review of urban & regional development studies 8 (I 996)

PRIVATIZED HOUSING AND THE DEVELOPMENT OF

CONDOMINIUMS IN CENTRAL AND EASTERN EUROPE:

THE CASES OF POLAND, HUNGARY, SLOVAKIA, AND ROMANIA

Christopher Banks, Sheila O’Leary, and Carol Rabenhorst

The Urban Institute, 2 I00 M St NW, Washington, D.C. 20037, USA

Received April 1996, final version May I996

This paper looks at the housing sector reform in Central and Eastern Europe and examines the progress to date in housing privatization and policies aimed at improving the management and condition of the existing housing stock through the establishment and operation of the condominium form of ownership. The paper compares and analyzes approaches taken in four countries with regard to four issues: (I) the legal framework and implementation strategies; (2) the role of local government housing strategies in supporting the development of viable condominium associations; (3) property management of privatized housing; and (4) financing rehabilitation and capital repair projects for condominiums. Findings include the need for a clear legal framework, competition in the property management markec more supportive local government policies, and public sector support in tackling rehabilitation finance issues.

I . Introduction

Housing will play an important role in the economic restructuring of the new democratic states of Central and Eastern Europe (CEE). No other sector of the economy directly affects the lives o f so many people. From the time major economic reforms began in the late 198Os, there have been two main initiatives relating to housing: (I) decreasing government control and subsidies to the housing sector, and (2) increasing quality and choice of housing for the residents. The basic strategy common to both initiatives for reform has been housing privatization - the transfer of ownership o f the existing state-owned housing stock, together with responsibility for maintaining and operating it, to the former tenants. I

Across CEE and the former Soviet Union, apartment buildings were privatized by transferring ownership of an individual flat or unit together with an interest in the common property (the roof, stairways, foundation, mechanical and structural systems, and so forth), which usually included the land under and surrounding the building. This legal form of ownership is known as “condominium.” State-provided and owned multifamily housing was so pervasive throughout CEE, particularly in urban areas, that a solid legal and economic framework for the development and operation o f condominium housing is critical to the success of housing reform. While there are fundamental similarities in housing reform programs throughout CEE, differences in the legal, economic, and

I In Poland, Hungary, and Slovakia, housing privatization was preceded by transfer of control and responsibility for maintenance from the state to the local governmenr In Romania, the centnl government sold the housing directly to the tenants; maintenance continued to be the responsibility of tenancs’ associations established by the state and in operation since 1977.

138 C. Banks, 5. O’Leary, and C. Rabenhont, Privatized Housing in Central and Eastern Europe

political situation in each country have resulted in mixed success for housing privatization and condominium development efforts.

A number of researchers and policymakers have analyzed the reform of the centrally planned and administered housing sector in the CEE the authors have relied on some of this earlier work for this paper. Early research on reform of the housing sector in Central and Eastern Europe, such as the work of Telgarsky and Struyk (I 99 I), Renaud (I 99 I), and Kingsley et al (I 993), focused on the “first stage” reform issues such as privatization of state housing and decentralization of control and financial responsibility for the stock. Later, analysts began to look at more narrow housing sector issues in country-specific settings. The work of Follain et al. (I 993) on housing finance in Slovakia, Mikelsons (I 993) on housing allowances in Slovakia, and the work of Rabenhorst (I 992; Rabenhorst I994a; Rabenhorst and Tatian, 1994) on condominiums in several CEE countries are examples. As the end of the f i rs t stage of housing reform in CEE approaches, it is the appropriate time to reflect on the accomplishments to date and set an agenda for the next stage of reform. This work has begun in a recent book edited by Struyk (1996) and in an upcoming cross-country analysis o f housing transition data compiled by Metropolitan Research Institute in Budapest and supported by the United States Agency for International Development.

This paper attempts to synthesize the results of condominium developments in CEE since the late 1980s. It compares and analyzes approaches taken in four countries to housing privatization and condominium formation, and offers conclusions about the success of these approaches based on the likelihood of improvement in living conditions for the residents. Section 2 provides a summary of the housing sector and housing reform initiatives undertaken during recent years in each country. Section 3 describes the establishment and operation of condominiums and owners’ associations in each country with regard to four issues: (I) the legal framework and implementation strategies; (2) the relationship between local government housing strategies and the development o f condominiums and owners’ associations; (3) property management of privatized housing; and (4) financing rehabilitation and capital repair projects for condominiums. Section 4 offers conclusions from the experiences in the four countries and suggestions on where the focus of future assistance efforts should be placed to provide the most effective support for condominium development.

2. The Housing Sector and Recent Housing Reform initiatives in Poland, Hungary,

Slovakia, and Romania

While reform of the housing sector has been accorded a higher priority in the overall economic reform programs of some countries than others, the general strategies adopted have been similar throughout most of CEE. Each country has progressed in its efforts to achieve housing reform to the point where it must address common issues affecting the management and maintenance of the large (and growing) stock of privatized multifamily housing. Although the countries discussed in th is paper began the housing reform process a t different stages, each has used three principal strategies to develop an owner-occupied multifamily housing sector:

Decentralization - transfer of ownership and financial responsibility for the state rental stock from the state to the local governments, with corresponding decreases in state government subsidies for construction, utilities, and maintenance;2 Privatization - transfer of ownership of flats to sitting tenants, generally with a legally mandated right to purchase under extremely favorable terms (below market price, small down payment, minimal interest rate, long payout schedule); and

’ With regard to transfer directly to tenants in Romania, see footnote I. In that country, Sfate construction and utility subsidies are now declining, as in other countries.

C. Banks, S. O’Leary, and C. Robenhorst, Privatized Housing in Central and Eastern Europe 139

Rental Sector Reform - reform of the non-privatized rental sector through phase out of rent control, institution of housing allowances, and diminution of tenants’ rights.

