between the owner and city that obligate the owner to maintain the current condition of the prop erty and not make changes without the ap proval of GIOP. The owner must permit GIOP to periodically inspect the property, notify GIOP of any damage to the property, and carry insurance on the property at his own expense. Penalties for violation of the contract range horn fines to government ex- propriation of the property. Owners may not reject categorization of their property as historically significant. At the same time, the Russian government does not give tax benefits or make other sources of funds available to owners for rehabilitation or maintenance.

Preservation requirements are also found in a 1992 regulation of KGA known as “Construction Norm VSN 2-89: Rehabilita- tion and Development of the Historic Areas of St. Petersburg” (VSN 2-89), which can be characterized as a combination of a long term plan, “zoning regulation,” and building code for the historic center. The regulation is effective until 2005, but is supposed to be up- dated every five years.

VSN 2-89 defines the three protected zones in the city’s historical center. The main objective of the regulation is to preserve the “historical, cultural, and architectural buildings, monuments and areas” of the city’s center, but also the “overall architectural landscape and typical silhouette” of the built environment The regulation is thus aimed at protecting not only individual objects, but also the historical city plan. The approach taken is conservative. Demolition is prohibited entirely in the central protected zone-the historical core-and permitted under very controlled conditions in the less protected zones. Even undistinguished

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Butler, Nayyar-Stone and O’Leary, The Low and Economics of Preservation in St Petersburg 33

structures cannot be removed in any cf the zones if they are part of the city’s historic “background and landscape,” a broad standard.

New construction is permitted in the zones only in specifically designated in-fill sites (“lacunae,” or “zones of regulated construction”), and in the central zone only to restore historical buildings to their original contours or to recreate an historical “architectural ensemble.” In height, foot- print, facade, construction materials, color and patterns, all new construction must be “compatible” with neighboring buildings. Changes are permitted to the planning structure of the historic core only “in exceptional cases” and only on the basis of planning feasibility studies.

5. The Economics of Rehabilitation

The analysis compared the economics of a typical new construction project in the outer ring of the city to an historic rehabilitation project in the center city. The working hypothesis of the analysis was that current legal and approval procedures, project time, and development costs associated with historic preservation projects yield higher total costs and risks when compared to a new construction project outside the historical zone. This is especially true for residential development. Even though rehabilitated residential unit sales at $2,500 per square meter have occurred due to the good location and prestige of the historic buildings, those familiar with the market reported in interviews that at best the buyers represent the top 5% of all households based on income.

To analyze a developer’s return on investment in new construction on the outskirts of the city versus rehabilitation in the historical zone a pro forma model was developed with detailed project costs and sale revenues. The main components of the model are hard costs (labor and materials),

taxes fees and permits, soft costs (other costs such as architecture, legal, insurance, engineering and relocation of tenants), land lease and building purchase costs, financing costs and sales revenue.

5. I Uncertain or Unquantifiable Factors

In preparing the financial model several factors were identified anecdotally, but could not be easily quantified and incorporated into the financial analysis. These factors include: uncertainty of the historic approval process and consequent unpredictability of costs and time to obtain necessary permits and approvals; high transaction costs incurred under- standing the process of obtaining approvals and in satisfying each government organiza- tion’s frequently changing requirements; construction risks associated with a historic preservation project-the historic buildings have been so poorly maintained that the true costs of rehabilitation are oflen not discov- ered until well after work has begun, and the downtown historic area has been so built up that demolition, foundation work and mha- bilitation of one building causes cracks and weakens the foundation of the adjoining building-and, the long term maintenance cost of a historic building subject to GIOP’s strict standards. While not quantifiable, it is assumed that most of these factors increase the yields demanded by the private sector for investing in historic structures.

5.2 Hypothetical Project

Two “typical” hypothetical projects were developed: a new construction residential project in the city’s outer rings and a center city historic rehabilitation project. Specifications of the two hypothetical projects are contained in Table 4.

