In the last decade, the Austrian real estate business has undergone a phase of growth, internationalization and professionalism. With the exception of construction and residential development, real estate had largely been regarded as a part of general corporate business, but it is now respected as a business in itself. Large real estate investment corporations and developers, mostly affiliates of banks and capable of large-scale developments, have been created. This process has been accompanied by the expansion of Austrian business to central and eastern Europe, where Austrian real estate companies achieve substantial turnover. Despite this growth in size and the outbound expansion, however, much of the Austrian market is based on individual small-scale construction and private investment. Classic mortgage-backed loan financing is still the most important real estate financing instrument. Yet, equity instruments are gradually emerging.

Types of rights in land

The acquisition of ownership in Austrian land requires a valid title (for example, agreement, bidding award) and its registration with the land register. Austrian law follows the Roman principle of superficies solo cedit, so the owner of the land also owns the buildings and constructions on it.

If an owner of a plot of land does not want to entirely dispose of its property and a developer desires to acquire a strong long-term legal position with regard to the land, a building right (a building right, under the Austrian act Baurechtsgesetz, BauRG) might be appropriate. The building right is the right of the transferee to erect buildings on the site and to use the buildings for a certain period (between 10 and 100 years). A building right is a right in rem, registered with the land register in the same way as land ownership (the land register attributes a separate register number to the building right). A building right may be sold, leased or encumbered similarly to the full property right. Buildings erected by the transferee based on its building right are deemed accessories to the building right rather than accessories to the property in the land. Upon expiry of a building right the ownership in the buildings is transferred to the owner of the land by law. Unless otherwise agreed, the landowner will compensate the transferee with regard to the buildings by a quarter of the remaining value of the buildings.

Section 435 of the Austrian Civil Code (the ABGB) provides an exemption to the above basic principle of simultaneous ownership in the land and buildings, qualifying buildings in specific circumstances as movables (superstructures or Superädifikat) and so allowing distinct owners of land and building. The wording of the law requires the building, to qualify as superstructure, to have temporary character, but case law extended this notion widely so that, given a careful documentation language, almost all types of buildings could be qualified as superstructures. Creation and transfer of rights in superstructures follow a specific legal regime (for example, the transfer of rights in superstructures is not registered with the land register, but respective documentation must be lodged at the competent court followed by a declarative annotation with the land register).

Under Austrian law, ownership in distinct parts of a building (such as apartments and office space) is acquired by joint ownership in the entire land and building (denominated in quotas) supplemented by an exclusive right (in rem) to use the respective distinct space (condominium – although not restricted to apartments called Wohnungseigentum, that is, apartment property). Both the property share in the land and the exclusive right to use the distinct space are registered with the land register.

A mortgage is a pledge in real estate and is also acquired upon registration with the land register. Due to registration, a mortgage is a highly effective security. The ranking of several mortgages on the same plot of land depends on the chronological order in which the registration was applied for; earlier registered mortgages entirely override later registered mortgages up to the secured amount.

Land register

To obtain ownership or certain other rights in Austrian real estate, the acquired title (for example, a purchase agreement) needs to be registered with the land register. The registration of the title constitutes the property as a right in rem, that is, with effect against third parties. Also, other rights in rem attached to land, such as liens (mortgages) and easements, are constitutively to be registered with the land register. The land register virtually covers the entire surface of Austria and is operated by the Austrian district courts (Bezirksgerichte), each responsible for the area of its local jurisdiction. Registration, in particular its constitutive effect and the connected rule of confidence, entails the minor importance of title search, title documentation and related title insurance with regard to Austrian real estate. An up-to-date excerpt of the land register proves the current legal title with only remote exposure risk.

An excerpt of the land register may be obtained at court, from notary publics or law firms at low costs. The district court administering the land register of its area keeps title documents with respect to each plot of land. These documents may be reviewed by anyone and may inform in particular on rights and obligations agreed on between the parties to former acquisitions.