2. I Decentralization of the Housing Sector

Hungary and Slovakia were relatively early starters in housing sector reform. Hungary cut central government subsidies to the housing construction industry in 1983, and began to grant increased control over the housing sector to local governments in I99 I with passage of the Act on the Transfer of Property, which shifted ownership and primary financial responsibility for the state housing stock and related maintenance companies to local governments (Hegedus et al, 1996). This transfer was accompanied by a corresponding decrease in central budget subsidies for maintenance and utilities. Slovakia followed a similar plan. In I990 and I99 I , CSFR took several important steps forward, beginning with a housing policy statement which endorsed restructuring of the sector along market principles, a phase-out of the state construction system, and a program of rent increases3 State funding for housing construction was substantially reduced, except for completion of projects h process. State-owned housing not subject to restitution was transferred to the local governments, followed in I993 by the termination of state operating and maintenance subsidies for rental housing (Kingsley and Mikelsons, 1996).

Between I990 and 1992, Romania privatized about 80 percent of the state multi-family housing stock through direct transfers to sitting tenants without the interim step of transfer to the local government. Most housing still owned by the national government is subject to restitution. Since 1977, the state stock has been managed by tenants’ associations rather than state maintenance enterprises as in other CEE countries. While unique to Romania among these four countries, this system achieved the common purpose of getting the state out of the business of managing the multifamily housing stock. The administrator of the tenants’ associations collects rent and utility fees from residents (whether tenants o r owners) based on the proportionate share of the building the resident occupies. Capltal repairs and routine maintenance are made by contractors hired by the administrator and paid for by the residents. Individual residents are responsible for maintenance of their own units.

The Government of Poland focused early housing sector reforms from 1990 to 1992 on elimination of state construction and finance subsidies, replacing them with a market-oriented system to encourage lending for mortgage and construction finance and the development of private housing (Hosier et al, 1995). Other reforms in the housing sector mirror approaches adopted in other CEE countries: decentralization of authority over the state housing stock, privatization of the stock (albeit at lower levels than other countries), and reduction in state subsidies for new construction and operating subsidies for the rental stock. More recently, Poland has addressed rental sector reform through adoption of rent increases and housing allowances, and has introduced a condominium law.

2.2 Privatization

After transfer of the stock out of state government control. the second major initiative CEE governments undertook was selling the rental stock to sitting tenants. In Poland, privatization began in the 1970s and nearly 5 percent of the communal stock had been sold by I988 (Hosier et al, 1995). Privatization has continued at a modest but increasing pace since then, with an estimated 13

The Czechoslovak Socialist Federated Republic dissolved peacefully in January 1993 to be replaced by the independent countries of the Czech Republic and Slovakia.

140 C. Banks, 5. OLeary, and C Rabenhonf Privatized Housing in Centrol and Eastern Europe

percent of communal and enterprise stock being sold by the end of 1994.‘ In Slovakia, privatization was slow to begin after the privatization law was passed in 1993, but has been steadily gaining momentum and is expected to result in transfer to private ownership of at least three-fourths of the former state-owned multifamily stock. Most local governments plan to keep 20 to 25 percent of the housing stock for social purposes. By the end of 1995, approximately 10 percent of the stock had been sold? In Romania, most of the stock was privatized between I990 and 1992, with privatization rates in the multi-family stock exceeding 90 percent in most urban areas (Table I) (Conway et al,

The slow start for most privatization programs can be attributed to a number of factors: uncertainties about the obligations and advantages of ownership, nominal rents, strong tenant rights, an undeveloped housing market, and the poor condition of the stock. As populations become more familiar with the benefits of property ownership, including the opportunity to control living conditions as well as the acquisition of a valuable asset, and as legal reforms clarify and solidify ownership rights, most tenants are expected to buy. Thus, the privatization programs will result in mass owner-occupied housing markets throughout the region.

In all four countries, legislation provides that owners acquire ownership of their individual unit and a proportionate share of the common property. Condominium laws that formalize the legal relationship among owners and delineate their rights and responsibilities exist in Hungary, Poland, and Slovakia, and a new condominium law is expected to be adopted in Romania in the fall of 1996. (Section 3. I contains a discussion of the legal framework for condominiums in CEE.)

1995).

2.3 Reform of the Rental Sector

Whether by sales to tenants o r transfer to local governments. very little state-built rental stock is owned by the state. However, there is still a substantial public rental sector, particularly in urban areas in Hungary, Poland, and Slovakia, and the state maintains control of public rental policy. although local governments in Poland and Hungary have been allowed increasing autonomy in setting rents. The rental sector is characterized by rents set far too low to cover operating and maintenance costs, strong tenants’ rights with lim ited possibilities for eviction, and poor physical condition of the stock resulting from years of poor maintenance by the state maintenance enterprises. Understandably, local governments are eager to increase revenue by raising rents, which at least theoretically would enable them to improve the quality of the rental stock

Increasing rents to a level that would cover full operating costs is a strategy adopted in Poland, Slovakia, and Hungary. In Poland, the 1994 “Law on Renting Residential Property and on Housing Allowances” granted local governments the authority to raise rents up to a ceiling of 3 percent of estimated replacement value. In 1992 in Slovakia, the state raised rents to a level sufficient to cover then current operating and maintenance expenditures. However, rent levels have not increased since then and are no longer adequate to cover current expenditures. Since I99 I, Hungarian local governments have had the right to set rents, although until recently few have taken steps to increase rents to a cost-recovery level.

The greatest obstacle to the political acceptance of rent increases is the belief that tenants simply do not have the means to pay the increases. In Hungary and Poland, programs to increase

‘ Enacted in June 1994, the Law on Separation of Housing from Other Assets of State Enterprises allows the transfer of enterprise housing to the municipality where it is located, forcing local governments to accept the transfer and privatize the stock or rent it

T h i s figure is based on calculations provided by lnstitirt byvania, a housing research firm in Bratislava.

