ReoCO: a (not so) New Way to Save Real Estate
With the aim of avoiding the devaluation of real estate in bankruptcy proceedings, ReOCos (Real Estate Owned Companies) are back in the spotlight. This kind of companies, incentivized by recent legislation by means of a particularly favorable real estate transfer tax regime, is utilized in enforcement proceedings, in order to prevent real estate subject to auction from being sold at a price far below the market price, thus causing its devaluation.
One of the biggest problems of insolvency proceedings is the devaluation of real estate. The devaluation is caused by the proceeding itself, since a quick sale is considered preferable compared to a sale at the market price, which results in the depreciation and selling of the debtor’s assets.
It is precisely at the core of this issue that ReOCo comes in to play.
ReOCos (Real Estate Owned Companies) are companies regulated by art. 7.1 of Law no. 130 of 1999, and they have recently come to a second life – after being practically unused for more than 20 years – thanks to a special tax regime guaranteed by some new legislation. But how does exactly a ReOCo work?
Let’s imagine a credit institution that has granted a loan, secured by a mortgage on a property.
If the debtor defaults on its obligations and the bank considers downgrading its loan to a NPL (Non-Performing Loan), the NPL will probably be sold as part of a securitization transaction to a Special Purpose Vehicle (SPV), which, through the issue of so-called ASB (Asset Backed Securities) and their placement on the market, aims to raise the resources necessary to purchase the loan.
Once these securities have been acquired and external finance has been obtained, the SPV has two options. Firstly, it can manage the recovery operations themselves, secondly it can create one or more ReOCos for the purpose of acquiring, managing and enhancing in the exclusive interest of the securitization transaction.
In this scenario, ReoCO will be able to participate in enforcement proceedings arranged within or outside the insolvency proceedings and back the sale price of the asset, in order to encourage raising actions by the other participants, thus raising the value of the asset by avoiding its devaluation.
ReoCo is also entitled to purchase the property in order to resell it without the urgency dictated by the execution procedure and, if necessary, has the possibility of carrying out a renovation of the purchased property, in order to ensure its resale at the best possible price.
This mechanism creates a favorable situation for all parties involved in the transaction, as the property will not be devalued and, likewise, the creditors will obtain the best possible satisfaction of their claim.
As mentioned above, Legislative Degree no. 34/2019 also provides for a special regime with respect to taxation. For the application of registration, mortgage and cadastral taxes it actually provides for a fixed amount (currently EUR 200,00 each) and other tax benefits.
Even though some gaps still need to be filled – which makes it necessary to treat the legislation with a certain degree of caution – the introduction of a specific regulation has certainly meant progress compared to the past and bodes well for greater protection of creditors.