Real Estate financing

01-06-2024
Real estate debt financing will be secured against the capital value of the property and serviced by rental income. A lender typically will requires security over the asset. In case of a share deal the lender will normally also require security over the shares in the corporate entity holding title to the property. The most common types of securities granted in Dutch real estate financing are:

Mortgage rights

A mortgage right is a security right over a registered immovable property, such as land, buildings, or leasehold rights, that secures the repayment of a loan. A mortgage right is created by a notarial deed and registered in the public Land Registry. A mortgage right can be granted by the owner of the property or by a third party with the owner's consent. A mortgage right can be ranked in priority according to the date of registration or by contractual agreement.

Pledge rights

A pledge right is a security right over a movable property, such as shares, receivables, bank accounts, or intellectual property rights, that secures the repayment of a loan. A pledge right is created by a written agreement and, depending on the type of property, may require notification, registration, or possession by the pledgee. A pledge right can be granted by the owner of the property or by a third party with the owner's consent. A pledge right can be ranked in priority according to the date of creation or by contractual agreement.

Guarantees

A guarantee is a contractual obligation by a third party, such as a parent company, a subsidiary, or a bank, to pay the debt of the borrower in case of default or insolvency. A guarantee can be personal or corporate, and can be limited or unlimited in amount, duration, or scope. A guarantee can be governed by Dutch law or by a foreign law, depending on the parties' choice.

In real estate financing, the following financial covenants are regularly included:

• loan to value;
• debt service cover ratio; and
• interest cover ratio.

Enforcement of security

Pledge and mortgage rights are enforced through a sale by public auction initiated by the foreclosing financier. In an enforcement process, Dutch law provides for the following possibilities for a public auction:

• in case of enforcement of a right of mortgage, the property can also be sold by a private sale, provided that this is approved by the court in preliminary relief proceedings after a request for these from the mortgagor or mortgagee;
• in case of enforcement of a right of pledge, the sale can also be concluded other than by a public auction, at the request of the pledgor or pledgee and after approval by the court in preliminary relief proceedings, unless the deed of pledge stipulates otherwise;
• in case of enforcement of a right of pledge, the pledgee can also request the court in preliminary relief proceedings that the pledgee will acquire the encumbered property against a sum to be determined by such court; and

CMS has extensive experience with working with clients to ensure swift finalization of financing and securities processes with lenders and is a well-known specialist for restructuring of debt.

For a more detailed overview of distressed real estate and enforcement of security we refer to our expert guide.