Spain wasn’t built in a day
9 February 2004
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More than 500,000 new homes have been built in each of the past six years in Spain. In 2003, the ground was broken for more new homes in Spain than in France and the UK combined. But while Spain’s economy is still outperforming its European neighbours, the surging demand for housing may have created a bubble that threatens to undermine that growth.
Foreign and domestic tourism are also acting as engines of residential real estate, particularly on the Mediterranean coast and on the Balearic and Canary Islands. According to the World Tourism Organisation, the country is the third highest for tourist preference in the world, with approximately 70 million visitors. It is also the second most popular timeshare destination in the world, after the US. In 2003, credit institutions granted 750,000 mortgage loans for the acquisition of residential property.
Commercial property transactions (excluding acquisitions of raw land and land for self-use) amounted to more than €3.6bn (£2.46bn) in 2003 – €2.13bn (£1.46bn) for office buildings, €800m (£547m) for retail centres and €740m (£506m) for hotels. The office market is mainly concentrated in Madrid and Barcelona, while hotel transactions also include the tourist areas.
Loans and credit
Loans are by far the most common real estate finance agreements in Spain. Credit facilities are common, as in other jurisdictions, for the development of real estate projects, where funds are made available subject to completing certain construction stages.
A wide variety of loan/credit transactions are available under Spanish law, depending on the borrower’s financing needs. From the lender’s perspective, it is possible to distinguish between one-sided loans and syndicated loans (where a group of credit institutions lend the funds). From the borrower’s perspective, a distinction can be made between loans granted to individual consumers (personal loans) and those granted to companies (commercial loans). Loans may either be unconditional, in which the borrower may freely dispose of the funds from the execution of the loan agreement, or conditional, in which use of the funds obtained is restricted to a number of specific agreed conditions set out in the loan agreement.
Although interest rates may be either fixed or floating, most transactions are entered into with floating rates based on prime rates, which are set by unrelated credit institutions such as Euribor.
Real estate finance may also take place through leasing, whereby credit institutions acquire the property and transfer its use to the lessee, who pays a specific price for a fixed term with the option to acquire the property at the end of the lease term for the residual value. In particular, the leasing of real estate is subject to the following main requirements: the leased property must be used within the lessee’s business; the duration of the lease must be at least 10 years; and the part of the price corresponding to amortising the principal must be fixed or increase during the lease term, and the amounts both for amortisation of the principal and interest must be expressly indicated in the leasing agreement.
Financing through real estate leasing presents significant tax benefits, since the amounts paid under the lease are deductible for the lessee. Additionally, amortisation of the leased property may be accelerated, since the lease term is generally shorter than the officially established amortisation periods applicable to acquisitions of real estate property.
Securitisation of mortgage loans
As in other jurisdictions, securitisation in Spain was borne only in relation to the mortgage loans market and as a mechanism enabling credit entities to transfer to third parties the rights and risks arising from loans secured by mortgages. Through this process, credit entities assign their rights arising from loans or similar transactions secured by mortgages to an entity called Fondo de Titulización Hipotecaria (FTH, or mortgage securitisation fund), which acquires such rights using funds raised from the issue of securities. The obligations relating to such an issue of securities shall be met by means of the cash generated by the assigned rights attached to the mortgage loans. The conversion of rights arising from mortgage loans into securities negotiated in the financial markets is contemplated for the first time in certain regulations enacted in the early 1980s in Spain (Ley del Mercado Hipotecario (Mortgage Market Act) 2/1981, (25 March), and Royal Decree 685/1982).
Such regulations aimed at obtaining enough financial resources for the construction and acquisition of real estate properties regulated the issue of different types of securities by credit institutions to finance the granting of loans, the funds of which were used for real estate development and were secured by mortgages on such real estate. This refinancing of loans granted within the mortgage market did not, however, involve taking out such loans from the balance sheet of the issuing credit institutions, nor transferring the risks arising from these mortgage loans. The main purpose of these regulations was to promote the investments by the public in mortgage loans granted by credit entities and to facilitate meeting the cash and solvency ratios established by Spanish banking regulations for credit entities.
Mortgage of real estate property (hipoteca inmobiliaria) is the most common security in real estate transactions and the preferred one for credit institutions. A mortgage allows the creditor, if the underlying obligation is not complied with, to have the charged property sold at public auction and to recover the debt out of the proceeds of sale. There is no transfer to the creditor of possession of the mortgaged property or of title, although the creditor may ask for interim management of the property while legal proceedings are in progress.
The mortgaged property may even be transferred to third parties, although such a transfer shall be inseparably subject to the mortgage. Thus, if a mortgage is foreclosed, the fact that the owner at the time is different from the owner at the time the mortgage was created is irrelevant.
Mortgages on real estate must be executed through a public deed attested by a public notary and, following payment of taxes, filed with the Land Registry. Until these steps have taken place, the mortgage has no legal existence and the lender is not protected. Bearing in mind that there may be a gap of up to two months between the execution of the deed and its effective registration, the creation of the mortgage should be filed with the Land Registry immediately after its execution, at the time of delivery of the funds, since priority is awarded on a first come, first served basis.
Real security has to secure a specific debt with a specifically identified item of property. It is, however, possible to create a mortgage to secure a revolving credit in which the exact amount owed will only be known when the debt becomes due – this is known as a hipoteca de máximo, which may also provide for a floating rate of interest, although the maximum amount for which the asset is charged and the maximum rate of interest have to be stated in the public deed creating the mortgage. Floating charges, where the charged assets are not specifically determined in the original agreement, are not recognised under Spanish law.
Jorge Adell and Bernat Mullerat are partners in Barcelona law firm Mullerat