Real estate liens as security for cross-border property finance The Eurohypothec - a security instrument with real prospects
| Autor | Otmar Stöcker |
| Cargo | Managing Director Association of German Pfandbrief Banks (vdp), Berlin |
| Páginas | 2256-2277 |
Page 2256
Cross-border 1 investment in real estate is not a new phenomenon. However, its funding by foreign banks - i.e. cross-border financing by a bank situated in State A of a property situated in State B - was only boosted with the realisation of the single market, along with its abolition of barriers under the law on the supervision of banks.
The development of complex, high-volume international financing methods has meant that under many legal systems real estate liens have not kept pace with modern requirements 2 .
For a long time cross-border mortgage transactions were not of any great interest to German banks. Apart from a few cases, mostly in regions close to the German border, business was confined to national territory. This was particularly so in the case of German mortgage banks, which were not permitted to secure loans on properties situated in other EC States by way of real estate liens until the middle of 1988.
The banks lacked the necessary know-how about property markets and legal terms and conditions because, until then, they had confined their activities to domestic mortgage transactions. The VDH/vdp 3 therefore started up an intensive information and training programme. Since 1989 the VDH/ vdp has been analysing legal terms and conditions in the form of national seminars, as well as conducting an intensive systematic review of mortgage and land registration law in the individual EU States - both through working groups on foreign business and its own VDH/vdp staff.Page 2257
Most mortgage banks were hesitant in taking on foreign mortgage business - not least of all because of the fact that, during the reunification period, all available resources were invested in developing the new German Länder. The fact that this then involved venturing into territory as yet unknown also meant that, at that time, they were only inclined to take small steps on a few foreign markets, with small volumes of credit that seldom amounted (after conversion) to more than 500,000 euros.
At the beginning of the 90s the structure of real estate funding transactions in Europe still generally took a relatively simple form. Foreign lending structures were therefore also simple. It quickly became apparent, however, that the different legal terms and conditions, particularly in relation to land registration and real estate liens, would lead to procedures for the grant of credit - and particularly the disbursement of loans - that differed from the procedure then followed in Germany.
If ownership title passes inter partes as soon as a written transfer deed is concluded but a mortgage is not created until it is entered in the land register 4 , the problem then is that the vendor will not want to lose or encumber his title to the property before he receives the purchase price, the purchaser does not yet have authority to dispose of (mortgage) the property but the bank will not pay over the loan to the purchaser before being sure that it will receive a mortgage over it. When one then also considers that a legal instrument such as a caution ( Vormerkung ) does not exist everywhere outside Germany and that, in many countries, there is no comparable system of land registration encompassing the positive principle of good faith inherent in registration nor any notarial system of the German kind, the initial problems faced by the banking industry become very clear.
There was also the fundamental problem that most Western European legal systems only made provision for accessory mortgages and the German mortgage banks were therefore unable to apply the contractual structures and procedures used at home based on the Grundschuld (land charge).
This did not mean that all transactions were based on legally uncertain foundations, but it became necessary to understand the established procedures and solutions to problems that foreign banks had already developed to counter weaknesses in the law - both those weaknesses already established and those that were at first sight just conceivable 5 . All of this meant, however, that at first the banks' internal working methods had to be speciallyPage 2258 tailored to the needs of each individual transaction - with corresponding consequences on transaction costs.
As from 1991, German mortgage banks were allowed to include foreign mortgage loans in the cover pool for mortgage Pfandbriefe 6 . The research results therefore were not only circulated within the association but were also made available to the banking supervisory authority through a series of consultations 7 .
As soon as the mortgage banks took on foreign business they had to decide their future strategy. For reasons of cost German mortgage banks quickly stopped regarding the direct cross-border funding of residential properties for private clients as a feasible area of business 8 . Professionalism, specialisation and cost all led to the mortgage banks setting minimum amounts below which they would not consider loan enquiries. At first that limit was approximately DM 1 million but with many banks it soon became DM 3 or even 5 million 9 .
A simultaneous expansion of business to cover all EC States was impossible for purely staffing reasons. The constant pervasion of both legal and commercial conditions and the revenue question meant that, at the beginning, the banks concentrated on just a few countries and on financing some less commercial types of property, particularly offices and retail properties. In order to keep a constant watch on market developments the trend now is to set up representative offices in the most important locations 10 .Page 2259
The original strategy of assisting German clients with their investments abroad and concentrating on the local market in a heavily fragmented property market was soon supplemented (or even replaced) by the taking-on of pan- European financing for highly professional international investors, an area which has steadily developed and won an ever-increasing share of the market. The sums invested achieved new dimensions, given the circumstances at the time. These became impossible for individual banks to manage. In the mid-90s it was still exceptional for a share of a cross-border loan allocated to an individual mortgage bank to amount to a sum of DM 100 million. The involvement of highly professional lawyers, mostly from large international law firms, also quickly became the norm, bringing with them their own ideas on contractual content and collateral mechanisms. This led to greater professionalism generally and also, to a certain extent, to standardisation of international mortgage business.
Rising investment costs made it increasingly necessary to have recourse to consortium loans, also known as syndication. The securing of such loans by way of mortgage made great demands on the legal expertise of all concerned. Under the Hypothekenbankgesetz (Mortgage Bank Law, the «HBG») German mortgage banks were even obliged to structure collateral in such a way that they themselves had a direct interest in it. Indirect security that was only given to the syndicate leader was unacceptable in principle. It was only in UK transactions that a solution was quickly found based on the English concept of a trust 11 . Under other legal systems it was found necessary to use complex devices such as joint creditor arrangements, mortgages ranking pari passu and the division of real estate liens.
It quickly became apparent to the VDH/vdp that the original idea of drawing up a uniform questionnaire for all countries once and for all would not suffice. Arrangements were therefore made for other specialist areas to be included as «specialist topics» alongside the list of questions in the so-called country reports 12 so as to cover the most significant matters with which of the current version of the KWG (German Banking Law) - as an accompanying measure to the conduct of direct cross-border business.Page 2260specialists in foreign mortgage business would have to deal 13 . One of the main points was the mortgage backing of initial syndicated loans; the chief legal topic in this regard is the creation of real estate liens ranking pari passu .
Both structures and legal issues became even more complex when it was not just one property that was to be financed, but a whole portfolio. One good example of this is the finance for the acquisition of almost 90 office and retail properties situated in Switzerland, which was provided in 2001 by a consortium of 4 German mortgage banks. The total volume of that finance amounted to approximately CHF 800 million. The properties were spread over various Swiss cantons.
The reason for a portfolio transaction is that, given the risk diversification effect, the risk with a portfolio is lower than the sum of the individual risks. It is quite clear, in the context of securing portfolio finance by real estate liens, that the best collateral is achieved by a collective real estate lien as it evens out fluctuations in the values of individual properties with in rem effect 14 .
The concept of a collective real estate lien is one known to Swiss mortgage law 15...
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