## **Financial Leverage Investors**

Private (mortgage) debt / leveraged financing of rental projects is available in the region through bank lending to professional private landlords, especially in the fast-growing mortgage markets of Lithuania and Poland, and increasingly in Romania and Russia. Most mortgage lenders, owing to lack of experience, have not yet started to differentiate their underwriting between investment<sup>65</sup> and owner occupation, which should imply favorable initial interest rate conditions for leveraged investors of income-producing real estate. Some, however, have begun to look at rental projects proposals as part of commercial lending through their corporate departments rather than through residential mortgage lending. Mortgage finance plays a significant role in Poland, where both cooperatives and the TBS system have access to long-term loans for financing new construction with public guarantees. There is still very little public financing in the residential sector, with the exception of a few international open property funds active in the main urban centers in upscale apartment construction.

Table 10 summarizes the assessment. Interpreted jointly with our LSMS/HBS results presented in Table 3 it suggests that greater professionalism and activity of private investors develops in tandem with the size of the private rental market. An important determining factor for both to which we turn now is the legal, regulatory and tax framework for rental investment.

# **Legal, Regulatory, and Taxation Frameworks**

## **Governing Laws and Regulations**

The civil code is typically the main source of law governing contracts, including specific provisions on rental agreements. In the studied countries, however, specific sections on residential rentals exist only in Lithuania, Poland, and Russia. The Armenian, Romanian, and Serbian civil codes either do not contain relevant sections or make only cursory reference to rental relationships.<sup>66</sup> Because of the undeveloped legal framework, most private rental relationships are governed by contractual provisions, with recourse to common courts in case of dispute. Needless to say this way of regulation is quite inefficient, protracted and uncertain.

## **Contract Establishment, Terms, and Enforcement**

# _Intermediation, Formulation, and Recording of Rental Agreements_

In the low- and middle-income rental market, the predominant intermediating mechanisms are newspapers and the Internet.<sup>67</sup> Rental housing brokers are rather infrequent in this market, as are formal individual contracts. Nevertheless, Lithuania, Poland, Romania, and Russia have active residential broker markets, which cover rental dwellings. Rental brokers serve typically the upscale private rental market for such clientele as young professionals, managers, and foreigners. Given the typical short lease terms, brokerage fees are between one month’s rent (Lithuania,

> 65 The terms “private” and “public” in relation to debt investment refer to the tradability of the claim rather than the identity of the holder of the claim. Bonds are public debt, while loans are private debt.

> 66  For more information see Annex 1.

> 67  Rental housing demand is mostly expressed by young households who prefer using the Internet.

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