In late May, Yuri Luzhkov got an axe. No, the Moscow mayor is firmly clinging to his post, to which he has been recently reap pointed by President Vladimir Putin. The axe Luzhkov got was actually a thank-you gift from a group of Muscovites for his effort to provide them with housing after they had been duped by a fraudulent investor who took their money, but never built the flats they intended to buy.

Actually, the axe was not real, but pictured on a panel painting. It was depicted slashing through a knot – a symbolic image extolling Luzhkov as the man who “cuts the problem knots.”

The picture couldn’t be truer – what looked like a hopeless case for 165 apartment buyers who were tricked by investors, ended like a fairy tale as the mayor handed them the keys to their new apartments, provided by the city.

Initially, the investor, Stroy-industriya Company, pledged to build the flats in eastern Moscow in 2002, only to renege later on its obligations, leaving buyers in limbo. Three years later, the investor company's management was charged with fraud and taken to court, while the city government made an effort to turn things around by bringing in a new investor and completing the construction.

On May 26, the effort was capped by a key-handing ceremony, which put an end to the apartment buyers' five-year ordeal.

Unfortunately, not all of these stories have a happy ending.

According to the mayor, more than 3,300 Moscow families had been the victims of developer cheats who took advantage of loopholes in legislation to get away with their clients' money, offering nothing in return. "The Moscow government was not obliged to resolve these issues, but we couldn't pass by these people's misfortune, they are Muscovites," the mayor told reporters. Luzhkov added that the city would continue to assist to provide the buyers' with housing, expecting to solve the issue completely in 2009.

He did warn, though, that such assistance would be offered only to those apartment buyers who were investing in the property they would eventually use as their residence. "Those who wanted to make money through investing funds in the construction of five to eight apartments [for further resale] can defend their claims to property in court," explained Luzhkov.

Despite the mayor's promises, the pace of construction could definitely be quicker as some buyers' patience is apparently running out. In early July a group of about 100 protesters picketed the city government building, accusing Luzhkov that he was doing little to solve their problem. Calling the mayor's pledges "fairy tales for fools" they voiced their discontent over the sluggish implementation of construction projects, which put on hold their plans to move to new homes. "According to the latest data provided by the Moscow government, there are around 1,780 tricked co-investors," Oksana Kaarma, managing partner at MIEL-Novostroiki told The Moscow News. Kaarma thinks meeting the 2009 deadline is feasible. "At the moment, the issue is rather acute, public movements have been created to support the co-investors, and it is being controlled by government authorities and the Public Chamber," adds Kaarma. According to her, all of these factors should help the Moscow authorities honor their pledge to provide housing no later than 2009.

The Moscow government has apparently extended a helping hand in an attempt to quell public discontent over fraudulent real estate deals. On the other hand, this is a gesture of good will, which the authorities didn't necessarily have to make. EVANS Managing Partner Anya Levitova thinks that, despite the tragic situation these people have found themselves in, the issue is rather ambiguous. "We often hear about the victims, but we rarely hear about those who successfully made big profits from participating in investment projects,"she says. "They don't turn in their profits to help provide housing for those investors who were less successful, less attentive and less reasonable. It is not entirely clear why all should pay for someone's light-minded behavior." Levitova adds that the investors' irresponsibility and their lack of understanding of risks involved remain the major problems. In real estate markets abroad, construction loans are among the least available and the most expensive due to a host of problems that investors may encounter during the project's execution, such as the opposition of residents of nearby homes, mala fide builders, architects' mistakes, etc. "That is why apartments in the buildings that are being built should be cheaper than those that are finished, have the same quality and share the same location," she adds.

Sergei Gorbachev, managing partner at the Moscow-based Legis Group law firm, says the co-investors' rights are most often violated in three ways. "Either construction is not taking place at all, or it's under way with significant delays, or there are delays with [the new owners'] property rights paperwork for apartments in newly-built homes." Gorbachev told The Moscow News. The widest-spread are the violation of construction schedules and delays in commissioning the new buildings. "The reasons vary from extended project approval timeframes to the developers' technological and financial problems," Gorbachev says. Though these risks may be hard to handle, opting for a different purchase instrument such as mortgage loans could be a viable option for potential apartment owners.

Over the last year, Russia has witnessed a sharp rise in mortgage lending and the trend is bound to continue. "While earlier the greater part of buyers used to choose the first and the most risky option [entering into ñî-investment deals to fund construction of unfinished buildings — Ed.], now we can observe a shift toward mortgage loans," Konstantin Kovalyov, managing partner at Blackwood, told The Moscow News. The pros include the lack of risks of protracted construction, and clearer, better defined credit schemes, which outperform other tools such as shareholder agreements, preliminary purchase-and -sale contracts, the schemes involving promissory notes, equity funds, issue of letters of guarantee, etc. "At the same time, mortgage is a more reliable instrument, which is confirmed by the growing volume of mortgage loans provided to the population — in 2006, its volume increased threefold," Kovalyov says.

MIEL's Kaarma believes the popularity of mortgage loans will only grow among the population. "Mortgage is a real possibility for those people who lack funds to finance the purchase of an apartment to acquire it through credit," Kaarma says. "Secondly, mortgage offers an additional guarantee of a 'clean deal' as the bank in this case acts as an extra guarantor of return of funds in case the apartment purchase contract is broken." According to Kaarma, the number of apartment acquisition deals with the help of mortgage loans has grown to 70 percent of all deals closed in the new housing market. Protecting the clients' interests isn't easy. Despite passing a new law in late 2004 that regulates relations between buyers and developers, there still remain loopholes that cheaters exploit.

The main advantage of the Federal Law #214 "On Participation in Joint Construction of Apartment Buildings and Other Real Estate Property" for clients is that their status has been changed from co-investors to project stakeholders. That way, they no longer share the risks (i.e. bear responsibility) of construction on a par with developers. However, bad faith developers still manage to work their way round the new legislation. Instead of rectifying their own faults, they often counter client pleas by saying that they can do very little — if anything at all — in the cases involving ñî-investment contracts that had been signed before the new law was enacted. And still, the issue seems to be that of choosing your developer carefully. Though frauds are rather rare in the premium segment of the market and typical in the economy segment, brokers suggest that the key trust-building factor is a developer's reputation. "We think that the potential violation of the ñî-investors' rights doesn't depend on the type of housing, but first of all on developers' decency and ethics. A well-known developer enjoying a good reputation would never violate his obligations stemming from signed contracts," Kaarma says.