C. Banks, S. O'Leary, and C. Rabenhonc Privatized Housing in Central and Eastern Europe 141

Table I Number and Percentage of Units in State Stock Privatized

Nationally and in Select Cities in Hungary, Poland, Slovakia, and Romania in 1991, 1993 and 1994 (cumulative, at year end)

1991 I993 I994f

Hungary

Budapest

Miskolc

Szeged

Poland

Warsaw

Krakow

Pozna

Slovakia

Poznan

Korn i r n o

N o v i Dubnica

Romania

National Units privatized % state stock privatizeda

Units privatized % state stock privatized

Units privatized % state stock privatized

Units privatized % state stock privatized

National Units privatized % state stock privatized

Units privatized % state stock privatized

Units privatized % state stock privatized

Units privatized % state stock privatized

National Units privatized % state stock privatized

District V Units privatized % state stock privatized

Units privatized % state stock privatized

Units privatized % state stock privatized

81asov - Units privatized % state stock privatizedg

Oradea - Units privatized % state stock privatized

I 54.84 I 2 I .5%

74,747 19.0%

10,980 43.4%

4.361 22.3%

188,800 9.3%

55,352 25. I %

10,766 18.8%

2,372 7.1%

d a d

0

0

0

16.510 29.4%

25,328 60.3%

287,365 39.9%

162. I62 4 I .2%

13,925 55.0%

5,162 26.4%

217.000 10.7%

57.067 25.5%

12.038 20.7%

2.427 7.5%

d a

d a

d a

d a

38,121 68.0%

d a

379,324 52.7%

223, I28 56.6%

17,713 70.0%

6,872 35.2%

265,300 13%

64,449 c 29. I X

16.527 23.877

3,704 12.4%

d a e 10.0%

I70 1 . 1 %

1.100 17.7%

250 14.3%

40,374 72.0%

32,000 76.2%

a Privatization figures do rot include enterprise housing . Poland figures are for 1992.

C Figures for Warsaw, Krakow and Poznan are for Ql- Qll 1995.

dPnvatization in Slovakia was not authorized uml the 1993. Privatization Law: therefore, although no 1991 figures are available, they are probably insignificant

eSlovakia has not benun to officially record privatization figures n official reports; thus all figures are unofficial estimates. ' Slovakia figures are estimated as of year end, 1995.

g State stock in Romania includes a subsrantial number of nationalized single fdmily houses, subsequently split into several units. which distort the level of privatization. For the purposes of multi-family housing subiecr to potential condominium ownership, the numbers in most cities reach over 90% by the end of 1994. Figures are for 1992.

Sources: Hungary: Renional Housing Indicators Database y1 the

Transitional Counvies of CEE. MRI-Budapest (April 1996); Housing Statistics Yearbooks 1989- 1995. Central Statistics Office-Budapest.

Poland Housing Economy 1992. 1993. 1994. Central Office of Satimcs; Housing Research Institute. Warsaw (unpublished data for L9951.

Slovakia: Regional Housing Indicators Daabase h the Transitional Countries of CEE. MRI-Budapest (April 1996); lnsrirut byvania. Bratislava (unpublished data for 1995).

Romania: Conway et al (1995).

142 C. Banks, 5. OLeary, and C. Rabenhonc Privatized Housing in Central and Eastern Europe

rents have been accompanied by means-tested housing allowances, which provide subsidies t o eligible households, implemented at the local government level. There appears to be strong government support for a similar program in Slovakia, to be funded by the state; implementation is expected to begin h 1997.

As a holdover from the socialist period, tenants’ rights remain strong, particularly in Poland and Slovakia. Eviction as a remedy for nonpayment of rent is theoretically possible but rarely used, primarily because of the landlord’s legal obligation to provide evicted tenants with alternative housing.6 In Hungary and Poland, alternative housing is no longer required, and in Slovakia the standards for alternative housing have been lowered. Slovakia also has introduced fixed-term leases, allowing eviction at the landlord’s discretion at the end of the stated term (Kingsley and Mikelsons, 1996). Still, eviction is uncommon because it remains a time-consuming, expensive, and politically sensitive proposition in countries where housing has long been considered a social if not a legal right At the same time, the virtual lifetime tenure rights enjoyed by renters presents a strong disincentive to privatization.

2.4 Policy vs. Implementation

Transfer of housing ownership, management, and financial responsibility has occurred rather quickly and comprehensively throughout CEE. Unfortunately, the central governments have been much slower to transfer control over housing policy. Local governments usually are responsible for implementation of privatization, but the structure and pace of housing reform and the power t o raise revenue to cover housing-related costs remain the domain of state legislators and policy makers. This bifurcation between the authority to make policy and the responsibility for implementation has had negative consequences for housing reform.

In Slovakia, control over rent increases in the state-owned stock rests with the central government. In Poland and Slovakia, local governments must establish procedures and carry out housing privatization, but the state mandated extremely low sales prices. In Romania and Hungary, the national government policy resulted in the transfer of a large percentage of the former state- owned stock to private hands, with attendant responsibility for management and maintenance, but failed to provide a workable framework for operating the housing in the form of a modern condominium law.

Despite shortcomings in the reform strategies adopted, the first phase of housing reform is nearing completion in all four countries. Control over housing service delivery has devolved to the local level and privatization is well under way. Governments must now deal with the aftermath of privatization: large numbers of new owners who are required by law to assume management responsibility for their buildings without the financial, legal, and technical tools needed to do so. The new owners face many problems: unclear delineation of their rights and responsibilities, confusion over the appropriate role for local government, lack of meaningful choices in contracting for management and maintenance services, and inadequate financial resources to make repairs necessitated by years of deferred maintenance. The next section discusses how these issues are being addressed in the second phase of housing reform in CEE.

The standards for alternate housing differs among countries, but in each case must meet mini mum norms set by regulation.

C. Banks, 5. O’Leary, and C. Rabenhorst, Privatized Housing in Central and Eastern Europe 143

3. Development of Condominiums and Owners’ Associations

3. I Legal and Implementation Issues

Throughout CEE, privatization legislation provides for transfer of ownership of a proportionate share of the common property as well as the individual apamnent creating the condominium form of ownership in all privatized buildings. Condominium laws in Hungary, Poland, and Slovakia provide guidance to homeowners on the rights and responsibilities of ownership and conditions and procedures for establishing and operating condominium housing. In Romania, a condominium law is under consideration in Parliament; in the meantime, the Civil Code and a 1924 law on voluntary associations provide an adequate legal basis for condominium formati on. To promote effective condominium development and operations, the legal framework must be clear and comprehensive. Three legal issues are fundamental to the proper functioning of condominiums: there must an association to which all owners are required to belong; the association must have the power to act as a legal entity; and registration procedures must establish title to the property and legal authority of the association.

Requirement of establishing owners’ associations. Policymakers, legislators, and residents themselves have come to realize that condominiums in privatized housing have a better chance of succeeding, both in terms of owner satisfaction and improvement in housing conditions, if owners ’ associations are required by law and put into place at the time privatization sales begin. This requirement is particularly important in the context of privatized housing in former socialist countries, where the former tenants had no expectation of owning their own homes and no opportunity to make decisions about their living conditions or the management of funds used to operate their housing. Without a functional legal and organizational framework, they would have little idea of how to meet the demands of joint ownership of a large, complex piece of real estate.

