The Saga of the Three Bogatyrs: How Unfinished Residential Complexes Remain Uncompleted

| 1 November 2021

Among the injured investors was Pavel Somov – at that time an employee of the Kievrekonstruktsiya company, which was building this complex. Pavel Somov explains how events developed from the very beginning of the conflict, and why it has not yet been exhausted, specifically for Mind – from personal experience.Among the injured investors was Pavel Somov – at that time an employee of the Kievrekonstruktsiya company, which was building this complex. Pavel Somov explains how events developed from the very beginning of the conflict, and why it has not yet been exhausted, specifically for Mind – from personal experience.

"BACKGROUND OF THE DISEASE"

The construction of the Tri Bogatyr residential complex started in May 2005. The developer in the project was JSC “Joint-stock company” Kievrekonstruktsiya “. Its shareholders were originally brothers Leonid and Dmitry Kryuchkov.

During the construction of the residential complex, the law on financial and credit mechanisms was applied (it regulates the attraction of investments from individuals and legal entities in the construction process through the FSF – Construction Financing Fund. – Mind). According to the law, the developer himself cannot accept money from investors. Instead, they are accumulated, relatively speaking, in a separate bank account. The accumulating bank of funds cannot function without the manager of the FSF, which, in turn, can be either the bank itself or a financial company with an appropriate license.

Initially, the emergence of this mechanism, as well as the law on it, was facilitated by the HC “Kievgorstroy”. And for some time she was almost the only one on the market who could legally accept money from investors during the construction process. All small developers were seriously puzzled by this. Then they began either to register their financial companies and obtain a license to manage the FSF, or to negotiate with banks.

So, in order to implement the “Three Bogatyrs” project, the developer agreed with KB Zakhidinkombank to be the manager of the FFS. According to the law, the steward received quite large powers. And “Kievreconstruction” was afraid to transfer full control into the hands of the bank.

According to the “classical” scheme, the manager of the created FFS could sell investment objects – apartments, non-residential premises and parking lots. In this case, “Kievrekonstruktsiya”, by power of attorney from the manager, entered into an agreement on participation in the FFS, selling square meters.

Prior to the start of the project, it was clear that the estimated cost was quite high. This became clear from the section of the JK project examination, which received a positive conclusion. And if we weigh the market prices at that time, then the price that was at the start of sales barely covered the cost price, without giving any profitability. And the factor of delaying the construction time was directly proportional to the economics of the project.

This object was saved by the rapid rise in prices for apartments from 2005 to 2008, when the price of a “square” soared four times. But in 2008 the situation changed significantly. This was the first wave of crisis, on which the problems of disorganization of the market “surfaced”. And the scandal with the “Elite Center” was only the first snowdrop.

The fall. Episode 1

At the end of 2008, the “Three Heroes” facility was still under construction, the stage of completion was about 80-85%. There were still unsold square meters – mainly parking lots and some of the apartments.

But suddenly the bankruptcy procedure of the developer – the Kievrekonstruktsiya company – began, connected with a conflict between shareholders, which arose in a completely different business. And in the midst of the scandal with the Elita Center, the construction of the Three Bogatyrs stopped altogether.

Considering the stage of readiness of the object and the fact that many buyers of apartments came directly from the shareholders, somehow it was hard to believe that the construction would stop. Not such a large amount was needed in order to complete everything, even within the framework of the financial flows of Kievrekonstruktsiya itself. Therefore, personally, as an investor, I was absolutely calm. But everything turned out to be quite different.

In anticipation of the freeze on the construction of the facility, the author of these lines submitted reports at meetings: how many meters we have not sold, at what price they can be sold, what additional payments will be needed, etc. The budget was sufficient to complete the construction of the houses according to the estimate given by the general contractor. The general contractor was the Rembud company, a pocket structure of the Kryuchkov brothers. But just a month later, during which four such meetings took place, suddenly the estimate for the completion of the construction increased three times – and there were no longer enough funds.

It is important to note here that the correctness of the presentation of information and the correctness of calculations are, in principle, a painful point of the construction market in Ukraine as a whole.

The rescue. Episode 1

In the spring of 2009, when the bankruptcy procedure for the facility was in full swing, and the shareholders no longer took much part in its fate, the investors (among whom was the author of these lines) had the idea to create a housing construction cooperative (HSC). In our case, the task was, at the expense of investors, to make up for the lack of funds to complete the construction of houses. And this step was more a consequence of the circumstances taken under the pressure of fear that the unfinished building would end up in the liquidation mass in the process of bankruptcy.

Formally, the investors had a “defender” of their interests – the construction financing fund. According to the law, in the presence of FFS of type A, the developer, that is, Kievrekonstruktsiya, had to finance the construction of this residential complex in full and complete it, regardless of how many principal investors contributed funds. Roughly speaking, the remaining apartments will be sold or not.

If suddenly the manager transfers money to the developer, but he does not build – this is a risk. The developer faces bankruptcy – this is a risk. In such risky situations, the law comes into force. When the FFS is created, property rights to all objects (a list of investment objects is formed – and this is an addition to the general agreement for the construction of this house), and all these investment objects are transferred to the mortgage manager. The manager thus protects investors, and people who took out loans gave their property rights to creditor banks in a secondary mortgage. In principle, everything is logical.

The fall. Episode 2

But in practice, things went wrong. In the summer of 2009, the manager sent a letter to the Kievrekonstruktsiya company: “Sorry, you have started bankruptcy, the law on the FFS comes into force”. At this time, Kievrekonstruktsiya has all the materials, equipment and work on its balance sheet, which is about UAH 230 million.