The projects were developed based upon discussions with active developers and builders in St. Petersburg. In addition to



assumptions about location and size, it is assumed that the new building is constructed of high-quality materials, in this case brick, which will make project costs higher than the typical Soviet era pm-formed concrete panel construction.8 The assumption only tends to minimize the cost differences between new construction and historic rehabilitation, which would be far greater if the lower-cost panel construction were taken as the norm.

Costs and Revenues. Cost and revenue information for new construction was ob- tamed primarily from interviews with developers and then substantiated and reconIirmed with interviews with other experts. Costs of rehabilitation were based on the following assumptions: (1) typical or average level of deterioration as experienced by developers interviewed and the typical scope of restom- tion requirements; ( 2) building originally constructed in the late 19th to early 20th century, primarily of brick; and (3) for all restoration, labor costs are estimated fca Russian laborers only.

In cases where actual numbers were un- available because considered confidential, the numbers were calculated as a percentage of base construction cost which are typically used by St. Petersburg developers as “rules of thumb.“9 One especially difficult cost to calculate was the cost of relocation of sitting residents, which may differ widely, depending, for example, whether the developer is acquiring a privatized apartment or relocating

’ To illustrate, in October 1995 the construction cost for one square meter of a brick residential building was $484 versus $353 for a panel construction. Nedvizhimost Peterburga, 1996 p. 59. At least one developer interviewed for this article contends that panel construction will continue to be an important component of the homebuilding industry because it is the main source of affordable housing.

9 Base construction costs are hard costs (labor, equipment and construction material) inclusive of value added tax (VAT) and indirect taxes on wages. For example, developers did not report actual numbers for design cost, but stated them as a percentage of total base construction cost.

a municipal housing tenant. The figure chosen for this cost was based on a figure of $ 11,000 per person (relocated), calculated for a World Bank project that involved a building similar to the hypothetical historic structure in this analysis (PADCO, 1996).

Financing Costs. In St. Petersburg a developer typically receives installment payments on a unit purchase price beginning when the building is relatively far advanced in construction-for example, at the third or fourth floor-and the entire purchase price is paid in full by completion of construction. Because construction finance is not readily available, particularly to developers that am not bank subsidiaries, this requires substantial infusions of equity in the early stages of a project. The cost of the developer’s equity is an opportunity cost. Since true opportunity costs were difficult to determine, fluctuated widely, and were subject to disa- greement in Russia, a finance cost of 40% per annum was imposed on the di&rence between total project costs and total project revenues during any period. This was based on bank lending rates for dollar denominated loans which were easily ascertainable at the time the analysis was done, and was considered an appropriate benchmark in the expec- tation that bank lending would become more available in the future. Unfortunately today, after the economic upheaval of 1998 few bank loans of any kind are available.

All costs and revenues were discounted using the net present value method. The net present value (NPV) was calculated at a 33% discount rate which was approximately the deposit rate on dollar deposits-one of the few returns on investment on which accurate information was available. It is lower than the financing rate of 40% because deposit rates are usually lower than loan rates. hi retrospect, we would have used the 40% figure for both financing (opportunity) cost and discount rate, because it more closely approximates the Russian investor’s required


Butler, Nayyar-Stone and O’Leary, The Law and Economics of Preservation in St Petersburg 35

Table 4. “Typical” Historic Rehabilitation and New Construction Residential Projects

Characteristics

New Construction Resi- Center City Historic dential Building outside Residential Building Historic Zone

Stories

Total floor area (m’)

Useable residential floor area (m’)

Total units

Average size of units (m’)

Unit Types 1 room 2 rooms 3 or more rooms

Land area (m’)

Retail on ground floor? (Yes/No)

Useable retail floor area (m’) Notes:

4

5,000

3,500

20

175a

All”