In Poland and Hungary, owners’ associations are required in all privatized buildings. The law now before Parliament in Romania also requires that owners’ associations be established in all privatized buildings, effectively eliminating the role of the old tenants’ associations. In Slovakia, on the other and, the housing privatization law makes establishment of an owners’ association an option, not a requirement. The other option is for each of the owners to enter into an individual contract for maintenance services, which in practice usually has meant the continuation of services by a public maintenance enterprise. The decision about the form of management is made at the time of the f i rs t privatization sale; therefore, as a practical matter, it is made by the municipality. Without the organizational structure of an association at the outset it will be difficult for the owners to form an association later in cases where the local government has chosen the individual contract option.

The city of Kosice, the second largest city in Slovakia, has developed a privatization program under which city officials inform prospective owners of all their rights, and provide assistance for establishing an owners’ association for those buildings that request it Most privatized buildings have chosen to establish an owners’ association, and satisfaction with this form of management and governance is quite high. This program is now serving as a model for other cities in Slovakia, where condominiums without owners ’ associations have proven to be less effectively managed.

Legal status of association. Another vital element of the legal framework for the successful operation of condominiums in privatized housing is the power of the owners’ association to act as a k@ entity. With this authority, the association can ensure that the owners have protected property and contract rights, and it can enforce the obligations of the owners to the association. As a legal entity, the association can enter into contracts with service providers, employees, and other contractors, and can use the property and association assets to secure credit.

Under the Hungarian condominium law, which was adopted in 1977, the association is not a

144 C. Banks, 5. O’Leory. and C. Rabenhorsc Privatized Housing in Centrof and Eastern Europe

legal person. This has constrained efforts to improve the condition of the housing because the association has no authority to borrow for common property repairs or renovation. In order to obtain bank financing, loan agreements must be negotiated with each unit owner in a building. All owners must agree to the loan terms before a bank will make funds available if the property is used as security for a mortgage loan. Largely as a result of this limitation, efforts have begun to amend and modernize the condominium law. State housing policy mandates that the new law be presented to Parliament by 1997.

In Romania, residents forming an owners’ association must separate from the existing tenants’ association, which usually controls a number of buildings, and request that funds held in the tenants’ association account attributable to the separating building be turned over to the new owners’ association. After registration with the local court, the new owners’ association has the authority and the funds to open a bank account, enter into contracts wirh providers of utilities and other services, and make decisions about the management of the property. These procedures will be simplified and made mandatory under the new condominium law.

In Poland, the law is not clear on whether the association is a legal entity. The taw does state that associations can sue and be sued, attributes that usually define a legal entity. According to Polish lawyers, however, the distinction was made h the law to preserve the association’s status as a civil rather than commercial association and to protect creditors of the association by assuring that individual owners could be held liable for debts of the association. Clarification of this point is important for concerns relating to liability, taxation, and secured lending.

Registration of the condominium. Registration presents one of the most difficult problems in implementing privatization and condominium laws in CEE. Except in Hungary, there is little experience with the complexities of the condominium form of ownership, and existing systems are not capable of handling expeditiously the huge volume of sales transactions that must be documented and registered, usually without computers o r specialized training.

Two kinds of registration are necessary to establish a functioning condominium. The first is registration in the property records of the residents’ ownership interests (the unit and the share of common property), usually carried out in the real property registration or cadastral office in the appropriate local jurisdiction under legally mandated procedures as part of the privatization process. The second is the registration of the owners’ association, carried out under authority of the court system or a special office in the jurisdiction for registering non-natural entities such as nonprofit associations or business enterprises. To register an owners ’ association, a special document, variously called an association agreement, charter, or foundation deed, must be prepared and approved by the owners. This document functions as a contract among the owners, setting out their individual and collective rights and responsibilities, including their financial responsib association, and binding them to comply with the taws applicable to condominium owners and to rules adopted by the association.

Even with a condominium law that provides procedures for registration both of the condominium property and the owners’ association, registration can present a significant obstacle to be overcome before the residents acquire legal ownership rights and the association can act with legal authority. In Slovakia, for example, backlogs in the cadastral offices result in delays of up to one year from the time privatization sales contracts are submitted until condominium owners acquire title to their property. During the interim period, the residents’ rights and obligations remain unclear. For example, it is uncertain whether they can legally sell their apartments during that period, cf whether they should continue paying rent to the municipality.

In Romania, in the absence of a condominium law, lawyers have developed creative procedures for registering condominiums, using a I924 law on voluntary associations. The primary impediment to registration has been fees up to the equivalent of US$I,OOO charged by notaries (now

C. Banks, 5. O’Leary, and C. Robenbarst, Privatized Housing in Central and Eastern Europe 145

private) to authenticate the registration documents. The condominium law now in Parliament states that owners’ associations shall be registered without charge, but it is not clear how registration will proceed without notarization, or how the law will require notaries to approve documents without permitting them to charge a fee.

3.2 Local Government Policies and Strategies

The establishment of condominium associations and their likelihood of success are determined to a large extent by the policies and strategies adopted by local governments, as reflected in the privatization procedures they use and support programs they sponsor. Local governments play several roles in relation to condominium associations. Depending on the national law, municipalities are usually responsible for making many of the legal and administrative decisions that allow the establishment and operation of owners’ associations. Local governments remain the owner both o f the buildings that are not privatized and the unsold units within buildings that are privatized, and often control the enterprises that provide management and maintenance services to privatized buildings, either by the new owners’ choice or by default.

Privatizaoon policy. The basic legal framework for establishment and operation o f condominiums is the relevant housing privatization and condominium legislation, typically passed at the national level and implemented locally. The most fundamental support a local government can offer to a new condominium is to adopt policies to ensure the highest possible percentage of private owners in any given building. The result is a condominium where private owners are in the majority and take on the management and administration of their building with the dedication that only private owners are likely to possess.

