Snapshot: real estate financing in Spain


Financing

Secured lending

Discuss the types of real estate security instruments available to lenders in your jurisdiction. Who are the typical providers of real estate financing in your country? Are there any restrictions on who may provide financing?

The most important real estate security in Spain is the mortgage, as it provides the lender with a direct instrument to enforce its rights in the case of non-performance by means of foreclosure of the property or forced administration. However, lenders usually request additional securities, such as pledges over other assets of the debtor (bank accounts, receivables, shares) or personal guarantees.

In general, credit entities (both national and foreign) are typically the providers of real estate financing in Spain with regard to all types and stages of real estate investment. However, alternative forms of financing (eg, mezzanine) have increased.

In general, there are no restrictions on who may provide financing as long as the regulations and laws applicable to the respective providers (eg, banking regulations applicable to credit entities or supervision by the Bank of Spain) are fulfilled.

Leasehold financing

Is financing available for ground (or head) leases in your jurisdiction? How does the financing differ from financing for land ownership transactions?

As mentioned above, Spanish law does not generally establish that a lease is superior in priority to other rights upon foreclosure. The Spanish commercial lease is governed by almost total freedom between the parties; a minimum or maximum lease term is not legally regulated. There are no special regulations regarding subletting. Therefore, the guarantees required by lenders financing lessees will not be directly related to the premises but to the borrower’s company and the business it develops (pledges over the shares, bank accounts or claims, chattel mortgages regarding equipment and machinery, etc).

Form of security

What is the method of creating and perfecting a security interest in real estate?

Under Spanish law, a mortgage must be granted by means of a public notarial deed and must be registered at the property registry to be valid. With regard to other securities (pledges, guarantees) lower formal requirements apply. However, to obtain an instrument that can be enforced directly in case of non-performance, such securities should be granted by means of a public deed. 

Valuation

Are third-party real estate appraisals required by lenders for their underwriting of loans? Are there government or industry standards for appraisals? Must appraisers have specific qualifications or required government or industry certifications? Who is required to order the appraisal?

Third-party appraisals are generally required by lenders, in particular, if the loan is guaranteed by a mortgage, as the auction value established in the mortgage deed with regard to an eventual foreclosure cannot be lower than 75 per cent of the value determined by means of an official appraisal. Appraisals usually follow the standards established by Spanish regulations; however, in the context of cross-border transactions, international standards, such as the Royal Institution of Chartered Surveyors, have become more common. Appraisers must be validated by the Bank of Spain and, therefore, must fulfil specific requirements with regard to their capital, purpose, insurance coverage, etc. 

Legal requirements

What would be the ramifications of a lender from another jurisdiction making a loan secured by collateral in your jurisdiction? What is the form of lien documents in your jurisdiction? What other issues would you note for your clients?

The ramifications may vary depending on whether the lender is resident within or outside the European Union. Generally, a lender from another jurisdiction must fulfil the requirements of its country of residence to offer loans in Spain and, depending on where it comes from, there may be additional ramifications. Anyone who wants to do business in Spain will need a Spanish tax identification number (referred to as ‘NIE’ for natural persons and ‘NIF’ for legal persons) and the business might be subject to local taxes, although this is determined on a case-by-case basis. The most common form of lien document is the mortgage loan. Embargos are also a way of securing a debt, but only once recognised by a court. Mortgages are registered at the property registry corresponding to the property and the information about the existence of a mortgage is public. Taxes (in particular, stamp duty) become due when a mortgage is granted.

Loan interest rates

How are interest rates on commercial and high-value property loans commonly set (with reference to LIBOR, central bank rates, etc)? What rate of interest is legally impermissible in your jurisdiction and what are the consequences if a loan exceeds the legally permissible rate?

Interest rates on commercial and high-value property loans are commonly set with reference to the European Interbank Offered Rate (EURIBOR) or to the index set from the Spanish Central Bank (usually the same). EURIBOR can be calculated monthly, bi-annually, annually or every five years. It is a reference rate that is constructed from the average interest rate at which eurozone banks offer unsecured short-term lending on the inter-bank market. The maturities on loans used to calculate the EURIBOR often range from one week to one year. It is common for banks to add their own interest rate to the EURIBOR (eg, Euribor plus 1.25 per cent). Usually, when the EURIBOR is negative (which is currently the case), banks will not give negative interest rates; in their calculation, the EURIBOR will remain at zero if it is negative. There is no legally impermissible rate of interest, but exorbitance may be determined on a case-by-case basis, especially regarding loan agreements with consumers.

Loan default and enforcement

How are remedies against a debtor in default enforced in your jurisdiction? Is one action sufficient to realise all types of collateral? What is the time frame for foreclosure and in what circumstances can a lender bring a foreclosure proceeding? Are there restrictions on the types of legal actions that may be brought by lenders?

In the case of debts secured by mortgages as the typical security over property in Spain, the mortgage is usually enforced by a judicial procedure, although extrajudicial foreclosure before a notary is also possible. In this context, the type of mortgage and the characteristics of the borrower must be taken into account: commercial or private loan, borrower as a natural or legal person, a mortgage over the main residence or another type of property, etc. The time frame depends mainly on the court, but in general, the lender must count on nine to 15 months. The lender must follow the legally established steps with regard to the chosen foreclosure procedure. 

