Discuss the types of mortgage collateral available to lenders in your jurisdiction. Who are the typical real estate finance providers in your country? Are there any restrictions on who can provide funding?
The most common form of collateral in real estate finance in Germany is the land charges which are entered in the land register of the financed property. The land charges are on the property but do not constitute a transfer of the building to the lender. Other forms of collateral are mortgages, which are less frequently used because they are less flexible, for example in the event of transfer to third parties or refinancing.
In commercial real estate finance, lenders usually also ask for additional collateral, such as an assignment of rent collateral, pledges of shares of the relevant real estate company, and bank account pledges.
Typical providers of real estate finance in Germany are banks, insurance companies or building societies. Real estate financing can be obtained both for the purchase of existing buildings and for development projects. In general, lenders need a German or European banking license.
Is financing available for land (or principal) leases in your jurisdiction? How does financing differ from financing land operations?
Funding is also available for inherited building rights (leases under German law), which may also be subject to land charges. Under many inherited building rights agreements, the consent of the owner is required to grant land charges relating to inherited building rights. The residual term of the inherited construction right is taken into account by the financing banks in their valuation of the title. Priority issues may arise between the lender’s land charge and the owner’s registered rights (for example, regarding the payment of inherited building right interest). These problems can usually be alleviated by careful drafting of the financing documents and the inheritance building right agreement.
What is the method of constitution and improvement of a security right?
A land charge requires a notarial deed and an entry in the land register.
Are third party real estate appraisals required by lenders for their loan underwriting? Are there government or industry standards for assessments? Do assessors need to have specific qualifications or required government or industry certifications? Who is responsible for commissioning the assessment?
Large finance lenders usually do an internal and external appraisal of the property. In particular, lenders require third-party expertise if they wish to refinance the loan via covered bonds under German law. Specific rules apply to the appraisal of acquisitions by real estate funds. Appraisers must have the expertise and experience necessary for the transaction and the property in question. Banks are required to order the valuation. In addition, the provisions relating to capital requirements under the banking law oblige banks to assess the value of the guarantees granted to them.
What would be the ramifications of a lender from another jurisdiction providing a secured loan in your jurisdiction? What is the form of lien documents in your jurisdiction? What other issues would you identify for your clients?
Lenders who wish to offer financing to borrowers in Germany on a recurring basis must hold a German or European banking license.
The typical privileges used for real estate financing are land charges. The creation of land charges requires a notarial deed and an entry in the land register. Both the notary and the cadastre charge fees under statutory law. Assignments of land charges are possible, but (depending on the exact type of land charges) may also need to be entered in the land register.
Loan interest rates
How are interest rates on commercial and high-value real estate loans generally set (with reference to LIBOR, central bank rates, etc.)? What interest rate is legally prohibited in your jurisdiction and what are the consequences if a loan exceeds the legally permitted rate?
Interest rates for real estate finance are generally calculated as the sum of the benchmark rate plus the margin. EURIBOR is often used as a benchmark rate. In addition to interest, borrowers usually also have to pay certain costs and fees from the lender.
Unreasonably high interest rates can be considered a violation of statutory law and are therefore prohibited. The eligible interest rates depend very much on individual circumstances. The limits of interest rates do not differ between the various types of lenders.
Loan default and performance
How are remedies against a defaulting debtor applied in your jurisdiction? Is one share sufficient to realize all types of collateral? What is the foreclosure period and under what circumstances can a lender initiate foreclosure proceedings? Are there any restrictions on the types of legal actions that can be brought by lenders?
As a rule, the enforcement of debts in Germany requires a successful court decision.
However, in granting a land charge as security for real estate finance, debtors are generally asked to accept immediate performance on the property and all other assets of the debtor. Thus, in the event of payment default, lenders do not have to obtain a court decision but can directly assert their claims, in particular by requesting a forced sale of the property. There are no restrictions on the types of legal actions that can be brought by lenders. Lenders can execute all collateral documents given to them.
Claims for credit deficit
Do lenders have the right to collect a judgment of money against the borrower or the guarantor for any shortfall between the outstanding loan balance and the amount collected during foreclosure? Are there time limits for a lender requesting an impairment judgment? Are there any limits on the amount or method of calculating the deficit?
Lenders can recover the difference between their debt (in particular the outstanding loan plus interest) and the amount recovered as part of the foreclosure procedure. The general limitation rules for claims under the German Civil Code apply. If the debtor or the guarantor has filed for insolvency and insolvency proceedings have been opened, individual enforcement of claims is no longer permitted.
Protection of guarantees
What steps can a lender take to protect their collateral until they have possession of the asset?
Collateral protection is usually provided by restrictive property covenants in loan and guarantee agreements.
In addition, forced administration is recognized as a type of foreclosure procedure. In forced administration, the property is not sold to a third party, but management of the property is transferred to a forced administrator and creditors receive rent payments.
In addition, rents may be collected during foreclosure proceedings in the event of an assignment as security of rent to the lender.
Can the security documents provide for recourse to all of the borrower’s assets? Is recourse generally limited to collateral and does this matter in a bankruptcy or insolvency case? Is personal recourse to guarantors limited to actions such as filing for bankruptcy, sale of the mortgaged or mortgaged property or additional financing encumbering the mortgaged or mortgaged property or the borrower’s property interests?
As part of the granting of a land charge as security for real estate finance, debtors are generally asked to accept immediate performance, not only on the property but also on all of the debtor’s assets. In addition, in the event of a successful court decision against the debtor, lenders can also enforce their claims using all of the debtor’s assets. Personal recourse to guarantors is generally not limited.
Cash management and reserves
Is it common to require a cash management system and do lenders usually take reserves? For what purposes are reserves generally needed?
Depending on the specific property and credit of the borrowers, lenders may apply for escrow reserve accounts. Such accounts may, for example, include reserve accounts for taxes and other public charges, ancillary costs, capital expenditure or rental improvement measures.
What other types of credit enhancements are common? What about forms of guarantee?
Reserve accounts are common for improving a borrower’s credit. In addition, letters of credit and parental guarantees are also commonly used. For construction or project development loans, holdbacks, as well as third party payment and completion guarantees, are often requested by lenders.
What clauses are generally required by the lender in the loan documents?
The exact set of loan covenants depends on the type of property and the transaction. However, typical alliances include the following:
- information and declaration clauses;
- commitments regarding appropriate property insurance;
- property-related commitments (for example, relating to maintenance and repair of the property); and
- negative pledge commitments.
What are the typical financial covenants required by lenders?
Typical financial covenants for German real estate finance are loan-to-value covenants, debt service coverage ratio covenants, interest coverage ratio covenants and loan-to-cost covenants. Additionally, most commercial loan agreements contain financial reporting requirements for the borrower. Lenders generally reserve the right to request property appraisals under certain conditions.
Guaranteed movable (personal) property
What are the conditions for constitution and perfection of a security right (personal)? Is a “control” agreement necessary to perfect a security interest and, if so, what is required?
A security interest in movable property is generally established by contract, which entails a transfer of title as collateral for the secured property.
Single Purpose Entity (SPE)
Do lenders require every borrower to be an SPE? What are the requirements for creating and maintaining an SPE? Is there a concept of independent administrator of PES and, if so, what is the purpose? If the independent administrator is in place to prevent a bankruptcy or insolvency filing, has the concept been maintained?
Lenders generally do not require every borrower to be an SPE. However, investors often choose to protect their liability and prepare for a clean exit by using SPEs for their real estate investments in Germany. As the SPE is a company incorporated under German law, general German company law applies, as there are no specific rules for SPEs.