Title documents based on which rights are registered with the land register require signatures legalized by an Austrian notary public or in line with The Hague Convention or appropriate bilateral treaties Austria is party to. The registration of rights is subject to specific and strict documentation language, so careful drafting is essential for a successful registration.

Acquisition by foreign entities

The acquisition of land by non-EU natural persons or legal entities controlled by non-EU persons or entities is subject to administrative approval under the statutes of the nine Austrian federal states on foreign real estate acquisition control. These statutes and the respective approval practices of local authorities differ substantially (for example, with regard to the level to which the foreign quality of shareholders is traced upside holding structures). So local expertise is advisable and ex ante contact with authorities recommended.

Zoning plans, construction permits

In Austria, zoning plans and construction permits fall in the competence of municipalities, zoning plans (defining lawful occupancy of each plot of land) are enacted by municipal parliaments and construction permits (entitling a developer to realize a specific project) are individually decreed by mayors in first instance.

Fees and taxes

The registration of ownership or building rights with the land register is subject to a registration fee, which amounts to 1% of the purchase price. The registration of a mortgage is charged with 1.2% of the (maximum) nominal amount of the secured obligations. In some circumstances registration fees may be – at least for interim terms – avoided by strategies ensuring the rank of potential registrations (for example, temporary annotation of rights with the land register). Share deals, through which legal entities that own real property are acquired, do not trigger a registration fee.

A transfer of property rights in real estate is subject to a real estate transfer tax at a rate of 3.5% calculated on the transfer (purchase) price. An acquisition of all shares in a company holding real estate also triggers transfer tax. However, this tax can lawfully be avoided by having a minimum share of the target company acquired by a third party, which may openly act as trustee on behalf of the principal acquiring entity.

Corporate

Large real estate development projects are often effected by way of special purpose vehicles (SPVs). In Austria an SPV would commonly be established in the form of a limited liability company (Gesellschaft mit beschränkter Haftung or GmbH).

A GmbH allows for a governance structure reflecting the needs of almost any individual project. Management may freely be appointed and recalled, specific preconditions may be provided for under the articles, management is generally bound to comply with instructions of the shareholders and (although not mandatory) additional corporate bodies such as a supervisory board or advisory board (which may be granted rights of consent before certain measures or transactions are implemented) may be established.

Further, changes in the shareholder structure during the project may be effectively limited or controlled under enforceable right of first refusal or option arrangements.

The articles of association of a GmbH must be disclosed to the public (commercial register), so sensitive topics will generally be governed in a shareholders' agreement where several sponsors participate in a project.

If the SPV is envisaged to enter into agreements with its shareholders or other companies pertaining to the same group of companies, strict Austrian capital maintenance rules, applying to all companies with limited liability, need to be considered. Instances where share capital may be repaid to the shareholders of a GmbH are strictly limited (for example, distribution of dividends or liquidation proceeds). These restrictions do not merely aim to preserve the nominal share capital of a company. Rather, transactions entered into by a GmbH and its shareholders within the above understanding may generally only be entered into at arm's length terms and conditions, which should be considered when structuring a project.

In project finance structures (cash-flow-based and limited recourse financing), a GmbH is the appropriate legal form, generally limiting the liability of its shareholders to the assets contributed to the company as equity (with the exception of certain situations, including qualified under-capitalization). Because minimum capital requirements upon incorporation of a GmbH are low and because financing banks might required it, enforceable shareholders' obligations to make additional capital contributions at a later stage can be structured.

In contrast, Austrian stock corporations (Aktiengesellschaft – AG) rather focus on real estate portfolio investment. They have been booming in the last 10 years. Six real estate corporations are listed at the prime market of the Vienna stock exchange, regularly funding several billion euro a year by capital increases. Their portfolios are largely composed of real estate assets in Austria, central and eastern Europe, where they act as big players. The Austrian Stock Corporation Act (Aktiengesetz) provides for strict and partly mandatory rules with regard to governance and supervision. An AG requires a supervisory board that, among other things, appoints the management.

