The Slovak real estate business is booming. It is also becoming an international business – attractive both to foreign and to national players. While the market for commercial real estate projects in western Europe provides low rates of return, the markets in the CEE region, and in Slovakia in particular, are a much more attractive environment. All this has encouraged the establishment of large real estate investment corporations and developers.

Rights in real estate

The acquisition of ownership in Slovak real estate requires both a valid title (for example, a purchase agreement) and an appropriate mode (that is, the registration of ownership in the land register). Slovak law does not follow the Roman principle of superficies solo cedit. So the owner of the land does not necessarily have to be the owner of buildings on the land.

Under Slovak law, ownership in distinct parts of a building (such as apartments and office space) is acquired by joint ownership in the land and the building (denominated in quotas) supplemented by an exclusive right (in rem) to use the respective distinct space. Both the property share in the land and the exclusive right to use the distinct space are registered with the land register.

An easement places some restriction on the owner of real property in favour of another person so that the owner is obliged to tolerate something, abstain from something or perform something. The rights arising from an easement are either attached to ownership in a specific immovable asset (real estate), or pertain to a particular person. An easement attached to ownership in an immovable asset will always pass together with the ownership right of the immovable asset.

Easements arise on the basis of: a written contract; a last will in connection with inheritance proceedings; an approved agreement of heirs; a ruling of the competent administrative authority; particular statutory provisions (for example, regarding utilities such as telecommunication or gas networks). A right-equivalent to an easement can also be acquired by the long-term exercise of such a right (acquisitive prescription). To be effective, rights-equivalent to an easement must be registered in the land register.

A lien is used to secure a receivable in case debt of the corresponding value is not paid (performed) in time. Satisfaction may be obtained from the proceeds realizing the asset encumbered by lien. A lien is established on the basis of a written contract or by a court decision approving an agreement on the settlement of inheritance. A lien could also arise ex lege or as an execution lien.

A mortgage is a pledge in real estate and is also acquired by means of registration in the land register. This registration makes a mortgage a highly effective security. The ranking of several mortgages on the same plot of land depends on the chronological order in which the respective mortgages were registered; earlier registered mortgages entirely override later registered mortgages up to the secured amount.

Land register

To obtain ownership or certain other rights in Slovak real estate, the acquired title (for example, a purchase agreement) needs to be registered in the land register. The registration of the title constitutes the property as 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 in the land register. A sale of land requires formalities, but 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 land register covers almost all land in Slovakia. It is operated by the land register office (katastrálny úrad) responsible for the territory in which the respective real estate is located. According to the Slovak Land Register Act, the data of the land register, that is, the data about the rights to the real estates, the parcel number and the geometrical identification of the real estate, are considered trustworthy and binding if not proved and enforced otherwise. An up-to-date excerpt from the land register proves the legal title with only remote exposure risk.

As in many other central European jurisdictions, title search, documentation or title insurance are redundant because of the comprehensive scope and constitutive effect of the registration of rights, and the connected rule of confidence.

Excerpts from the land register are provided by the respective land register offices. The land register offices also keep copies of all documents that served as a basis for any registration with respect to each piece of land. Copies of these documents can be obtained and included in legal due diligence research.

Title documents based on which rights are to be registered with the land register require signatures legalized by a notary public. The registration of rights requires precise and unambiguous wording of documents, so careful drafting by experienced attorneys is essential for a successful registration.

Acquisition by foreign entities

Foreigners' acquisitions of real estate in the Slovak Republic used to be limited by the Foreign Exchange Act. Since the Slovak Republic's accession to the EU (May 1 2004), these restrictions have been liberalized. Today, foreigners may acquire real estate in the Slovak Republic, with some exceptions. The Foreign Exchange Act defines a foreigner (cudzozemec) as a natural person or a legal entity that is not a resident, including branch offices of foreigners in the Slovak Republic (unless a branch office of a foreign bank in the Slovak Republic to the extent of the activities covered by its banking licence). The Foreign Exchange Act stipulates certain exceptions to the freedom of foreigners to acquire real estate in the Slovak Republic.

Foreigners may not acquire ownership rights in land that forms part of agricultural or forest land outside the border of the built-up area of a municipality. However, this restriction does not apply to a foreigner who inherits the property or a foreigner who:

• holds a citizenship of the Slovak Republic;
• holds a citizenship of a EU member state and has the right to temporary residence on the basis of the registration of the foreigner's acquisition of ownership rights to land that forms part of agricultural land and which it has been farming for at least three years from the date of the validity of the treaty on the Slovak Republic's accession to the EU.

Foreigners may not acquire ownership rights in real estate the acquisition of which is restricted by law (for example, mining or environmental law).

Zoning plans, planning permits, construction permits

In Slovakia, zoning plans, planning permits and construction permits fall within the competence of municipalities. As a basic rule, zoning plans (defining lawful occupancy of each plot of land) are enacted by municipal parliaments, and planning permits (approving the specific purpose for which the site will be used) and construction permits (entitling a developer to realize a specific project) are decreed by mayors as representatives of the municipalities in first instance.