This has been achieved most often in municipalities where a progressive administration has been willing to reduce prices and provide other incentives to privatize, and to implement sales and information programs that are independent of political influence. For example, the city of Krakow, Poland, offers a 90 percent discount in the sales price if all units are privatized simultaneously. A five-year moratorium is then placed on resale of the privatized unit to prevent windfall profits from sales at market price. Owners who violate the moratorium must pay the municipality the equivalent of the discount received. In Kosice, Slovakia, privatization is targeted by offering financial and other incentives in buildings where a majority of residents want to buy. Prices are lower than the maximum stipulated in the law, and additional discounts of up to 50 percent are given on the basis of the number of residents within a particular building who want to purchase their flats. In addition, buildings with a high proportion of privatizing units are given priority in the sales and registration queue. These policies of concentrating privatization in selected buildings have helped the cities by minimizing the complications of mixed ownership.

Privatization obstacles. Perhaps the most complicated obstacle to privatization has been the delegation of responsibility for implementing privatization from the local government to the local housing maintenance enterprise, usually owned or controlled by the municipality and responsible for managing the same buildings they are privatizing. There are advantages to this approach, to be sure, such as the enterprises’ familiarity with the technical condition of the buildings to be privatized. However, there are conflicts inherent in the relationship between the local government and the maintenance enterprise. For example, if the municipality encourages new owners to form an owners’ association and manage their own building, the owners may have an opportunity to improve the quality and efficiency of services to their building. This is desirable from a political standpoint, because the owners are more likely to be satisfied with their housing options and the increased control they have over their living conditions. However, it may have an adverse effect on the

146 C. Banks, 5. O’Leary, and C. Rabenhorsc Privatized Housing in Central and Eastern Europe

government-owned maintenance enterprise that currently performs this service and that may have strong ties to the local administration. Balancing these interests remains a challenge to successful privatization policy.

In Slovakia, where public maintenance enterprises are implementing privatization, they are not encouraging tenants who buy their apartments to form owners’ associations, but are signing them p for individual maintenance contracts with the enterprise. This makes it difficult for the owners to organize an association and contract for better o r cheaper services for the building, which in turn perpetuates the feeling that nothing changes with ownership - the same public company maintains the building and makes decisions that properly should be made by the owners. In Kosice, the local government resolved this problem by hiring a private firm to process sales contracts and produce technical reports for buildings, steps which are mandated by law as part of the registration process but in most places are carried out by the local public maintenance enterprise. This has resulted not only in formation of owners’ associations, but has also increased the capacity of the city t o privatize in a timely way and has supplied newly formed associations with the proper documentation needed to register their buildings.

Mixed ownership. Most local governments are wrestling with the problem of mixed ownership resulting from the sale of less than I00 percent of the units in a given building. Although guidelines for how to deal with problems arising from mixed ownership are sometimes provided in national condominium legislation, it is up to the local governmenc as the owner of unsold apartments in a condominium building, to implement policies that allow for effective management of those buildings. Common problems throughout the region arise over issues such as what voting share the local government should have (one owner = one vote, o r voting based on proportional ownership interest), and what financial and decision-making responsib es the local government has in the operation and management of the building, and as landlord for tenants not purchasing their units.

In some cases, there is confusion about whether the municipal owner must pay the monthly condominium fees or contribute to renovation funds established by the association. In many Polish cities, complications have arisen due to the practice that the association must collect fees attributable to unprivatized units directly from tenants of the municipality who reside in those units, despite the fact that under the relevant law, the owner (municipality) must pay the monthly fee established by the association, not the tenant. In Kosice, Slovakia, the local government has adopted a regulation that the city must pay the fees established by the association for non-privatized units, even if the rent charged to the municipal tenant only covers a fraction of these fees. The association can then depend on stable monthly income and equal treatment for all owners in the building.

Education, information, and financial assistance. There is l i e useful information or practical assistance available to the millions of new and prospective condominium owners across CEE. State and local governments have made few attempts at mass education and information campaigns for new home buyers, despite the fact that residents are largely unaware of the physical and financial requirements of owning and managing condominium building. Inaccurate press reports and general misperceptions concerning the role of the condominium association and the rights and responsibilities of ownership are not uncommon and add to the confusion of new owners. Lack of knowledge about the basic functioning of a condominium association and workable model statutes and bylaws impedes the development of effective condominium associations. Fortunately, there are exceptions to this situation which can serve as a model for broad dissemination.

The local government in Krakow, Poland has actively encouraged condominium development. In 1995, the city signed with a local association of condominium owners a declaration of support whose objective is to provide cooperation and assistance with resolving problems which arise in implementing the condominium law. The association plans to provide public education materials to

C. Banks, 5. O’Leory, and C. Rabenhorst, Privatized Housing in Centrol and Eastern Europe 147

owners to help them administer their buildings. Krakow recently drew up a socio-economic plan for 1996 to 2000 which provides for support of condominium development through creating access to rehabilitation financing for condominium associations, encourages associations to take over management of their building, and improves the legal basis for property registration and real estate transactions.

The city of Budapest, Hungary has established a condominium outreach program so that representatives from many buildings can meet on a regular basis with local government and property management officials to share experiences and ask questions about a range of issues, including organization and management of a condominium association, procedures for dealing with mixed ownership, maintenance and repair problems affecting common property and strategies for dealing with them. A meeting in March I996 was attended by over 1,500 such representatives. District XI of Budapest has established a matching grant program whereby condominium associations, after being evaluated under criteria designed by the district government, may receive a grant toward a defined improvement or repair project

Kosice. Slovakia has developed policies resulting in higher privatization rates than most other cities in that country: effective targeting of buildings for privatization, and innovative support for newly formed associations. At the beginning of the privatization process, the city government set ~p

a special privatization office independent of the municipal housing maintenance enterprise. The office has taken a grass roots approach to privatization and condominium support by meeting with tenants on a building-by-building basis to discuss the benefits and responsibilities of condominium ownership, as well as to encourage the formation of owners’ associations, which under the law is voluntary. Residents can visit the privatization office to sign their purchase contract% and to receive assistance with registration of the association, organization of meetings, election of officers, and solutions for specific problems they confront.