Loan deficiency claims

Are lenders entitled to recover a money judgment against the borrower or guarantor for any deficiency between the outstanding loan balance and the amount recovered in the foreclosure? Are there time limits on a lender seeking a deficiency judgment? Are there any limitations on the amount or method of calculation of the deficiency?

Should the amount recovered in the foreclosure be insufficient to pay the outstanding loan balance with the corresponding additions, then the lender will obtain a certification from the court stating the price recovered after the auction as well as the outstanding amounts for any concept with the special distinction of the principal pending, ordinary interest, default interest and costs of the proceeding. The lender has a time limit to enforce the deficiency judgment of five years of the payment becoming due. There is a limitation concerning the amount that the mortgage can cover, but there is no limitation on the amount or method of calculation of the deficiency. 

Protection of collateral

What actions can a lender take to protect its collateral until it has possession of the property?

The lender cannot take possession of the property until the auction price has been paid. However, the mortgage itself should be sufficient security, as it is closely linked to the property and will remain so until the mortgage is settled and finally cancelled. If the lender seeks to collect rent in the case of the borrower’s default, a pledge over the rent receivables should be established in addition to the mortgage over the property. Within judicial enforcements, the lender may solicit the seizure of the rent and other borrower credit rights vis-à-vis third parties.

Recourse

May security documents provide for recourse to all of the assets of the borrower? Is recourse typically limited to the collateral and does that have significance in a bankruptcy or insolvency filing? Is personal recourse to guarantors limited to actions such as bankruptcy filing, sale of the mortgaged or hypothecated property or additional financing encumbering the mortgaged or hypothecated property or ownership interests in the borrower?

Security documents cannot provide recourse for all of the assets of the borrower. Nonetheless, the debtor’s entire estate is liable by law. That said, the foreclosure of a mortgage has a privileged procedure that helps to save time and costs. In a bankruptcy proceeding, the amounts secured by the mortgage will be considered as a credit with special privileges and therefore preferential, but the outstanding amounts outside the limits will not be treated equally. The limits of personal recourse to guarantors depend on the agreement between the parties. It is possible to limit the recourse to certain actions; however, the guarantor may also agree on unlimited recourse.

Cash management and reserves

Is it typical to require a cash management system and do lenders typically take reserves? For what purposes are reserves usually required?

In the context of standard financing, the lender usually does not require cash management systems or reserves. However, the lender usually pledges the rental accounts, rental receivables and legal deposits or other guarantees to be able to enforce its rights quickly in the case of non-performance. In the context of a refinancing loan, cash traps or lockboxes are more common. 

Credit enhancements

What other types of credit enhancements are common? What about forms of guarantee?

A typical credit enhancement in Spain are personal guarantees by the shareholders or the borrower’s group companies if the financial capacity of these additional guarantors is considered sufficient by the lender. Such guarantees are usually designed as payment guarantees with regard to part or all of the debt. In this context, a first-demand guarantee granted in a public deed gives the best protection, as the guarantee can be enforced directly against the guarantor.

Loan covenants

What covenants are commonly required by the lender in loan documents?

Borrowers are usually required to comply with corporate covenants (change-of-control clauses, licences), contract-related covenants (subordination clauses, fulfilment or substitution of securities) and property-related covenants (insurance, environmental obligations, repairs and maintenance of the property, etc).

Financial covenants

What are typical financial covenants required by lenders?

The typical financial covenants are loan-to-value, interest coverage ratio and debt service coverage ratio. In this context, lenders generally ask for the annual accounts or – in the case of non-performance of the covenants – for further reporting documentation with regard to the borrower’s financial situation. Lenders tend to request regular updates of appraisals (usually every few years or more frequently in the case of non-performance).

Secured movable (personal) property

What are the requirements for creation and perfection of a security interest in movable (personal) property? Is a ‘control’ agreement necessary to perfect a security interest and, if so, what is required?

Movable assets (including receivables) can be collateralised on one hand by means of ordinary pledges that necessarily require the transfer of possession of the pledged good or by means of a chattel mortgage or a non-possessory pledge if the possession of the movable asset shall not be transferred to the lender. However, assets that can be collateralised by means of a chattel mortgage or a non-possessory pledge are limited by law. Furthermore, such securities must be formalised by means of a public deed. Ordinary or possessory pledges can be signed as private documents with a view to possible enforcement; however, formalisation in public deed is recommended. Generally, the security agreements contain control clauses.

Single purpose entity (SPE)

Do lenders require that each borrower be an SPE? What are the requirements to create and maintain an SPE? Is there a concept of an independent director of SPEs and, if so, what is the purpose? If the independent director is in place to prevent a bankruptcy or insolvency filing, has the concept been upheld?

In general, lenders do not require the borrower to be an SPE. However, in larger real estate transactions it is usually the investor that opts to carry out the investment by means of an SPE. No special requirements apply with regard to the creation and maintenance of SPEs except for the requirements for the incorporation of a limited liability corporation under Spanish law. There is no general concept of an independent director in Spain.



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