ARCO VARA AS - NASDAQ OMX Baltic

and non-residential projects for approximately 30 per cent of all development projects in terms of
book value. The Group’s aim is to reach a market position where it develops approximately 10 per
cent of the annual new apartment production in every capital city where it operates.
Non-residential projects are intended for sale to either investors or businesses. As a rule, Arco
Investeeringud sells all its projects prior to or upon completion (closed position development) and it
does not develop rental properties for its own account.
The development division is linked to the Group’s services and construction divisions. It often uses
agency services to sell completed projects, although such own-account sales do not account for more
than 10 to 15 per cent of Group’s total agency revenue. Similarly, the development division uses the
services of the construction division, provided that the price is competitive. The intra-group
construction services account for approximately 50 per cent of the construction division’s revenues.
Description of business process
The development process begins with initial market analysis and identification of potential projects.
Group’s project managers co-operate with the services division, which has the best understanding of
the overall market situation and demand, and which understands the characteristics of the region where
a proposed project is located. The project manager studies the local building regulations, identifies the
general principles for the planning and building in the region, and studies the urban development plan
for the area (when available), which provides the framework for the spatial development of the rural
municipality or city. When a suitable location is found and the project type determined, the project
manager prepares an investment memorandum which is presented to the Supervisory Council of the
division for approval. Analysis process also contains stress testing of the project’s profitability for a
possible stagnation or correction in real estate prices.
Once the project is approved, the division commissions the detail planning of the project, which is
required for obtaining approvals for building activities from the local government authorities.
Arco Investeeringud solicits bids from the pre-selected architectural bureaus and chooses one to
prepare a proposal for the detail planning for the project.
The detail planning forms the basis for land use and building activity on a given parcel of land in a
rural municipality or city. It details the division of land units, determines the construction rights
attaching to each unit, delineates the area that can be occupied by buildings and determines the areas
reserved for streets and other infrastructure. The construction rights for each land unit specify its
intended use, maximum number of buildings, maximum built area and maximum height of the
buildings.
The procedure for the preparation and adoption of detail planning involves several procedural steps
and stages, the length and outcome of which may sometimes be difficult to predict. Planning is the
responsibility of the city or municipal administration both in Estonia and Latvia, and commencing
detail planning requires a formal decision by the city or municipal council or another municipal
authority. The developer normally commissions the detail planning for a project it proposes to
develop. Working drafts of the detail planning proposal need be coordinated with various
administrative agencies, such as the heritage and environmental protection authorities, and must be
made publicly available for comments and objections. Also, public hearings must be held in the course
of the procedure. Comments and objections of interested parties are to be taken into account to the
extent possible. In some cases a strategic environmental impact assessment must be prepared as part of
the preparation for detail planning. Detail planning may also require an approval of the governor of the
county. The municipal authorities can adopt the detail planning only after all these steps and
procedures have been successfully completed.
According to the Group, the detail planning approval can take up to three years, and sometimes even
longer. The process is less time-consuming in municipalities outside Tallinn and overall the process
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