CHINA Law and Practice Contributed by: Nancy Zhang, Xiaoying Tian and Liangqian Ying, JunHe LLP
3.3 Restrictions on Granting Security Over Real Estate to Foreign Lenders Although the PRC laws do not prohibit an offshore lender from being the mortgagee of real estate col - lateral, in practice, certain local real estate registration centres, which serve as the competent authority in charge of real estate mortgage registration, such as in Xiamen, refuse to register an offshore entity (includ - ing offshore banks) as the mortgagee. Therefore, in terms of practicality, it may not be possible to register a mortgage in favour of offshore lenders in certain localities, resulting in a failure to create an effective mortgage. A borrower is generally able to make repayments to its offshore lender without further restrictions, pro - vided that they have completed the relevant foreign exchange regulatory formalities for the cross-border loan (including, but not limited to, the registration of such cross-border loan) in accordance with the PRC laws. 3.4 Taxes or Fees Relating to the Granting and Enforcement of Security If a mortgage is created over real estate, both the mortgagor and the mortgagee are obliged to pay stamp duty for the mortgage contract at a tax rate of 0.05% each of the secured debt. A minimal reg - istration fee for a real estate mortgage (CNY80 for residential property and CNY550 for non-residential property, per registration) is charged by the registra - tion authority and often borne by the mortgagee. Furthermore, if the mortgagor and mortgagee agree in the mortgage contract to an enforcement notarisation, a fee for enforcement notarisation may be incurred, which is usually borne by the mortgagor. Such fee is charged by the notary public office at a rate equal to an agreed percentage of the amount of the secured debt, which may vary at different localities. 3.5 Legal Requirements Before an Entity Can Give Valid Security Under PRC laws, certain real estate may not be used as collateral to secure a debt, such as land owner - ship (other than land use rights that can be a valid collateral), land use right to certain collectively-owned land such as farmers’ homestead land (other than
shareholder(s), to acquire a commercial real estate, it must meet the requirements and restraints in relation to foreign debt under the PRC laws. Currently, no real estate companies are allowed to arrange loans from offshore, except for foreign-invested real estate com - panies incorporated prior to 1 June 2007. Offshore Acquisition and Onshore Fixed-Asset Loans Where a foreign investor acquires commercial real estate through an equity deal (by acquiring equity interest in the onshore company holding the real estate), the most common financing structure is an offshore acquisition loan accompanied by an onshore fixed-asset loan in renminbi. The offshore acquisition loan is extended by an offshore bank to the offshore buyer to pay for the equity/share purchase price in the same currency as that of the equity/share purchase price, secured by a pledge over the equity interest in the onshore target company acquired by the buyer. The onshore fixed-asset loan is generally extended to the onshore target company by an onshore subsidiary of the offshore bank, secured by a mortgage over the real estate owned by the onshore target company. 3.2 Typical Security Created by Commercial Investors Where a commercial real estate investor that intends to acquire or develop real estate, acquires a loan from a lender, it will usually be required to provide the fol - lowing forms of security: • the mortgage over the real estate; • the pledge of the equity interest of the target or • the pledge of the account receivables, which are usually the rental proceeds generated from the real estate; and • the agreement for the transfer of interests in mate - rial contracts, which generally include material lease contracts, the property management con - tract, asset management contract and insurance policies in relation to the real estate. project company by such investor; • the guarantee made by the investor;
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