Snapshot: real estate financing in Switzerland

Financing

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?

Mortgage notes registered on the property typically secure real estate financings. Mortgage notes grant the creditor a lien on the property in the amount specified in the mortgage notes. Mortgage notes are transferable and may be used as collateral for a subsequent lender after repayment. Mortgage notes are enforced in a formal enforcement proceeding led by the debt enforcement office at the place of the property. The enforcement takes time, certainly more than a year.

In addition, commercial real estate financings (especially by non-Swiss banks) are typically secured by an assignment of rents and other claims, the assignment or pledge of bank accounts, and, sometimes, a pledge of the share of the property company. Assigned claims may simply be collected by the bank to which they were assigned; the enforcement of a share pledge is more difficult.

Swiss banks have a predominant role in the financing of real estate in Switzerland. In recent years, a few pension funds have started to provide financing through mortgage brokers, and the first foreign banks have just recently announced their entry into the market. In addition, a few private institutions have been providing mezzanine financing.

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

The acquisition of a building right is typically financed in the same way as the acquisition of full ownership in land. Financing is available for the purchase price, but not for the recurring lease payments.

Lenders do not finance rental agreements. The financing of tenant fittings is typically made in the form of a loan for general business purposes, as it is not practically possible to pledge tenant fittings.

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

Nowadays, real estate financing is almost exclusively secured through mortgage notes. Mortgage notes may be issued in the form of paper securities in bearer or registered form or as paperless mortgages registered in the land register only.

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?

The law does not require third-party real estate appraisals for the financing of real estate. Some lenders nevertheless request such appraisals in commercial financing transactions. In any case, capital adequacy regulations require banks to assess the value of the property at least by an internal valuation.

Some institutional investors, in particular Swiss investment funds, require an independent third-party appraisal for the acquisition of real estate; other investors include such requirements in their internal regulations. Financing banks regularly request the disclosure of appraisals in such cases.

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?

Foreign lenders may in principle make loans secured by Swiss real estate without a special qualification to do business in Switzerland being required, provided that lenders do not have infrastructure or employees in Switzerland. However, foreign lenders may face certain tax disadvantages: borrowers of a loan by a non-Swiss-resident lender that is secured by Swiss real estate must withhold federal and cantonal income tax of roughly 13 to 33 per cent of the interest at source. The tax at source on interest income is reduced to zero under a number of double taxation treaties, including those with France, Germany, Luxembourg, the United Kingdom and the United States.

The creation of new mortgage notes leads to notary fees, land register fees and in some cantons even taxes. The fees are substantial in some cantons. Mortgage notes are thus usually not deleted in the land register but transferred to a new lender in case of a refinancing – in general, no fees accrue in this case.

How are interest rates on commercial and high-value property loans commonly set? 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 are typically set as LIBOR or the Swiss Average Rate Overnight (SARON) plus a margin, nowadays often with the caveat that SARON may never be less than zero. Federal law does not have maximum interest rates that would apply to anything other than consumer credit loans, but the interest may be considered usurious in extreme cases. Some cantons have interest rate limits (eg, the maximum interest rate is 18 per cent in the canton of Zurich).

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?

Outside the insolvency of the borrower, the lender will typically start debt enforcement proceedings for the foreclosure on the property, in which the borrower has several possibilities to object. In particular, the debt enforcement officer will set the borrower a final deadline of six months to pay prior to organising a public auction to liquidate the property. The enforcement of a security in the property thus takes time.

If claims have been assigned for security purposes, lenders will typically also notify third-party debtors (such as tenants, banks and insurance companies) of the assignment of claims so that the amounts are directly paid to the lender. 

The debtor may in principle file for bankruptcy or request a moratorium at any time during the process. Such proceedings have effects on the proceedings for the liquidation of the property but do not affect the preferential right of the secured lender to the proceeds from the property.

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?

Outside the bankruptcy of the borrower, the borrower is liable for the full amount of the loan plus interest and other permitted additions, and must compensate the lenders for any deficiency in the amount recovered through the foreclosure.

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

Outside an insolvency proceeding, in an ordinary debt enforcement proceeding with a view to foreclosure, the bailiff will register a transfer restriction in the land register and must take over the administration (property management) of the property. If rents have been assigned to the lender for security purposes, the lender may also notify the tenants so that the rents can be directly paid to the lender.

In a bankruptcy proceeding, the bankruptcy administration will take control of the debtor and thereby the property. Similarly, in a moratorium proceeding, the administrator will supervise the debtor, and the sale of fixed assets (including investment properties) is excluded without the consent of the court.

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?

Claims from loan financings are ordinary personal claims against the borrower under Swiss law, so that recourse against the borrower is not limited. Non- or limited-recourse loans are unusual in Switzerland and must be specially agreed. In an insolvency situation, however, the lender will benefit from the proceeds of other than secured assets only pari passu with other non-preferred creditors.

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

Cash management systems are not usual in financing by Swiss banks, but foreign lenders sometimes require such systems based on the practice in their home country.

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

Other credit enhancements such as guarantees are not common in Swiss real estate financings.

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

Loans by Swiss lenders are often rather lean and do not contain comprehensive covenants. Generally, the following are most common:

• no insolvency of the borrower,
• no foreclosure on secured property;
• no disposal of secured property;
• no change of use of the secured property;
• no assignment of rents;
• adequate insurance coverage;
• adequate maintenance of the property;
• no default in payment of principal or interest;
• financial reporting and other information requirements (in particular rent roll); and
• pari passu clause, negative pledge.

What are typical financial covenants required by lenders?

Most Swiss real estate financing contains explicit (or at least implicit) loan-to-value covenants. Interest cover ratios are sometimes agreed in larger financings, as are financial reporting requirements (typically annually or semi-annually).

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?

With the exception of shares, movable property (such as furniture, fixtures and equipment, and tenant fittings) is hardly ever used as security for real estate financings. Swiss law requires the lender to have possession and physical control over movable property for a pledge or security transfer to be valid; in most cases, this excludes the possibility for movable property to be taken as security.

The assignment of claims is common (in particular rents and insurance claims and (less commonly) bank accounts and warranty claims). Intellectual property or other rights are hardly ever used as security in real estate transactions. The assignment of claims requires a written agreement; notification of the debtor is not required (and thus not often made prior to an event of default), but has the effect that the debtor may only pay the assignee to be released.

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?

Lenders do usually not require that each borrower be an SPE, but SPEs are often chosen by investors to enable them to exit by way of a share deal. There is no special regulation of SPEs in Switzerland; the ordinary rules of company law apply.