What sort of security is typically created or entered into by an investor who is borrowing to acquire or develop real estate?
The financing of acquisition and development projects is generally secured by security created over the assets and shares of the borrower; lenders generally accept non-recourse financing for the acquisition of commercial real estate assets, whereas investor and/or bank guarantees will usually be required in addition to the standard security package for development projects.
Typically, the lenders will require security that allows them to directly or indirectly recover the financed asset.
The most common forms of security over real estate are:
Under French law, pursuant to article 2409 of the French Civil Code, a mortgage must be notarized (using a notarial deed) that is, executed in front of a French public notary. The debtor’s consent to the mortgage needs to be given in the notarial deed either directly by the debtor or by its attorney-in-fact on its behalf, pursuant to a power of attorney granted for the purpose of such deed. The beneficiary’s (ie the lender’s) consent to the mortgage may be expressed by an agent of the lender, under a power of attorney expressly granted by the lender to its attorney-in-fact. The mortgage deed must state the obligation secured and the amount of the secured debt.
In order to be completed, a mortgage requires:
Obtaining the mortgage extract for the relevant asset usually takes three weeks (sometimes more, depending on the location of the property).
A mortgage will guarantee the repayment of the principal amount secured, payment of the interest at the contractual rate and additional expenses, usually valued at up to a maximum 20% of the amount secured.
A mortgage must be registered with the land publicity registry. There is no time limit for registering a mortgage, but in the absence of registration the mortgage will not be enforceable against third parties. In addition, if the borrower is subject to bankruptcy proceedings prior to registration, it will then be impossible to implement the required formalities with full effect in the proceedings. Mortgages rank according to their date and time of registration. As a result, a mortgage created in February but registered in May will rank behind a mortgage created in March but registered in April.
A lender's legal mortgage can only secure liabilities incurred in connection with the financing of the acquisition price of a property (excluding any other costs relating thereto). This means that, if a loan agreement is entered into to finance the purchase of land and the carrying out of construction works, only the financing relating to the purchase of the land may be secured by the lender's legal mortgage. In such a case (purchase of property and construction works), a lender's legal mortgage will be granted for the amount of the loan corresponding to the purchase price and a contractual mortgage will be granted for that part of the loan relating to construction works.
A lender's legal mortgage, like a mortgage, must be made by a notarial deed, but, contrary to a contractual mortgage, the loan secured by lender's legal mortgage must also be made by a notarial deed whereas contractual mortgage may validly secure a loan made under a private deed (it being specified that in such case the lender would not benefit from enforceable title allowing it to enforce such mortgage within a prior court judgement declaring its receivable due and payable). The deed of sale, also made by a notarial instrument, will provide that payment of the price of the property was effected in whole or in part with the funds lent.
Like a contractual mortgage, this security must be registered with the land publicity registry for enforceability against third-parties purpose and it ranks according to its date and time of registration. However, article 2418 of the French Civil Code provides for specific ranking rules to govern the case where several mortgages of different kind (legal, judicial and/or contractual) are registered on the same date:
The registration of a lender's legal mortgage is less costly than a mortgage registration, since this security is exempt from the land publicity tax, which can represent a significant cost saving when the amount secured is significant.