Because there is no condominium law per se in Romania at this time, the local governments have played an active role in those cities where owners’ associations have been established. Starting in Brasov and later in Oradea and Focsani, owners’ associations have been organized by identifying city hall employees as coordinators whose function is to provide information and assistance to owners, and to coordinate the complicated process of organizing meetings, explaining the role and responsibilities of an owners’ association, separating financial accounts from the former tenants’ associations, registering the new association in the court, and gathering technical documentation on the buildings. Seminars and workshops have been delivered to owners and professionats interested in providing services to the condominium sector, and mass media techniques such as call-in radio shows, TV and newspaper interviews, pamphlets, and a video documentary have been used to disseminate information.

With donor assistance, a substantial amount of condominium material has been developed in all four countries, including condominium management training manuals, pamphlets, and newsletters. Materials are disseminated through training courses, education centers, workshops, seminars, and conferences in cooperation with local governments, national governments, and NGOs.

3.3 Property Management and Maintenance Services

Throughout CEE, the most frequent providers of services to privatized and public housing have been the public maintenance enterprises operating under authority of the local government. During the earliest years of wide-scale privatization, new owners often did not possess the legal right to select their own maintenance contractor; even when they did, little if any private property management market existed. This situation has begun to change, because property owners have

148 C. Banks, 5. O’Leary, and C. Rabenhonf Privatized Housing in Central and Eastern Europe

begun to recognize their rights to manage their own property or to contract with the entity of their choice for management services, and because people with property management skills have begun to offer their services through the private sector as they have observed the emergence of a potentially significant market

Meaningful choice among property management service providers is important to the development of the condominium housing sector. A t the present time, most owners are faced with only two options: continuation of management by the local public maintenance enterprise, in some cases “privatized,” or self-management’ A more efficient management company would reduce costs and improve services for most buildings, freeing up resources for the major capital repair or improvement projects t h a t remain out of reach for most associations. Competition from rival firms would eliminate the monopoly enjoyed by the public maintenance companies, forcing them to improve the delivery of services or lose business.

Local governments have begun to consider strategies to improve the quality and efficiency of the government-provided services, as well as contracting for private management services themselves for the properties they continue to own. Given that the government-controlled enterprises continue to provide services to a large portion of the privatized and public stock in most locations, it is neither practical nor politically expedient to liquidate these organizations without considering alternatives to delivery of the services they provide.

In Hungary, ownership of the inefficient state-owned property management enterprises (IKV) was transferred to local governments in 1991, and there has been substantial reorganization since then which has resulted in the separation of asset management and technical functions, the privatization of many of the former IKVs, and competitive bidding of maintenance contracts for the remaining public stock (Hegedus et al, 1996). National law mandates the privatization of all the former public housing maintenance companies in Slovakia within the next several years. Some privatized companies will continue to offer services to condominium associations, but they face competition from new private property management firms that can provide more efficient services, often at lower cost.

Krakow, Poland has reorganized its maintenance companies into a number of smaller units. and after atransition period will force them to compete with one another and other private firms for the management of the public stock. This approach differs from that of Szolnok, Hungary, where the city bid out the management of a portion of its public housing and substantially reduced administrative costs as a result8 Similarly, municipalities in Slovakia are becoming interested in contracting competitively through the private sector for management and maintenance services for property that remains in municipal ownership. The city of Ruzomberok has combined these approaches by tendering the management of its public stock and the restructuring of its maintenance enterprise as part of a single package. This process is still under way and the results are not yet known.

Professional management services. When housing privatization ends, there will be a huge number of multifamily buildings that require management and maintenance services. This will present a substantial market that could be served by firms now offering commercial management services, or by individuals with financial, technical, or legal expertise. While the cost of such professional services might seem high to many associations, the size of the market should produce sufficient

Local government role.

’ In some countries, local management and maintenance enterprises have been le@y privatized into joint- stock companies, but local authorities still retain majority ownership.

*The average reduction in administrative costs for private management was 32.1 percent for five multifamily buildings pam‘cipating in a pilot project Subsequently, the city’s IKV also reduced costs significantly (Sanden, 1994). In addition, analysis conducted in the city of Moscow has shown private firms can provide high quality services a t prices competitive to public maintenance enterprises (Angelici e t al, 1995).

C. Banks, S. OLeary, and C. RabenhorsS Privatized Housing in Central and Eastern Europe 149

competition and demand for entrepreneurial individuals or small firms to offer affordable services. In the city of Kosice, demand for private sector services has already been demonstrated. Almost one-third of the privatized stock (approximately 2,000 units) is being managed by a private property management firm, whose prices are competitive with the municipal maintenance company and whose services are regarded by the residents as far more effective. This number will probably increase as the pace of privatization and establishment of owners’ associations increases.

A significant obstacle to the development of private property management services for condominiums is the owners’ perception that they cannot afford private sector services. This is based on several assumptions that have proved to be largely untrue when tested. Professional services can actually be less expensive than self management because of stronger purchasing power and the ability of one professional to manage a number of buildings. In addition, high quality services are likely to result in a better run building and improvements in technical condition of the property, increasing its value. Nevertheless, distrust of the private sector by many owners combined with the lack of knowledge of the current technical condition of the privatized buildings has resulted in the vast majority of buildings being “self-managed,” at least for the time being. In all likelihood, this will change over time as competition develops in the property management market and owners become more willing to invest in good management and improvement in housing conditions.

Hungary’s condominium law provides for a unique method of managing condominium properties. The executive board of each condominium association hires a common representative who has authority to act on behalf of all the owners in contractual and legal matters, such as delivery of services and approval of repair and maintenance contracts. Common representatives are often representatives from the local state housing management company (IKV) or its restructured successor due to the owners’ lack of knowledge about choices for property management and misperceptions about the advisability of private management services. The power of the common representative, who can make decisions in many cases without prior approval from the executive board or the owners, is an issue that should be addressed in Hungary as amendments to the condominium law are considered.

3.4 Design and Financing of Rehabilitation

Even where successful programs are in place to establish condominium associations, owners sti l l face the seemingly intractable problem of financing renovations or capital repairs. Impediments to rehabilitation include lack of financial resources of individual owners, lack of private sector property management firms to assist in the process, tax policies and high inflation, which discourage associations from saving for larger projects, complications of mixed ownership, and difficulty in obtaining proper technical documentation of the building’s structural condition. Another cause for confusion exists in Poland, where the condominium law states that local governments are responsible for delivering privatized buildings in sound condition and with full technical documentation. A number of programs and policies in CEE are beginning to explore solutions to these problems.

