Alternatives to Dutch bank account structures in Dutch real estate financing

Written on 1 Oct 2019

In the current Dutch real estate financing (REF) market it is almost impossible for Dutch borrowers to grant security over their Dutch bank accounts if the financing party is not a Dutch bank. The reason? Dutch banks ceased giving their (required) consent for creation of (second ranking) security over bank accounts in favour of other parties than the relevant Dutch bank.

This article gives an insight on the developments with regard to bank account security for Dutch REF and shows what practical alternatives are currently being used in the market.

Market parties in Dutch REF market

In the period 2010-2013 Dutch banks (main players: ABN AMRO, Rabobank, ING and SNS (now Volksbank)) had approx. EUR 100 billion of loans outstanding in the commercial real estate market[1]. Meanwhile the Dutch banks have reduced their exposure to REF to approx. EUR 60 billion. The appetite for financing in the sector remains strong (nearly EUR 20 billion in 2017 and EUR 22 billion of investments in 2018)[2]. The retreat of Dutch banks resulted in foreign investors and foreign banks jumping into the gap.

Non-Dutch banks such as Berlin Hyp, Deutsche Hypo, Morgan Stanley (via Unifore) and Hypo NOE are rapidly building their loan portfolios in the Dutch real estate market. But non-banks such as Canada Life, Metlife, Starz and even peer-to-peer platforms (such as Mogelijk) and crowd-funding platforms (such as Geldvoorelkaar and Matching Capital) are also increasing their market share. Although all of these parties can provide funds, they cannot open Dutch bank accounts.

Importance of bank account security and control

In REF the following cashflows are the most important: (i) rent, (ii) disposals (sales of assets), (iii) insurance proceeds and (iv) in some cases also, subsidies. Most of those cashflows will be covered by security. But once payments are made to the  bank accounts of the borrower, it becomes a claim from the borrower on the account bank. If the bank accounts are not pledged and the borrower would go bankrupt, the amount standing to the credit of the account could fall in the bankrupt estate (leaving aside some exceptions).

Under the standard documentation of the Loan Market Association (LMA) the Borrower needs to open separate bank accounts to keep (most of) the abovementioned cashflows separated. And (first ranking) security over those bank accounts is a condition precedent for LMA financings. Meaning that the Dutch borrower needs to be able to give security over its bank accounts before it can utilise the loan.

Position of Dutch banks

Each Dutch bank has, among other things, a first priority right of pledge over bank accounts held with that bank pursuant to the Dutch general banking conditions[3] and the relevant applicable general terms of the account bank itself. The terms also include the assurance that the client has not and will not create security over those rights without consent of the bank.

The Dutch market practice was at some point to accept the first ranking security of the account bank and create second ranking security, with the account bank acknowledging that the first ranking security would only be used for costs and fees in relation to the account (or sometimes capped to a certain absolute amount). Our understanding and experience now is that Dutch account banks are, as a matter of policy, unable to accept security over their bank accounts in favour of third parties.

The key reason provided by Dutch banks is that they are not willing to accept the risk of liability (and costs of additional monitoring) if they would make payments shortly after receiving an enforcement notice under a right of pledge. In addition, Dutch banks may not be comfortable with the underlying payment waterfalls and implied duties to monitor mandates and payments.

Alternatives

If Dutch banks do not give consent for (second ranking) security over the bank accounts, granting security is not possible. Given the market practice and LMA standards, this leads to discussions with foreign parties that are not aware of this restriction. So far we have seen the following alternatives, but each has its pros and cons.

Alternatives Pros Cons
Open bank account at foreign lender The bank accounts are with the lender and the lender can easily get access and control.
  • Not a bank account in the Netherlands. Depending on the type of business of the borrower. There may be a commercial rationale to keep the transaction and bank accounts Dutch.
  • Additional jurisdiction involved to create security over the bank account (increasing lawyers fees) – although some foreign banks may solely rely on their own standards for that (without the need for external lawyers and security documents)
  • Only works if the foreign lender is a bank. If it is an institutional investor or an online platform this is not an option.
Keep Dutch bank accounts and open foreign account(s) and do cash sweeps. Borrower can keep its normal NL bank account(s).
  • Additional foreign account(s) required.
  • Depending on systems, cash sweeps may take time and effort to arrange.
  • Cash sweep is not bankruptcy proof. Certain amounts sitting on the NL bank account could still be “lost” in bankruptcy.
Use online banks – for instance Ebury. This bank has an online presence only and has accepted pledges in some recent deal. Bank account in the Netherlands
  • If the borrower requires more classical banking services and/or other services (e.g. insurance) as well, this may not be sufficient.
  • Not sure whether new market parties such as Ebury will continue to cooperate with this.
Make an analysis of the average amount standing to the credit of the account and mitigate the risk by parking part of that amount (whether or not in steps) in a deposit account. The risk of losing the entire amount standing to the credit of an unsecured bank account is mitigated since this amount or part of it is already on a deposit account.
  • Since this amount is not repaid, but formally considered drawn, there are (interest) expenses associated with this. Although it can be agreed that the amount on such deposit account will be taken into account for purposes of financial covenant calculations, this may not be worth it.

We are of course more than happy to further discuss other alternatives with you as well. Should you have any other questions please feel free to contact us!

[1] Annexum | Top financiers 2019: Aantrekkende markt, terugtrekkende financiers

[2] CBRE | Real Estate Outlook 2019

[3] NVB | General Banking Conditions 2017 – see article 24