1,350

Yes

1,100

12

11,800

10,080

144

70

28 44 72

4,000

Yesb

700

a The typical renovation project in the center entails consolidation of the rooms of for- mer communal apartments, which tend to be relatively large. In addition, the market in the center is for “luxury” quality apartments, so most renovated apartments are 3 or more rooms. (In Russian practice all rooms other than kitchens, baths and dining areas are included in the room count.)

b Not long ago the typical newly constructed residential building outside of the center would not have ground floor retail space, but there seems to be a trend to include ground floor retail and service uses in the newer buildings.

return on investment, which is probably more suitable for both the opportunity cost of equity and the discount rate. However, using a discount rate lower than the financing rate does not compromise the es- sential result of the analysis. In fact, use of a higher discount rate would only make the cost difference between new construction and historic preservation more pronounced, because returns are Mer out in time for a historic building.

Land and Building Acquisition Costs. At the time this study was completed the amount a developer actually paid for a development opportunity was a complex calculation involving cash payments, long term rents, and infrastructure charges paid both in cash and in kind.

To create the project pro forma it was necessary to rely on the “typical” deal with the city. The terms of acquiring vacant land parcels were relatively straightforward. A developer who acquired a vacant parcel SX new construction was generally not paying a “price” for the land, as he was not “purchasing” it, but instead paid a combination of a small land rent during construction, set by legal formula, together with a development exaction equal to $40 per square meter of the completed structure plus 7% of the space in the structure, either in kind or in cash value. These assumptions resulted in an imputed land price of approximately 20% of total project costs, notably similar to “a rule of thumb” used by developers in market economies.



The typical deal for an existing building was far more ambiguous, and rarely dis- closed. By city regulation the inh-astructure exaction imposed on building redevelopers was equal to the “market value” of the building less the costs of relocation. Since at the time the methods for determining the market value--only recently tied to standardized international appraisal methodologies-were unsettled, the results of the calculation were unpredictable. Developers interviewed in the course of the study estimated that the formula would result in inf?astructure exaction of approximately 25% of project hard costs.

In addition, however, it was assumed that some price would be paid for the building itself, based partly on the fact that the local law provided for competitive tenders of buildings, which when successful resulted in a lump sum price being paid by the developer in addition to the infrastructure exaction. The assumption made in the analysis was therefore that the price paid for the building, beyond the infrastructure charge, would be 20% of total project costs. In fact, competitive tenders have turned out to be a tar- ity, and most buildings have been allocated for “targeted use”-that is, by confidential negotiation between the city and the developer. Confirmation of actual prices paid l?r buildings is hard to obtain. In retrospect, it is likely that the actual price paid by most developers for an existing structure, beyond the infrastructure exaction, was minimal, if paid at all. Thus, while the assumptions of the analysis resulted in an imputed price fbr the land and building of approximately 25% of total project costs, this may have overstated the actual cost somewhat, and exag- gerated the cost di&mnce between new construction and preservation of older buildings.

The ambiguities encountered in pricing existing buildings reflected both the uncertainty and flexibility of city officials. They were generally not sure how much a development opportunity was worth, and in any case were willing to negotiate.

By all accounts prices varied widely. Today, under new regulations, all development opportunities-land and buildings-are to be sold at market value as determined by standardized appraisal methodology. If determined correctly, this market value will reflect infrastructure exactions to be paid by the developer.

5.3 Results

The model confirms that the costs associated with historic preservation are signiti- cantly greater than for new construction. For a developer to make a reasonable rate CE return on historic preservation the square meter price of residential space would be affordable by only a very small segment of the population. * O

New Construction. The summary spreadsheet for new construction is shown in Table 5. A typical new construction residential project is completed in approximately one year-six months for pre-development and six months for construction. The analysis is therefore presented in four quarters.

In general, costs incurred prior to the start of construction are equally distributed in the two quarters before the period of construction. Hard costs and land lease cost am included only during the construction period, but soft costs and fmancing costs am incurred for the entire duration of the project. The model assumes only equity financing but an opportunity cost of 40% per annum is applied to the developer’s equity.