Fees and taxes

The ordinary registration (within 30 days) of ownership, or certain other rights, with the land register is subject to a registration fee of Sk 2,000 ($75). For express proceedings within 15 days there is an increased rate of Sk 8,000.

The Income Tax Act unified personal income tax and corporate income tax at a flat rate of 19%. Tax on dividends has been abolished and capital income of shareholders of companies seated in the Slovak Republic is not subject to taxation.

Real estate tax is a local tax, according to the Local Taxes Act, because its rates are determined by the respective municipality in which the real estate is located, with effect as of January 1 of the respective calendar year. According to the Local Taxes Act, revenue of this tax funds the municipality's budget. Real estate tax is divided according to its subject: tax on land, tax on buildings and tax on flats (apartments). The Local Taxes Act stipulates rates for each of them but municipalities may provide for different rates.

The VAT Act provides for a flat value-added tax rate of 19%. According to the VAT Act, any taxable person (any person independently performing economic activities regardless of their purpose or results) with a seat, place of business or business premises in the Slovak Republic is subject to registration as a taxpayer once it exceeds a turnover of Sk1.5 million within 12 consecutive months. However, a taxable person is entitled to register as a VAT taxpayer even if it did not meet the turnover threshold.

Corporate

Large real estate development projects are often carried out through special purpose vehicles (SPV). In Slovakia an SPV would commonly be established in the form of a limited liability company (spolocnost s rucením obmedzenym – SRO).

An SRO 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 may be established. Because the articles of association of an SRO must be registered in the commercial register, sensitive topics will generally be governed in a separate shareholders' agreement if several sponsors are participating in a project.

When focusing on real estate portfolio investments, a Slovak stock corporation (akciová spolocnost – AS) might be the first choice. The Slovak Commercial Code (Obchodny Zákonník) provides for strict and partly mandatory rules with regard to governance and supervision. An AS requires a supervisory board.

Debt financing

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

Basel II implementing legislation, which applies as of January 1 2008 for banks, will bring about stricter evaluation and reserved lending practices of banks with regard to real estate projects. Commercial real estate loan financing in accordance with the Basel II accord will be classified into the following categories:

• General real estate financing (debt repayment by all the borrower's financial resources).
• Income-producing real estate (IPRE) (debt repayment exclusively by cash flow generated by the financed real estate).
• High-volatility commercial real estate (HVCRE).

Banks will be forced to comply with capital requirements, triggering higher interest rates for borrowers as a result of a substantial concentration in HVCRE financing. HVCRE will to be qualified by the national bank supervision authority (in Slovakia, Národná banka Slovenska). Under the Basel II guidelines, for example, acquisition, development and construction projects not containing "substantial equity", that are not "sufficiently pre-leased", or that have "uncertain vending opportunity" may be qualified as HVCRE. The effect of Basel II on lending practice in HVCRE projects is a subject of assessment for the future, and the financial viability of real estate projects will be scrutinized in more detail.

Leasing (to distinguish the concept of leasing from rent, in Slovak nájom, the English word leasing is also used in Slovak) has developed as an important financing concept for real estate.

In general, the lessor purchases the property and constructs the building according to the lessee's needs. The lease agreement is usually concluded for a definite term, and 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 construction allows the lessee, although not the owner of the real estate, to have the building constructed and 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. Further, unlike loan repayments, lease instalments may be qualified as expenses-reducing profits, so that income tax can be optimized.

Equity financing

Basel II guidelines will force the real estate industry to consider more equity elements in its debt-focussed financing strategies. In particular banks with a focus in real estate will have traditionally strong loan portfolios that are likely to be diversified in the long run. So banks, along with investors and developers, still venture into alternative equity-based financing strategies.

Author biographies

Ladislav Poloma Siska & Partners Ladislav Poloma is a member of Siska & Partners CHSH Bratislava and has been with the firm since January 2007. His main areas of practices are mergers and acquisitions, takeovers, competition law and corporate law. Poloma graduated from the Law Faculty of Comenius University in Bratislava in 1995. Before joining Siska & Partners CHSH Bratislava two months ago, he was head of the legal department of the Slovakian subsidiary of a multinational FMCG company for almost 10 years. Thomas Hamerl CHSH Cerha Hempel Spiegelfeld Hlawati Thomas Hamerl joined CHSH Cerha Hempel Spiegelfeld Hlawati Partnerschaft von Rechtsanwälten in 2006. He advises clients in numerous projects concerning public procurement, public-private partnerships, real estate, construction contracts, environmental law and unfair competition. He graduated from the University of Vienna in 1995. Before joining CHSH he worked for other high-profile Austrian law firms and for the European Commission. Hamerl is a frequent speaker at seminars and regularly publishes articles concerning public procurement and PPPs in legal magazines.