Most banks are reluctant to enter the untested residential rehabilitation lending market. Since privatized condominiums are new entities, they have no demonstrable credit record or income stream with which a bank could safely underwrite a loan. This problem is exacerbated by the fact that costs and availability of housing construction have been somewhat volatile during the transition to a market-based system, creating difficulties for owners’ associations when drawing up budgets and collecting payments from members. Compounding these issues are macroeconomic conditions such as interest rates of 30-40 percent in some CEE

Financial sector and related legal issues.

150 C. Banks, 5. O’Leory, and C. Rabenhorsf Privatized Housing in Central and Eastern Europe

countries. Bud Bank, a majority state-owned construction and mortgage bank in Poland, has established a

program which makes short to medium term loans available to condominium associations at variable market-based rates, currently around 30 percent. The loan terms are not very favorable, however; for example, interest on the association’s deposit account is only 12 percent, and the maximum loan amount cannot exceed 20 percent of declared deposits in the bank. Not surprisingly, no condominium association has borrowed under these terms to date. Restrictions appear in a state- subsidized rehabilitation loan program in Hungary as well, where the National Saving Bank has had a virtual monopoly on mortgage lending and other banks have been slow to enter the housing finance market In this program, owners’ associations must establish an account with the bank within a very limited time period after formation, and the loans must be heavily collateralized with deposits from the owners’ association and even then are granted only to natural persons, not the association. Slovakia’s construction savings scheme offers a favorable subsidized interest rate, but requires borrowers, who must be natural persons, to wait for six years and save a target amount before qualifying for a loan. Other banks in Slovakia, where interest rates are relatively low, are offering renovation loans to natural persons with 11.5 to I2 percent rates. Security includes personal and third party guarantees as well as liens on the subject property. These loans may prove to be attractive for condominium rehabilitation as more owners’ associations are formed.

Moving to encourage more banks to enter the mortgage lending market, several countries have adopted simplified foreclosure procedures and made evictions and auctions of repossessed properties more expeditious. Over time, these changes should increase borrowing possibilities for condominiums, but to date, modifications to foreclosure procedures have not yet resulted in a significant increase in mortgage lending activity. It is worth noting that since rehabilitation loans are relatively small compared to the value of the property, the possibility of foreclosure on a condominium property for this type of small loan is of secondary value to a lender, given the ensuing legal complications and costs. This has resulted ‘n the over securitization of rehabilitation loans with association cash reserves.

Lack of clarity in the legal status of the association causes problems for lenders because t prevents them from making loans to an association as a legal person with the rights of a single borrower. The need to lend individually to each owner in an association is substantially more burdensome and costly. Even in countries where the association’s status permits it to be a

borrower, current government-assisted programs are aimed at individual households, not condominium associations. This is an area where legislative change may be needed.

Government policies. Government policies to support rehabilitation and renovation of condominiums take a variety of forms, some of which directly leverage financing for capital repair projects, and others which more indirectly support owners through social allowances. In several countries in CEE, housing and utility allowances are either being implemented or planned by local and central governments. Although these programs are considered part of broader reform of the housing sector and are aimed primarily at bringing public rents in line with operating costs, h most cases they apply to private owners as well. For condominiums, implementation of housing allowances will allow low income owners to make required payments to the capital repair and renovation fund and thereby increase capacity for owners’ associations to self-finance rehabilitation projects.

A number of local governments are implementing programs directed at facilitating or leveraging investment for rehabilitation of condominium buildings; examples of these programs were described above. Some central governments have had subsidized rehabilitation lending for homeowners for many years; others are only now developing policies and programs to support this type of lending. In Hungary, the government has issued a decree entitling condominiums to obtain loans from the

C. Banks, 5. OLeory, and C. Rabenhont, Privotized Housing in Central and Eastern Europe IS1

National Savings Bank with a subsidized interest rate for renovation of common property in their building. This is the principal rehabilitation program for condominiums in Hungary. In order to qualify, condominiums must open a renovation account at the bank no later than 90 days after the establishment of the association. If this deadline is missed, the association must maintain a renovation account for at least five years before it can qualify to borrow, For these reasons and others described earlier, very few of these loans have been made.

The government in Poland has proposed the establishment of a national renovation fund to provide shared financing from central and local government budgets for condominium rehabilitation loans. Owners’ associations would need to contribute 30 percent of the project costs in cash. The government-subsidized construction savings program in Slovakia, offered through the Construction Savings Bank is now set up for individual borrowers who receive a 40 percent premium on their deposits up to 6000 Slovak Crowns (the equivalent of US$200) per year.’ Theoretically, owners could borrow jointly under the auspices of a condominium association and take out individual loans with a fixed 6 percent interest rate. This system is limited by the parameters of the program, however, which force savers to wait several years before qualifying for a loan and the need for the bank to underwrite every individual borrower rather than the association.

The proceeds from housing privatization could provide another source of funds for condominium rehabilitation projects. In Slovakia and Hungary, the privatization laws mandate the reinvestment of these funds for housing or infrastructure projects. Several cities in Slovakia are investigating options for using or leveraging these funds by owners’ associations, such as setting q~ revolving loan funds or guarantee funds for bank loans.

Owners’ association issues. In theory, rehabilitation projects should be very attractive to an owners’ association. Significant cost savings could be realized, particularly by increasing energy efficiency. The technical design of rehabilitation projects is not a major obstacle; throughout CEE, multifamily construction during the socialist era followed a limited number of prototypes, and engineering and other technical skills are well developed in all these countries. There is widespread interest throughout the region in common projects, such as installing individual heating systems to avoid the high cost of inefficient central heat production and delivery, replacement of deteriorated panel joints and window frames, and repair or replacement of leaking roofs.

While most owners can cover monthly maintenance costs and establish at least minimal cash flow, their resources are usually insufficient to correct long-standing deferred maintenance needs, let alone to undertake major renovations. Furthermore, housing allocation practices under the socialist regimes result in residents of vastly different income levels living in the same building (for example, pensioners on fixed incomes may live in the same building as a top manager at a state enterprise), which creates problems when operating and renovation budgets are based on proportion of ownership.