The approach taken in the analysis is to fix all parameters other than sales price per square meter of residential space, which is the product of the analysis and answers the question: “Given the cost data, at what price will residential space need to be sold to

lo Only tables with the summarized pro forma results are included. For the remaining spread sheets- soft costs, taxes fees and permits, and hard costs, con- tact the authors.


Butler, Nayyar-Stone and O'Leary, The Low and Economics OfPreservation in St Petersburg 37

Table 5. Pro Forma Results for a New Construction (thousands of dollars)’

Summarv of Costs and Revenues Net Present 1st 2nd Quar- 3rd Quar- 4th

Value Quarter ter ter Quarter Total

Revenue Residential and commercial unit salesb Sale revenue less 7 percentC

Total Revenue

Development Costs soft costs Hard costs

Total Development Costs

Land lease Financing costsd Total Project Cost

Net Revenue’

Return on total investment (before profit tax)’

Return on total investment (after profit tax)

Price per square meter (residential space:)

Price per square meter (retail space)

7,794 7,248 7.248

2,106 2,302 4,409

4 575

4,989

2,260

45%

30%

$925

$1,600

- 3,133 - - 2,913 - - 2,913

141 141 1,073 - - 2,027 141 141 3,101

- - 3 9 23 235

150 164 3,339

(150) (164) (424)

7,310 10,444 6,799 9,712 6,799 9,712

1,386 2,741 966 2,994

2,353 5,736

3 6 496 764

2,852 6,506

3,947 3,207

Notes: Building location: Outside the historical zone. Building specifications: Total floor area: 11,800 m2; Useable residential floor area: 10,080 m’; Useable retail floor area: 700 m*. 10,080 m* of residential space and 700 m* of retail space. Sale revenue is decreased by 7%because the infrastructure development fee requires the developer to give 7% of constructed space to the city. Soft costs include the infrastructure fee of $40.00 per m’. Financing cost is calculated at a rate of 40% per annum. NPV (Net Present Value) is calculated at a 33% discount rate. Total return on investment is the NPV of net revenues/NPV of total project costs.

provide a stipulated return on investment?” There is, of course, a trade off between residential and retail space prices-a higher price for retail space could lower the price for residential. In the basic analysis the retail space price is treated as fixed based upon available market data-$2,400 per square meter for the rehabilitated buildings which tend to be in the more desirable center city retail location, and $1,600 per square meter in the new buildings in the outer rings.

The pro forma assumes the developer requires a 30% afler tax return on total investment. The return on investment demanded by Russian developers may vary

considerably. Therefore a range of return on total investment-from 10 to 500/&--was considered to quantify its effect on the sale price of the residential and retail space both in a new construction as well as a historic building project (see Table 7) (St. Peters- burg Foundation for Development of Real Estate Market, 1996).

On the basis of the costs shown for new construction, a typical residential unit of the hypothetical project would have to sell for $925 per square meter assuming the retail space price is futed at $1,600 per square meter. Housing at this price is affordable for a very small segment of the population


38 Butler, Nayyar-Stone and O’Leary, The Law ond Economics of Preservation in SC Petersburg

of St. Petersburg. Comparison of this figure with reported market data reveals that $925 per square meter is at the high end for new construction. However, this result is based on the assumption of a high quality brick building with modem amenities. New multifamily buildings constructed of pm-formed concrete panel, are priced in the range of $480-$650 per square meter.

residential and retail space in rehabilitated historic structures in the center.

6. Sensitivity Analysis of Historic Preservation

Historic Preservation. A typical historic preservation project requires 2 1 months for completion-nine months for construction and on average one full year for the pre construction approval process. The analysis has therefore been presented in seven quarters. The summary pro forma spreadsheet for a historic preservation project is shown in Table 6.

