The current practice and procedures of real estate management in Riga show a completely unsuccessful property governance model, which does not correspond to modern trends in real estate governance. This model is decentralised and fragmented; there are no standardised governance principles, no cost analysis processes regarding specific assets, no clearly defined tasks and performance indicators. After the audit, the State Audit Office concludes that the Riga City Municipality perceives real estate governance in a too narrow sense, more like property management only. Furthermore, other market participants whose business is related to real estate do not understand that model.
There is no good practice in property governance
The Riga City Council Property Department (hereinafter referred to as the Department) manages approximately 30,000 real estate properties worth 1.5 billion euros out of the 2.1 billion euro- worth real estate accounted in the municipality by spending at least 30 million euros on various property management processes every year.
Real estate governance begins with the complete identification of real estate sites. The auditors found significant deficiencies in the accounting of the property of Riga City Municipality. For example, the municipal real estate inventory database included buildings that the auditors did not find in nature during the audit, for instance, there is a cemetery area instead of a residential building at 12 Lizuma Street while the administration building located at 15 Tālavas Avenue and a garage located at 356G Brīvības Street recorded do not exist at all.
The audit revealed that the City Municipality does not know the totality of all its properties and does not know their technical condition and financial indicators. It leases properties at low prices, resulting in lower budget revenues and more investment in maintenance. The City Municipality has also not determined the scope and frequency of real estate maintenance activities nor collected complete information about it.
Good practice in real estate governance suggests that properties should be divided into three primary portfolios: basic (which the municipality needs at a given time), the asset (which may be required in the future), and the disposable portfolio (which will not be required). The audit results show that a part of the real estate registered by the Department is not necessary for the implementation of municipal functions, but the Department has not assessed the perspective of their use following the procedures and criteria the Department has set itself. It is possible that property that is not necessary to implement municipal functions currently would be needed for businesses.
“Rīgas serviss” Ltd, “Rīgas pilsētbūvnieks” Ltd, “Rīgas namu pārvaldnieks” Ltd, and “Rīgas nami” Ltd provide municipal real estate management currently. The State Audit Office emphasises that the City Municipality must elaborate a reasonable and suitable real estate governance model, as the existing one has developed historically. The municipality has not assessed which institution could manage its real estate more economically, efficiently, and effectively, including real estate leasing and real estate management and development.
Repair and restore forgetting about fire safety
Uncoordinated governance also results in incomprehensible repair and development priorities, a lack of information transparency, illogical decisions, and uneconomic actions. The facts obtained in the audit show that the maintenance of buildings in Riga does not aim at their safe and sustainable use. There are repair works carried out without determining prevention of which damage and in which objects were a priority or should be performed extraordinary, as well as were not segmented according to the impact on the safe operation and maintenance of buildings. The auditors admit that such practices do not preclude the risk to their users’ lives and health, nor do they ensure preserving the buildings in the future.
For example, the City Municipality has carried out various maintenance and improvement works necessary for educational institutions’ operation. Still, the auditors must admit that the results do not facilitate buildings’ safe operation and do not prevent, for example, potential fire hazards. There is no fire detection system installed, or it is outdated and does not comply with the statutory requirements in at least 30 municipal general education institutions. Simultaneously, the City Municipality has carried out various maintenance and improvement works in those educational institutions without investing in establishing a fire detection system, although it is a mandatory requirement. For example, in the Pushkin Lyceum, the school museum premises are renovated, the school territory is improved, and paths are renovated. In its turn, in the Riga Secondary School No 93, an entrance, a sports field, a gym and kitchen facilities were renovated, but the fire detection system has not been introduced in educational institutions yet.
Entrepreneurs are dissatisfied with the availability of information
The economic operators intending to buy or rent property from the City Municipality also face fragmentation and a little chaos. Real estate developers cannot easily obtain existing information about municipal plans at one place about who, where, what, and when would build. One must search for information about various properties in various sources such as the City Council administration, the Property Department, the Housing and Environment Department, municipal enterprises, or those institutions’ websites.
The reason is that the City Municipality has established several institutions with administration and real estate management experts, and these institutions have the same or similar tasks in the area of real estate governance. During the audit, the State Audit Office has listened to private sector economic operators’ opinions, which pointed to the need to improve the availability of information on vacant real estate in the municipality. The Latvian Chamber of Commerce and Industry also indicated that all possible channels for publishing information should be sought, as posting information on the City Municipality’s website was not enough. At the same time, the local community, for example, might be interested to know that the City Municipality owns several garages in the city centre that are not managed, rented, and are decaying.
Housing issues of community resolved in favour of other municipalities
The City Municipality has not set criteria, priorities, or plans for the purchase of the real estate, resulting in underestimating the long-term impact of municipal decisions and absurd situations. For example, the City Municipality disposes of property, but then it purchases the same object from an individual, thus losing at least 131,226 euros during the transaction. The absence of plans also leads to other incomprehensible decisions.
To solve the housing issue, the Riga City Municipality has purchased residential buildings from private real estate developers outside the administrative territory of the City of Riga, for instance, in Sigulda, Ādaži, Baldone, Olaine, and Silakrogs in Ropaži Region. As a result, those residents of the municipality whom one has assisted in resolving their housing issues in this way have declared their residence quite naturally in a local or regional government of the new place of residence after receiving the apartment. Consequently, the local or regional government where the resident is declared also receives the budget revenue from personal income tax contributions, and that is not Riga anymore. Nevertheless, Riga still maintains those properties and finances the elimination of various accidents.
The auditors conclude that by developing real estate in its own territory and building residential buildings on the land plots it owned, the Riga City Municipality was able to gain significant budget revenues from personal income tax contributions. Calculations show that starting from 2015, the Riga City Municipality has not obtained budget revenues of at least 1.4 million euros from only three residential houses purchased outside the administrative territory of the Riga City Municipality. Still, “Rīgas pilsētbūvnieks” Ltd still covers credit liabilities for the purchase of five buildings, whose outstanding lump sum exceeds 7 million euros with a maturity of up to 2028.
Recommendations for arranging real estate governance
The State Audit Office recommends the Riga City Municipality to identify all its real estate and its technical condition, perform financial analysis of governance and real estate objects, and divide properties into portfolios according to the most current real estate governance trends aiming to introduce a conformable real estate governance strategy and select the most appropriate management model.