Consumer protection

When a consumer acquires real estate, the Austrian Consumer Protection Law applies, providing the consumer with various rights to information and rescission.

Debt financing

In Austria, most real estate (development) transactions are financed by mortgage secured debt.

Loan agreements and guarantees may be concluded without specific formal requirements; the creation of mortgages requires legalized signatures to be registered with the land register.

The purchase of real estate itself is not subject to agreement-related stamp duties. However, certain types of financing agreements (such as loan and credit agreements), assignments and certain guarantees are subject to Austrian stamp duty according to the Austrian Stamp Duty Act.

Given that stamp duty is calculated on the basis of the nominal value of the respective transaction (for example, nominal loan amount) and the tax rate is high (for example, 0.8% for term loans, 1% for non-abstract guarantees), the Austrian Stamp Duty Act has a big effect on Austrian real estate transactions.

However, stamp duty is generally only triggered if a document (Urkunde) within the meaning of the Austrian Stamp Duty Act evidences the agreement. A document within the meaning of the Austrian Stamp Duty Act has to be signed at least by one party to the agreement. The dates of these documents or the language in which the document is drafted is irrelevant for purposes of the Austrian Stamp Duty Act. As a viable measure to avoid stamp duties, documentation on these transactions is often executed outside of Austria (offshore documentation) and certain contractual provisions (for example, on place of performance in case of loan agreements) are structured accordingly. Further, it needs to be assured that existing documentation is not brought into Austria or that substitute documentation is not created after the execution of the transaction documentation. Generally, provisions on costs and taxes are amended to require the party that causes the imposition to bear Austrian stamp duty.

The registration of mortgages with the land register triggers a substantial registration fee.

Basel II implementing legislation, in effect since January 2007 but mandatorily applicable only as of January 1 2008 for banks, will bring about stricter evaluation and reserved lending practice by banks relating to real estate projects. Based on the Basel II accord and the Austrian Banking Act (Bankwesengesetz), commercial real estate loan financing will be classified into the following categories:

General real estate financing (debt repayment by all financial resources of the borrower).

Income-producing real estate (IPRE; debt repayment exclusively by cash flow generated by financed real estate object).

High-volatility commercial real estate (HVCRE).

A substantial concentration in HVCRE financing will force banks to comply with increased regulatory capital requirements triggering higher interest rates for borrowers. Real property types constituting HVCRE lending will be categorized by the Austrian Financial Market Authority (Finanzmarktaufsicht - FMA). For example, acquisition, development and construction projects not containing "substantial equity", not "sufficiently pre-leased", or with "uncertain vending opportunity" may be qualified as HVCRE. The effect of Basel II on lending practice in HVCRE projects will be monitored in the future; in any case, financial viability of real estate projects will be scrutinized in more detail.

Leasing (to distinguish rent, in German Miete, from the concept of leasing, the English word leasing is also used in German) has developed into an important financing concept for real estate. All of the larger Austrian banks have their own daughter companies providing leasing services.

The concept is primarily tax driven. In general, the lessor purchases the property and constructs the building according to the needs of the lessee. The lease agreement is usually concluded for a definite term, the rent to be paid is calculated according to the lessor's expenses and expected profits. Upon expiry of the agreement the lessee may have an acquisition option at a pre-defined residual value. This structure allows the lessee, though not the owner of the real estate, to have the building constructed and to use it according to its needs, at the same time upholding its liquidity and keeping the investment off balance sheet. Due to the off-balance-sheet financing, the equity ratio remains high so that the lessee's rating can be improved. Unlike loan repayments, lease instalments may be qualified as expenses that reduce profits, so that income tax can be optimized.

To keep the investment off the lessee's balance sheet, careful drafting of the lease agreement is required. According to the ministerial guidelines to the Austrian Act on Income Tax (Einkommensteuerrichtlinien), the residual value at which the lessee is entitled to exercise the option to acquire the object upon expiry of the agreement needs to amount to at least half of the book value at the time of option exercise. If the price is lower, the investment must be integrated into the lessee's balance sheet. However, this (low) borderline is likely to be raised to the full book value by new ministerial guidelines later this year.