The analysis varied taxes, building price, fees and charges, time (pre- construc- tion period), and hard costs (see Table S)- factors that the St. Petersburg government has the ability to alter without fedeml government involvement. Relocation costs- perhaps the single largest cost of rehabilitation and the largest dBerence between rehabilitation and new construction-are treated as fixed and unlikely to be much at&&d by policy changes.

In general, costs incurred prior to the start of construction have been equally distributed in the three quarters before the period of construction. Hard costs and land lease cost are incurred only during the construction period, but soft costs and financing costs are incurred for the entire duration of the project.

Taxes. Profit taxes were 34%, and were chosen as the focus because of the substantial impact on developers’ return and the fact that most of the revenue goes to the city. The analysis decreased the tax rate from 34% to a minimum of 13%, which by law must be returned to the federal budget.

A typical residential unit of the hypothetical rehabilitation project would have to sell for $2,200 per square meter, assuming the price of retail space is fured at $2,400 per square meter. Given the high price of a mha- bilitated unit and present market conditions, it is reasonable to expect that only a small amount of rehabilitated residential space could be successfully marketed each year.

Building Price. Variations in building prices were considered, ranging from a building price equal to 20% of total project cost to disposition of the building to a developer free of charge.

Decreasing the “acceptable” atIer tax return on total investment has a significant effect on the sale price of residential space, in both new construction and rehabilitated buildings. However, it appears that even at a 10% return on investment the price per square meter for a rehabilitated historic unit is nearly $1000 more than the price of a newly constructed high quality residential unit.

Fees and Charges. The infrastructure development fee is one of the major costs associated with both new construction and rehabilitation of historic buildings, as the city attempts to cover the cost of upgrading dilapidated infrastructure city-wide through project exactions.

Time. An historic preservation project typically has a pre-construction period of 12 months. Since the pre-construction phase for a new construction takes 6 months, the length of pre-construction time for a historic preservation project was varied ti-om 12 months to 9 and 6 months.

The results produced by the model tend to be confirmed by reported prices fbr

Hard Costs. The hard cost information obtained from developers for the rehabilitation of a historic building is based on an

0 The Applied Regional Science Conference (ARSC)/Blackwell Publishers Ltd. I999

Table 6. Pro Forma Results for a Rehabilitated Historial Building (thousands of dolla&

Summarv of Costs and Revenues Net Present 1st 2nd 3rd 4th 5th 6th 7th

Value Quarter Ouarter Ouarter Ouarter Quarter Quarter Quarter Total

4.830 Revenue

Residential unit sales Commercial Unit Sales

Total Revenueb

Development Costs soft costs’ Hard costs

Total Development Costs

Land and Building Costs Land lease costs Building purchase costd

Total Land and Building Costs

2,100 3,500 1,400 7,000 990 1,650 660 3,300

3,090 5,150 2,060 10,300

-

-

329 329

11656 6,462

2,022 1,189 3,212 329 329

329 -

329

329

329

586 450 460 2,813 746 638 506 1,891

1.332 1,088 967 4.704

7 774 782

457

4,45 1

2.036

- - 4 235 235 - 235 235 4

150 207 108

715 771 1,444

(715) (771) 1,658

4 -

4

4

4

12 940 952

597

6,253

4,087

- 235 235

94

658

(658)

235 235

38

602

(602)

- -

1,092

4,078

971

1,097

Total Project Cost

Net Revenue’

Return on total investment (before profit tax)’

Return on total investment (after profit tax)

Price per square meter (residential space:)

Price per square meter (retail space)

45%

30%

$2,200

$2,400

Notes: ’ Building location: Outside the historical zone. Building specifications: Total floor area: 11,800 m’;

Useable residential floor area: 10,080 rn’. Useable retail floor area: 700 m’. b 10,080 m* of residential space and 700 m’ of retail space. ’ Sale revenue is decreased by 7% because the infrastructure development fee requires the developer

to give 7% of constructed space to the city. Soft costs include the infrastructure fee of $40.00 per m’. d Financing cost is calculated at a rate of 40% per annum. ’ NPV (Net Present Value) is calculated at a 33% discount rate. ’ Total return on investment is the NPV of net revenuesiNPV of total project costs.

