Overview (January 2001)

Background
Rolling Stock
Facilities
Summary

Background

The Austrian railway company Oesterreichische Bundesbahnen (OBB) became the first Austrian company to be involved in cross-border leasing transactions when it made its first rolling stock American sale and leaseback for locomotives. OBB has tapped the US leveraged lease market seven times for rolling stock to a value of more than $1.4 billion. Vienna Transport (formerly an independent division of the City of Vienna and now an indirect subsidiary thereof) has made three American leveraged leases for light rail equipment to a value of $1 billion. In 1998 OBB entered into a service contract transaction for $599 million for two marshalling yards. This was the largest lease to be attached to marshalling yards and the first European cross-border real estate deal of its kind. These transactions have been very attractive to investors. OBB can now rely on the provisions of the Austrian Rail Infrastructure Financing Act of July 1996, which reduces risks for investors and allows for attractive net values of assets for Austrian owners. Further, the act contains an implicit guarantee of the Republic of Austria and Vienna Transport.

Rolling Stock

Civil law - transfer of title and possession
One of the main areas of concern is how the transfer of rights in rem (ownership and possession) of the rolling stock is dealt with. According to the provisions of the Austrian Act on International Private Law, Austrian law shall apply to the question of transfer of ownership and possession for rolling stock located in Austria. Any transfer requires a legal or contractual basis which contains the obligation to transfer possession or ownership respectively. A lease or sale constitutes a recognized legal title. The transfer of possession or ownership is then perfected by the handing over of moveable assets like rolling stock or if this is not feasible, by way of symbolic transfer.

This is more important in sale and leaseback structures as the lessee actually sells assets, thereby reducing the possibility for other creditors to enforce their claims successfully in the event of default. In this event it is at least necessary to (i) attach plates showing the new owner and (ii) have a formal act of taking possession for the perfection of the sale.

In the event of lease-in, lease-out transactions this problem is not so acute since the original owner does not lose ownership and the rolling stock is still available as security, although the value is reduced by the lease right of the investor or the special trust established for that purpose.

Taxation
The Austrian Stamp Duty Act provides for substantial stamp duty on almost any type of written contract. In particular lease contracts, assignments, loan agreements and mortgages are subject to stamp duty in the range of 0.8% to 1% calculated on the payments to be made under the various contracts. Stamp duty is not payable if:

• at least one party to the agreement is foreign;

• an agreement is signed outside Austria; and

• thereafter neither an original nor a certified copy of the agreement is brought into Austria.

One exemption from this rule concerns loan agreements. Loan agreements between banks are generally exempt from stamp duty. However, if the borrower is an Austrian party and not a bank, then stamp duty will be payable, regardless of where the agreement is signed. The only way to achieve the same effect as a loan is to issue notes (preferably in the form of bearer notes) which are not subject to any stamp duty or capital transfer tax.

A further way of avoiding stamp duty is by not having a lease drawn up in writing, but instead having an oral agreement or correspondence between the lawyers of the respective parties. In practice, such options are only available to parties of first class financial and economic standing.

A pledge of moveable assets including receivables is exempt from stamp duty and can be used instead of assignments. Both pledge and assignment can be structured to have materially the same effect.

Regulatory issues
The lease-in, lease-out of rolling stock does not require specific consents. Any enforcement against rolling stock is restricted, depending on the status of the operator or the fact that it is used for public transport. An enforcement against assets of a community or against rolling stock used for public transport requires the consent of the competent supervisory authority, the respective Austrian state or the federal ministry of transport for rolling stock. An enforcement procedure may only proceed with respect to rolling stock if it neither endangers public transport nor hinders a community in the execution of its public duties.

Facilities

Civil law - transfer of title and possession
In Austria all land is registered in a land register kept at the competent magistrates court. Maps showing individual lots are obtainable from the local federal surveyors' offices. Only those rights and encumbrances registered in the land register are enforceable against third parties. Any purchaser of land can fully rely on the correctness of the entries in the land register and may acquire land in good faith without any encumbrances not registered at the time when the new owner is registered therein, unless it has acted maliciously and in collusion with the landowner and in knowledge of any existing but unregistered rights.

Taxation
The taxation and regulatory issues concerning the lease of facilities (which generally includes the lease of real estate) are more complex. To register a lease, an original lease has to be brought into Austria, and so stamp duty will be triggered. A nominal registration fee is payable.

A mortgage can be registered on the basis of a separate document which need not contain the loan agreement. However, such specific documentation is subject to stamp duty of 1% and a registration fee of 1.2% with respect to the secured amount. Clearly, 2.2% of fees will dramatically reduce the net value and economic feasibility of a leveraged lease transaction.

In a service contract structure it is essential that the right of investors to the services originally supplied through the leased facility can be provided by the investor, as mortgages and leases cannot be registered due to the costs involved. Therefore, only the agreement on rights of enjoyment remain as a way of avoiding stamp duty or substantial registration fees.

Any mortgages or other encumbrances registered after such blocking order will have no effect against an owner registered using a blocking order. If the investor receives such a blocking order and renews it over the term of the lease, he may then apply for registration as the owner if this is provided for when the service contract starts.

Further, it is possible to obtain a renewable blocking order for the land register which only allows the party which is in possession of the original order to be entered as owner in the land register.

A mortgage securing the right of the investor can be registered, although it triggers stamp duty and a registration fee, and causes a foreign resident investor to be subject to Austrian taxation with any income earned from receivables secured by mortgages registered on Austrian real estate. This may trigger grossing-up obligations of the Austrian lessee, which substantially reduce the net value received and thereby render a leverage lease transaction which is economically not viable. It may be easier to agree on rights of enjoyment, or similar rights which are not considered to be leases for stamp duty purposes and which can be registered in the land register from the outset.

Regulatory issues
The acquisition of real estate in Austria by non-European Union residents requires the consent of certain state authorities, although such consent is not required for persons domiciled within the European Union. However, numerous bilateral agreements with Austria exist which allow investors to acquire real estate in Austria. However, due to the long term of the lease or service contract, there is a risk that the existing bilateral agreement may be amended to the disadvantage of the investor. It seems advisable, in the event that registration of the investor's ownership is required under the service contract, that a subsidiary of the investor (or relevant trust) be formed within the European Union to exercise any ownership rights of real estate. In addition, the consent of the Federal Ministry of Transport is required for facilities used for public transport to perfect the rights of the investors under a service contract which commences after the initial leave period.

Summary

Austrian companies have been very active in the cross-border leverage lease sector, pioneering various new types of transactions. They are expected to remain at the forefront of European companies engaged in such transactions, due to their increased knowledge of the sector and the nature of the transactions involved.

For further information on this topic please contact Louis Foramitti at Ortner Pöch Foramitti Rechtsanwälte OEG by telephone (+431 535 3721) or by fax (+431 533 1555) or by e-mail ([email protected]).