Similar to loan agreements, lease agreements trigger stamp duties at substantial amounts: for agreements of indefinite term 1% of three years' rent, for agreements of definite terms 1% of the entire rent, yet up to a maximum of 1% of 18 years' rent. To avoid the 18 years' rent calculation, agreements are commonly concluded for indefinite terms combined with long termination waivers. Stamp duty on lease agreements may, similarly to loan agreements, be avoided by the creation of draft agreements and their (only) oral conclusion; however, utmost precaution is required after conclusion of the agreements in order not to trigger stamp duty ex post.

Equity financing

Basel II will force the real estate industry to include more equity elements into their debt-focussed financing strategies. In particular, banks with a focus on real estate have a traditionally strong loan portfolio likely to be diversified in the long run. So banks, along with investors and developers, are venturing on alternative equity-based financing strategies.

On the portfolio investment side, the corporate form of a stock corporation (Aktiengesellschaft - AG) listed on the stock exchange has evolved as the equity finance instrument.

Traditional debt financing, in particular backing distinct developments, could further be supplemented by mezzanine structures balancing higher risk with higher interest spreads by the subordinating repayment obligations. Through the support of mezzanine investors the equity of a developing entity can be reduced to 3% to 5%, while debt remains at 70% to 80% of total investment costs. Mezzanine investors can, in exchange, be granted favourable profit participations. In Austria, mezzanine capital is commonly provided for individual projects (no blind pools), with several mezzanine investors jointly acting through a trustee. Mezzanine investors usually exit upon sale of a developed project. Mezzanine structures can be designed as direct investments in the project company or as (subordinated) profit sharing lending.

In 2003 the Austrian Act on Real Estate Investment Funds (Immobilien-Investmentfondsgesetz) was enacted. Since then, a few open real estate investment funds have been raised in Austria, yet do not play a big role due to the strict provisions with regard to repurchase obligation of shares, investment criteria and biannual appraisal by certified real estate experts.

Apart from and outside of the developed business of Austrian mortgage banks (Hypothekenbanken), mortgage-bonds issuing entities (Pfandbriefemittenten) and of covered bank-bond issuing entities (Emittenten fundierter Bankschuldverschreibungen), real estate-specific securitization instruments are new in Austria. In 2005 the first mortgage-backed securitization bond over €250 million, with a rating of mostly AAA, was issued by a large Austrian real estate corporation.

Public subsidies

Laws of Austrian federal states provide for numerous and complex subsidy schemes in the housing sector (Wohnbauförderung) that form a substantial basis for the economy of the residential real estate business. Subsidies are granted to purchasing individuals rather than to developing entities. Non-profit housing developers also enjoy certain fiscal advantages.

Author biographies

Peter Vcelouch CHSH Cerha Hempel Spiegelfeld Hlawati Peter Vcelouch is a partner of Cerha Hempel Spiegelfeld Hlawati and has been with the firm since 1997. His main areas of practice are real estate, commercial litigation, arbitration and European Community Law. He advises national and international clients in real estate and construction law matters as well as in commercial litigation and arbitration issues, in particular with respect to large construction projects. Vcelouch graduated from the University of Vienna (Mag iur, 1994, Dr iur, 1996). He worked as an academic assistant at the University of Vienna, Institute for Constitutional and Administrative Law (1995 to 1997). He has authored numerous publications in his areas of expertise. Roland Ebenhoch CHSH Cerha Hempel Spiegelfeld Hlawati Roland Ebenhoch is associate lawyer of Cerha Hempel Spiegelfeld Hlawati. His focus is real estate, M&A and project finance. He regularly advises on real estate development and investment projects. Before his legal career, he worked in consultancy related to real estate and urban development. Ebenhoch graduated from the University of Salzburg (Mag iur, 2003) and from Munich University of Technology (Dipl Ing, 1997). He also enjoyed legal education from universities in Paris and Hong Kong.