4 Butler, Nayyar-Stone and O’Leary, The Law and Economics of Preservation ifl St Petersburg

Table 7. Effect on Sale Price of Residential Space from Different After Tax Returns on Total Investment (dollars per square meter)

Total Return on Sale Price for New Sale Price for Historic

Construction Building Investment

(after profit tax)

lG%

Retail fixed at $1,600 per m”

715

Retail fixed at $2,400 per m2

1,605 20% 815 1,910 30% 925 2,200 40% 1,035 2,485 50% 1,145 2,780

assumption of a typical or average level of deterioration as experienced by developers interviewed and the typical scope of restoration requirements. City policy can sometimes affect hard costs by establishing physi- cal restoration standards which may cause an increase or decrease in these costs.

Multiple Variables. It is clear that no single variable will provide an answer to the affordability problem, but that the combined effects of all can have significant benefits.

The cost of redeveloping the historic structures can be reduced by various actions, but no single step can bring those costs within the price range of new construction outside of the city center, and certainly not within the price range affordable by most of the residents of St. Petersburg. The assumption that the buildings arc given to developers free of charge results in the largest single reduction in price of residential space, but even then the price is almost twice as much as high quality new construction. Re- location costs clearly are the main reason.

Significant reductions in cost will be achieved only by a combination of steps. As part of the analysis, combinations of ao tions were tested. The costs of restoration were below those of high quality new construction only in scenario 3, which, although based on radical assumptions, is not out of the question.

The analysis did show that conversion of a residential historic building in the center to commercial use-ground floor retail and the upper floor offices-is far more feasible than residential use, and can be profitably done within the range of known prices for commercial space in good buildings in the city center (averaging about $2,500 per square meter). However, the demand for commercial and retail space is also small, and may become even smaller aher the economic collapse of 1998; much of that demand was driven by foreign business and Russian firms which are scaling back or at least taking a “wait and see” approach further investment.

to

7. Conclusions and Policy Options

On the basis of the foregoing analysis, the following conclusions may be offered: l Effective demand for any type of new

market-priced housing in St. Petersburg is not substantial. While there is undoubtedly a niche market for luxury housing in well located historic structures in the center of the city, there is a very small market in the city for housing in the price range produced by historic rehabilitation. It is likely that the size cf this market will be decreased even tbrther by the recent economic upheaval.

0 The Applied Regional Science Conference (AfW)/Blackwell Publishers Ltd. 1999

Butler, Nayyar-Stone and O’Leary, The Law and Economics of Preservation in St Petersburg 41

Table 8. Sensitivity Analysis of Different Sale Price Parameters’

Parameters/Scenarios

Profit Tax 34% (base rate) 30% 25% 20% 13%

Building Price (percent of total project cost)

20% (base rate) 15% 0%

Infrastructure Development Fee (percent of construction cost)

25% 15% 0%

Time 12 months (base period) 9 months 6 months

Hard Costs Base cost’ 0.75% of base cost 0.50% of base cost

Multiple Variables Scenario ld Scenario 2’ Scenario 3’

Notes:

Sale Price for Rehabilitated Historic Residential Building (dollars per square meter)

$2,200 $2,150 $2,100 $2,050 $1,975

$2,200 $2,050 $1,550

$2,200 $2,075 $1,900

$2,200 $2,080 $1,900

$2,200 $1,950 $1,675

$1,375 $1,060 $700

All sales prices are calculated for a 30% total return on investment (after profit tax). The sale price for residential space is calculated keeping the retail space price fixed at $2,400 per m*. Based on a typical or average level of deterioration and typical scope of restoration requirements. Scenario 1. Building price: 0, infrastructure fee: 0 Scenario 2. Profit tax: 13%, building price: 0, infrastructure fee: 0. pre-construction: 6 months. Scenario 3. Profit tax: 13%, building price: 0, infrastructure fee: 0. pre-construction: 6 months, hard costs: 50% of base.