Many owners’ associations have begun to collect monthly payments to a renovation fund and have opened a bank account for transacting their financial business. Since the associations have only recently been established and have had to build up reserves from scratch, such funds are usually too small to pay for major repairs; but they serve to demonstrate an ability to save and potentially the ability to borrow. In Slovakia, some associations have expressed willingness to borrow on commercial terms that are as low as 11.5 to 12 percent. However, in the absence of a modern mortgage law and with lending to the association as the borrower as yet untested, private banks have been reluctant to encourage the development of this market

Despite these institutional obstacles, some creative ideas are being developed to address the

In 1992, the Slovak government set up a contractual savings scheme based on German and Austrian models, and one in nine Slovaks now participates in the program.

152 C. Banks. 5. O’Leary, and C. Rabenhorst, Privatized Housing in Central and Eastern Europe

need for renovation. One of those i s construction of new units on the roof decks of existing buildings. For most multifamily buildings, faulty roofs are a major problem, causing water infiltration in upper units and eventually resulting in serious structural damage. The new units could either be financed by a private investor who is interested in renting or owning the units for commercial purposes, o r the condominium association could develop the project itself, securing the loan from a bank with the cash flow gained by renting out o r selling the space. Some banks are interested in lending for this type of project as it provides a more secure revenue stream from which to pay back a loan.

4. Conclusion

For the most part, the f i r s t phase of housing reform in CEE is complete. Ownership, management, and financial responsibility for housing has been transferred from the state to local government and then to individual owners. Activation of a broad-based housing market will occur more quickly if there is continuing support and assistance available to the new owners, with information and education programs to help them understand their rights and responsibilities, additional options for property management, financing programs to help improve the condition o f the housing stock, and needs-based allowances to help fixed and low income families meet the rising costs of ownership o r tenancy. In each of the four countries reviewed in this paper, some municipalities are implementing privatization and condominium assistance programs that can serve as a model for others. Enlightened local government policies can do a great deal to speed up and rationalize the housing privatization process, and support and encourage the development of healthy condominiums. Efforts to inform citizens of their rights and obligations and to help them adjust to home ownership are effective ways for local governments to increase citizen satisfaction.

It has been clearly demonstrated that a legal framework which defines the rights and responsibilities of owners and provides guidance on forming and operating an owners’ association is essential to foster effective condominium development and management. Condominium laws should provide that an owners’ association must be established and must have authority to act as a legal person. In addition, clear procedures for registration of property rights and the association are needed. The new condominium laws in CEE should be regarded as a f i r s t step in an evolutionary process, to be amended as experience and changing circumstances Warrant

Meaningful choice among public and private property management services can help owners gain more effective control over their property and improve their living conditions. The private property management market for condominiums in CEE is still nascent but many possible sources for management alternatives exist, including commercial property managers, real estate firms, skilled individuals, and construction or building repair firms. Programs of training in professional property management services for condominiums are being sponsored by donor agencies from Western Europe and the United States. These programs should be continued and expanded where possible.

The most difficult problem in the aftermath of privatization is the limited resources available for improving the condition of the housing. The vast majority of buildings require substantial rehabilitation to bring them up to modern standards. After implementing privatization and establishing condominiums, government support should be directed at facilitating the rehabilitation of the existing stock. More can be done to encourage lending for rehabilitation without direct investment by public authorities. Transitional approaches to enable owners’ associations to access low cost credit as they struggle to improve their buildings and build up capital reserves should be encouraged, especially in buildings with severe structural problems and in those where some owners cannot afford full payments mandated by the owners’ association. Governments should ensure that existing loan

C. Bonks, S. O’Leory, and C. Rabenhont, Privatized Housing in central ond Eostern Europe 153

programs and subsidies for housing construction and renovation apply to multifamily housing as well as single family homes. Eventually, institutional lenders can be expected to recognize that condominiums are an attractive, secure new market; and loan programs will be designed to meet their needs.

Establishment of the housing market is well under way throughout CEE. Mass housing privatization programs have created the opportunity for millions of families to own their own homes, and will contribute substantially to the development of markets throughout the housing sector in areas such as construction, lending, property management, and legal and financial services. While there remain problems in the management and improvement of condominium housing, sufficient momentum has been established to ensure that housing sector reform is positive and irreversible.

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C. Banks, 5. O’Leary, and C. Rabenhont, Privatized Housing in Central and Eastern Europe 155

Appendix A Tenure Categories of Housing Stock in Hungary, Poland, and Slovakia,

1989, I993 and 1994 at Year End (in thousands of units)

Number of Uniu (as a % of total stock) I989 I993 I994

Hungary National 3,855 (100%) 3,971 (100) 3,971 (100)

Poland

State (municipal and enterprise) (x of total) a48 (22) 516(13)

Cooperativea

Private 3,007 (78) 3,455 (87)

National 10,716 11,366 (100)

State (municipal and enterprise) 3,433 (32) 3.1 36 (28)

Cooperative 2,606 (24) 3,079 (27)

Private

341 (9)

3,630 (9 I)

1,434 ( 100)

2,907 (25)

3, I70 (28)

4,678 (44) 5, I 5 I (45) 5,357 (47)

Slovakia Nationald 1.572.3 ( 1 00) I ,6 I 7.8 ( 1 0 o ) C 1.675.7 ( 1 00)

State (municipal and enterprise) 440.0 (28) 448. I (28) 457.3 (27)

Cooperative 336.6 (21) 357.5 (22) 379.3 (22)

Private 795.6 (50) 812.1 (50) 839.1 (50) ~~ ~

aCooperatives as a form of tenure do not exist in Hungary. bFigures are for 1988. Figures are for I99 I .

dSlovakia has not begun to count privatization figures in official statistical repom. Therefore, the amount of housing is the state stock is actually less than reported here, due 26 privatization. Estimates of the amount of housing privatized nationwide range from 8 to 10 percent

Sources: Poland I988 National Census: Report on Housing. Municipal Office Warsaw, 1994 and 1995; Monitoring of

Housing. Housing Research Institute. Warsaw (1994). Slovakia: I988 Census: 1991 Census; Official Statisucal Yearbook of the Slovak Republic 1991-1994. Hungary: Hungary: Regional Housing Indicators Database in the Transitional Countries of CEE, MRI-Budapest

(April 1996); Housing Statistics Yearbooks 1989-1995, Central Statistics Oftice-Budapest.