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Finance

Finance providers

What are the typical providers of real estate financing in your jurisdiction? Are there any restrictions on who may provide financing?

The providers of real estate financing in Ireland can be broken down into two types:

  • domestic (traditional) banks who have branches and relationships at a local level; and
  • non-traditional lenders who have become more prevalent in recent years.

The difference between the two lies largely in the risk appetite and commercial terms on offer. The non-traditional lenders do not have state ownership or the regulatory restraints of domestic banks and lend at higher rates with various forms of prepayment, arrangement and exit fee mechanisms. They can also move more quickly than domestic banks, who have reporting obligations and credit committee approvals and protocols to adhere to. The non-traditional lenders are not regulated and therefore do not lend to consumers or individuals.

Financing structures

What are the most common structures used to secure real estate financing and how are these security interests perfected?

The most common form of real estate finance structure is an all assets debenture from a corporate entity borrower, with share security over its shares (which are normally owned by another corporate entity). It is becoming increasingly rare to see the use of personal guarantees. A lender would look to put in place security at all levels of the group structure. It is also common to see subordination agreements where other loans are subordinated to the senior debt. If there is security for these other loans, an intercreditor agreement is required.

What covenants are typically made in financing agreements?

Covenants are negotiated on a transaction-by-transaction basis. In a real estate finance transaction the following categories of covenant and undertaking are common:

  • financial covenants;
  • information undertakings;
  • general undertakings; and
  • property undertakings.

Some of the most common financial covenants are:

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

It is common for a facility agreement to include a limited number of ‘covenant cures’ whereby breaches of the financial covenants ‒ which are normally tested quarterly ‒ can be cured by way of a cash injection.

Enforcement of security

How are security interests enforced in the event of default?

Under normal circumstances, a demand letter will be sent; if this is not satisfied, the secured lender can then proceed to appoint a receiver. The steps that need to be taken will be dictated by the security document entered into by the parties and in some instances the statutory powers available.

What is the typical timeframe for the enforcement of security?

This will be dictated by the terms of the security document, but ordinarily a receiver can be appointed within 14 days from the issuing of a letter of demand. The length of time from the appointment of the receiver to the sale of the secured asset will vary greatly depending on the nature of the asset.

Investment

Investment climate

What is the general climate of real estate investment in your jurisdiction?

Ireland’s gross domestic product grew by 7.3% in 2017 (compared to an EU average of 2.5%). Ireland remains a highly sought after location for real estate investment.

The need for more housing dominated the headlines throughout 2017.

The student accommodation market in Ireland continues to perform strongly for investors seeking a long-term investment option given existing and future demand.

Many government initiatives are focused on the above. For example, in an effort to increase supply, a fast-track planning process for large-scale housing developments of 100 houses or more and student accommodation developments of 200 or more bed spaces was introduced.

This will create opportunities for developers, builders, funders and investors.

Investors

Who are the most common investors in real estate?

Recent years have seen an increased professionalisation and internationalisation of the Irish real estate market. Private equity funds continue to reduce their presence in 2017 and are being replaced by more long-term holders of real estate assets such as real estate investment trusts and pension funds, both national and international.

Are there any restrictions on foreign investment in real estate?

Subject to satisfactory anti-money laundering documentation being provided and UN and EU sanctions lists, there is no restriction on foreign investment in real estate.

Investment structures

What structures are typically used to invest in real estate and what are the advantages and disadvantages of each (including tax implications)?

A number of structures can be used to invest in Irish real estate and the type of structure used depends on the investor base, objective of the investment and exit strategy of the investor (eg, whether the asset is held to generate rental income or to appreciate in value).

Irish companies can be used to develop real estate and a 12.5% tax rate should apply to the sale of fully developed land by an investment company.

Non-Irish resident companies are often used to invest and hold Irish real estate and are liable to income tax at a rate of 20% on rental profits, compared with a 25% for Irish resident companies. 

Qualifying Irish real estate funds used for international investment in Irish property portfolios are tax exempt at the level of the fund but highly regulated and expensive to set up and run. Therefore, these are suitable only for large scale investment. The Irish Collective Asset Management Vehicle (ICAV), which is a form of fund, is frequently used for large portfolio investment. The ICAV is able to ‘check the box’ to elect to be a disregarded entity for US tax purposes, which is an advantage over other fund vehicles which cannot. Following changes introduced in the Finance Act 2016, these funds are now subject to withholding tax of 20% on distributions and redemptions.

The activity to be conducted, the size of the investment and the location of the shareholder will dictate the most appropriate structures.

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