l Historic rehabilitation can be more costly than new construction, primarily because of relocation costs, time costs and high restoration standards.

l Newly constructed housing outside of the center can be constructed and sold for considerably less than historic rehabilitation, enjoys a larger potential market, presents fewer risks and uncertainties and can provide attractive returns on investment.

l The economics of commercial space am more attractive for the private investor because of the market’s ability to bear the high price per square meter, but the demand in that market also is probably not large enough to have a substantial impact on the historic space in the short or medium term.

l Even though the regulations and procedures do not appear to differ markedly from practices in other parts of the world, present city practices on privatization and approval of historic rehabilitation projects are subject to complaints concerning excessive time delays and a high degree of subjectivity and uncertainty, which ate found to a much lesser extent in new construction projects.

l The city has some policy tools that may encourage additional private investment in historic rehabilitation, but aside from massive direct or indirect public subsidy, there is not likely to be any single step that will accomplish this objective; simultaneous changes to a number of policies will probably be necessary.

A premise of this paper has been that significant public financial support is not likely to be available for rehabilitation of historic buildings, and so the city must attract greater private investment by reducing the costs of development. Cost reduction is unlikely to proceed through direct cash out- lays in the form of subsidies or grants, but may perhaps be accomplished if the city- and perhaps the federal government-

foregoes certain income to which it may be entitled, including by reducing land and structure acquisition costs, infrastructure fees and certain taxes.

Additional steps which the city might consider include changes to tax policy, re duction of infrastructure and property acquisition fees, changes in land use policy, and more aggressive marketing of historic buildings as good investment opportunities.

Tax Policy. The city’s fees and taxes applied to redevelopment of historical properties might be reduced, although the recent economic collapse, attributed in part to in- adequate tax collection, will undoubtedly make the city exercise caution in granting further tax concessions. If the city reduced its share of the profit tax it might decrease the sale price of residential space in a historic building significantly, provided it could assure that the tax concession was passed through to purchasers. Many models exist in the legislation of other countries, ranging horn direct credits against profit taxes to systems of “accelerated depreciation” of r~ habilitation costs.

In July of 1998, immediately before the economic collapse, the city adopted several new tax rules to spur investment, including provisions on accelerated amortization of investment against the profits tax, reduction in land and building rents during reconstruction and reduction of real estate taxes (building and land) during reconstruction. In better times, these steps may perhaps produce results.

Infrastructure and Property Acquisition Fees. The city has gradually reduced i&a- structure fees, in particular by offsetting the amount developers spend on relocation. It may need to make further financial concessions to developers, including fnrther reductions in intiastructure fees and transferring building and land rights at reduced prices or at no cost to redevelopers.

The present approach of the July, 1998 law on Investments in Real Estate in


Butler, Nayyar-Stone and O’Leary. The Low and Economics of Preservation in St Petersburg 43

St. Petersburg is to base all building sales on market price as determined by appraisal, which, surprisingly enough at this late date in transition, is a new approach. Under this approach it is likely that the building prices will reflect the high infrastructure exactions, relocation costs, advanced state of deterioration and exacting rehabilitation standards. Thus many buildings likely will have no price other than the cost of redevelopment.

Relocation Policy. It is assumed that the costs of relocation are relatively fmed. Impressions of the city’s policy toward relocation are that it is generally fair and reasonable given the difftcult choices to be made. However, certain improvements might be considered which affect the costs of relocation without unfairness to the sitting tenants, including clarification and publication of the city’s policy and procedures on relocation in historic structures and creation of an efficient administrative mechanism for resolving relocation disputes, which now proceed directly to court.