There were no guarantees that the construction site would not fall into the liquidation mass. But Zakhidinkombank, as a manager, took over all property rights. An acceptance certificate was signed between the developer and the bank, and the latter received absolutely everything – materials and so on, as a balance sheet item. Now the steward, according to the law, had to find a new developer who would bring this object to completion for his own money.

hat new developer, being of sane mind, would take such a risk – an object without a balance of completion. When there is simply not enough square meters to complete the building. And there are no amendments in the law, there are no changes regarding this part and the ways out of such a situation.

The rescue. Episode 2

Then, on May 22, 2009, on the basis of an initiative group of investors, the servicing housing and construction cooperative “Our House” was created, which from that moment became the official developer and assumed property rights, i.e. took the unfinished building on the balance sheet.

The general meeting of the participants accepted the calculations, according to which the additional payment for each apartment was to be $ 3-7 thousand, which is not so much against the background of the funds already invested at that time. People started donating money. “Our house” accepted this money, bought free square meters for them, which still remained with the steward.

The manager sent this money in transit through the builder “Our House” to the previous construction contractor. The stage of readiness was high, and the confidence of success was just as high. As a result, construction has resumed. The monolithic part, two floors of underground parking, two floors of non-residential premises have been completed. Almost all the work on the gas boiler house, gas connection, and waterproofing of the parking lot were carried out.

The fall. Episode 3

The crisis played a disastrous role: people’s financial reserves were depleted, the remaining free square meters, which were in the facility, were not sold. And at this unfortunate moment, a temporary administration was introduced into the bank, which was the manager of the FFS. As a result, payments have stopped altogether.

ZhSK got into an inexplicably long train of proceedings. All this time, the rights to the land plot for the residential complex remained with the previous developer company – “Kievreconstruction”. Fears that the land could be given to the liquidation mass, and investors could lose everything, grew.

The efforts of the investors who besieged the city administration ended with the decision of the Kyiv City Council session to transfer the land plot under the object to the ownership of the servicing cooperative “Our House”. It seems to be like a victory – the land is there, the balance sheet is unfinished, everything is in our hands. But the bankruptcy procedure that took place at that time once again complicated everything. After all, it is difficult to do anything without the manager of the construction financing fund. Anyone who invests even a penny in this construction without a new manager is at 100% risk. And 99% that this money will freeze until a new ruler appears.

 

The only way to complete the building with the help of investors is only if the FSF is closed. And this can only be in the case of putting the facility into operation. So we got a vicious circle.

On April 9, 2019, several principals blocked activities in the courts to complete the construction of the facility. (Explanation – “this construction began through the creation of the FSF, but it was suddenly continued without the FSF. This is impossible”). As a result, we were forbidden to carry out any work on adjusting the project, taking into account the completely new existing building codes, etc. And now this construction site is a hostage to lawsuits.

Subtotal: how to break out of the vicious circle

We now have a new facility management. It is based on the preparation of all the initial information to attract a new ruler, namely: areas (sold, vacant); project documentation, brought in line with the current standards; estimate for the completion of construction – the so-called balance sheet, confirmed by official documents.  

Here it is necessary to say a few words about the necessary adjustment of the project documentation. Since the objects started almost 20 years ago were built in accordance with the old building codes, then in order to put them into operation, you need to go and approve at the board of the Ministry of Regional Development the deviations in the works actually performed according to the old standards from the existing standards.

For example, according to the new existing norms, one of the three “candles” in the housing estate will have to be removed, since it already contradicts the new norms of inclusiveness. As a result, some of the affected investors may lose their meters altogether. This, of course, is hardly possible. But this situation shows the absolute imperfection of legislation and the inaction of state bodies as a regulator of this process.

In order to complete the construction in accordance with the current standards, everything must be designed in accordance with them. And this part of the work has already been done. According to the corrected project, the cost of completing the house has been calculated. It amounts to UAH 127 million. But prices on the building materials market have increased significantly over the past six months, so indexation in the relevant sections is possible.


We received from the archives of the National Bank an officially certified copy of all primary documentation – so that we can see who bought what, when and from whom. From the Deposit Guarantee Fund, we received statements on the movement of all funds in order to check whether there were really sales of apartments in the complex for dummies. All these documents are now in court. Thanks to a scrupulous analysis, we made sure that 90% of the apartments in the residential complex are actually sold.

All that now remains is to go through the section of the Ministry of Regional Development, where the deviation from the norms will be approved, and after the completion of construction work, to commission the facility in accordance with the new technical and economic indicators. Then you won’t have to demolish anything. This is the first step. Step two is to find a steward. Step three – the manager will already find the developer.

Although, most likely, it is us, the investors, who will have to find it and collect money for the completion. Property prices are going up, which is good, and now is the perfect time to finish building quickly. This requires a steward. But, unfortunately, none of the current managers is interested in our facility with such a balance: the market is growing, there are many new interesting projects that are being implemented in Kiev and the suburbs. So the position of commercial banks and financial companies is absolutely logical here. All that remains is to establish a financial company, obtain a proper license and save the object, investors and their square meters.


At the same time, the question is open why the state cannot allocate a state bank – for example, Ukreximbank, Ukrgasbank, Oschadbank – or a municipal utility company in the capital that conducts such economic activities? After all, “Three Heroes” is just a small particle of the huge problem with unfinished construction in Ukraine.