Land Use Policy. The lack of transpar- ency and clarity in the process of approving historic preservation projects t?ustrates some developers. The July 1998 Law on Invest- ment in Real Estate provided a detailed and more transparent procedure for allocating development opportunities generally to the private sector, including some significant advances in the procedure for obtaining int?astructure connection rights. This process used to be controlled, and abused, by the local natural monopolies, which ex- tracted exorbitant economic rents from private developers. However, the new law does not address specifically the problems of historic rehabilitation, which are primarily problems of rehabilitation standards and design approval.

Other modifications to existing procedures that could improve the process include: review and modify the applicable center city regulations (VSN 2-89) to adapt to the changing nature of the real estate market

and provide more relevant guidance; consider whether the boundaries of the historic district are too wide; audit, correct (if necessary), and publish the accumulated preservation guidelines in an accessible document; audit the extensive lists of protected structures and remove as many questionable structures as possible from the lists; and establish minimal regulations for less valuable structures.

Marketing Policy. The city may have to take a more direct role in marketing its historic buildings as investment opportunities. Aside from the obvious benefits of making the opportunities better known, systematic marketing of the buildings could reduce risk and time for the private sector by bringing to market a “packaged” product which has already passed through all city processes and been evaluated.

The city’s July, 1998 investment law provides for creation of a “register of investment objects,” which has existed informally but now has legal status. The register would be a detailed list of development opporhmi- ties available to the private sector, including technical specifications and deal terms, and would be published on a regular basis. Ac- cess to the information would be available to all investors on an equal basis.

After the events of September/October 1998 Russia and St. Petersburg have experienced a setback, and immediate concerns about me1 and food may have placed concerns about preserving the city’s cultural heritage on the back burner, at least for the short term. Nevertheless, throughout the Soviet era, through good times and bad, the city and its concerned citizens have demon- strated an enduring commitment to preserving the historic environment with the lim- ited resources available, and we can expect that commitment to continue with a new emphasis on the role of the private sector.



We wish to thank Ludmila Kolokolnikova of the Urban Institute-Moscow for her invalu- able assistance gathering data and conducting interviews for this article. Thanks also go to Marina Istomina and Ephim Schluger of the World Bank for sharing their information and expertise. Special appreciation to the local experts in St. Petersburg, particularly Misha Berezin and Oleg Matyukhin of AUREC and the researchers of the Leon- tief Center, who provided vital information

for the article. Finally, thanks to Raymond Struyk and Olga Kaganova of the Urban Institute for their suggestions and feedback on our work. Research for this article was funded by the United States Agency for In- ternational Development.

Final version received November 1998.

Correspondence should be sent to Ritu Nayyar-Stone at: mayyar(@ui.urban.org

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Business St. Petersburg. 1996. Moscow Tears Away Control for Petersburg Monuments. September 17. p. 2.

Butler, Stephen B. and Sheila O’Leary. 1994. A Survey of the Emerging Land Law of the Russian Federation. (Columbia University) Parker School Journal of East European Law, Vol 1: 541.

Diamond, Douglas. 1996. Economic Factors Affecting Land Uses on Block 130 of Central St. Peters- burg: Report to Bancroft, Inc. June.

Drobyshev, E.Y., et al. 1996. Analysis of the Real Estate Market in the Center (Historic Part) of St. Petersburg. St. Petersburg Foundation for Development of Real Estate Market.

Kaganova, Olga. 1995. Discussion Paper: Methodological Problems of Appraisal of Undeveloped Land in Russian Cities. Washington, D.C.: The Urban Institute. December.

Korchagina, Valeria. 1996. St. Pete Rents. Russia Review, October 7: 34. Moore, Adrian. 1995. Restrictions of Monumental Size. The Moscow Times, August 8: 16. Nedvizhimost Rossii. 1995. October. (in Russian) Planning and Development Corporation (PADCO). 1996. St. Petersburg Center City Rehabilitation

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