Order on Valuation of Mortgages and Loans in Real Estate as Security for the Issuance of Covered Bonds

Order on Valuation of Mortgages and Loans in Real Estate as Security for the Issuance of Covered Bonds 1)

Pursuant to Section 8, paragraph 7, Section 12, Section 13, paragraph 2, Section 33 f, and Section 39, paragraph 3, of the Act on Mortgage Loans and Mortgage Bonds and other matters, as consolidated by Statutory Order No. 315 of 11 March 2022, and Section 152 h, items 1 and 2, and Section 373, paragraph 4, of the Act on Financial Business, as consolidated by Statutory Order No. 406 of 29 March 2022, the following is prescribed:

Chapter 1
General Provisions on Valuation

Section 1. For the purpose of mortgage credit institutions' valuation of mortgages and loans in real estate pledged as security for the issuance of mortgage bonds, particularly covered mortgage bonds and special covered bonds, and credit institutions' valuation of mortgages and loans in real estate pledged as security for the issuance of special covered bonds, the institution shall estimate a reasonable cash value for the property without regard to the property's ranking of priorities.

Paragraph 2. The valuation shall be based on the scope of the mortgage right, subject to paragraphs 3-5.

Paragraph 3. Except for harbors for commercial handling of goods, vehicles, and passengers, marinas, and airports, road and traffic facilities that are not accessory to buildings may not be included in the valuation.

Paragraph 4. In the valuation of office and commercial properties as well as holiday homes that are rented out commercially, only land, buildings, and building accessories may be included in the lending base, subject to Section 14, paragraph 4.

Paragraph 5. Installations covered by Section 37 and Section 37 a of the Registration Act may only be included in the property's lending base if they:

1. are fixed to the property,
2. cannot be moved,
3. form natural and integrated parts of the property's operation, and
4. are installed in the property at the owner's expense.

Section 2. The institution's estimate of the value of the mortgage may not exceed the property's reasonable cash market value (market value), regardless of whether the property has recently been sold for a higher amount, subject to Section 27. By the property's reasonable cash market value is meant the estimated amount at which the property can be sold on the valuation date in an independent transaction between an interested buyer and an interested seller under normal market conditions, where each party has acted on an informed basis, with caution, and without coercion.

Paragraph 2. If circumstances are deemed to require a particular scarcity price, the institution shall disregard this in the valuation.

Paragraph 3. In the valuation, the institution shall take into account current risks of changes in market conditions or structural changes.

Paragraph 4. For the purpose of valuation, the institution shall include relevant comparable references.

Section 3. The institution shall value the loan at its nominal value for the purpose of calculating compliance with the coverage requirement in accordance with Section 18 a, paragraph 2, Section 33 a, paragraph 4, or Section 33 b, paragraph 4, of the Act on Mortgage Loans and Mortgage Bonds and other matters, and Section 152 a, paragraph 2, of the Act on Financial Business, subject to paragraph 2.

Paragraph 2. The institution may choose to value the loan at its current value for the purpose of calculating compliance with the coverage requirement, provided that the conditions in Section 18 a, paragraph 3, Section 33 a, paragraph 5, or Section 33 b, paragraph 5, of the Act on Mortgage Loans and Mortgage Bonds and other matters are met.

Chapter 2
Inspection and Documentation

Section 4. The institution shall ensure that inspection and valuation are carried out by a qualified valuer employed by the institution, pursuant to Article 208, paragraph 3, letter b, of Regulation (EU) No 575/2013 on prudential requirements for credit institutions and investment firms, subject to paragraph 2. The valuation report shall be prepared or approved by the qualified valuer who participated in the inspection.

Paragraph 2. The institution may entrust inspection and valuation to a non-employee if the requirements in Article 208, paragraph 3, letter b, of Regulation (EU) No 575/2013 on prudential requirements for credit institutions and investment firms are met, and the institution has issued a detailed valuation instruction. The institution must be able to sanction the non-employee for disregarding instructions, including by withdrawing the valuation task without notice. Payment for valuations must not depend on the size of the estimated values.

Paragraph 3. If the institution entrusts valuation to a non-employee, the institution shall, prior to disbursement, conduct regular and thorough spot checks with inspection of a suitable proportion of the externally conducted valuations based on valuation reports. The spot checks must be of such scope and selected in such a way as to obtain sufficient probability that property descriptions and valuations that are incorrect in relation to actual facts are reviewed. If the institution does not have a model in accordance with the requirements in the second sentence, the institution shall continuously conduct spot checks constituting a minimum of 5 percent of the valuations entrusted to non-employees.

Paragraph 4. If the institution conducts the spot check prior to issuing an offer, the loan amount must always be based on the value set by the institution.

Paragraph 5. If the institution conducts the spot check after issuing an offer, the offer must contain reservations for final approval, and the loan amount must be adjusted by issuing a new reduced offer if the necessary lending value for the offered loan exceeds the lending value set by the institution by either 5 percent or 75,000 DKK.

Section 5. Prior to final valuation, the institution shall ensure that the property has been inspected externally and internally, unless the loan is granted against full public guarantee. In the valuation of a plurality of similar units, internal inspection may be conducted on a suitable number of units.

Paragraph 2. Notwithstanding paragraph 1, the institution may grant loans for the redemption of mortgage loans in its own institution and prior loans with a cash proceeds maximum corresponding to the redemption amount and the costs associated with redemption and disbursement of the loans, including rate hedging costs, but excluding accrued interest, default interest, and arrears, without inspection prior to final valuation.

Paragraph 3. The provision in paragraph 1 does not apply to loan offers that contain reservations for the execution of construction work and for the institution's confirmation of the value, pursuant to Section 30.

Paragraph 4. The institution must not issue a loan offer with reservations for valuation later than 9 months from the time of inspection. The institution must not disburse loans later than 15 months from the time of inspection.

Paragraph 5. The Danish Financial Supervisory Authority may grant exemption from the inspection requirement in paragraph 1 based on a documented valuation model for owner-occupied dwellings for year-round use.

Section 6. The institution shall ensure that the valuation is based on information about the property's land area, buildings, accessories, rights, and obligations, including building regulation provisions. The institution shall further ensure that sufficient information is available to assess the property's income-generating potential, etc., including lease agreements, tenant lists, or similar, as well as other factors affecting the property's value. If the property was sold less than 6 months prior to the time of the loan offer, the institution shall ensure that information on the sales price and terms is available.

Section 7. It must be clearly stated in the loan file under which assumptions the valuation was conducted. In the disbursement of advance loans in real estate pledged as security for mortgage bonds and special covered mortgage bonds, documentation that the conditions under Section 31, paragraph 2, are met must be kept in the loan file.

Paragraph 2. Accessories covered by Section 37 and Section 37 a of the Registration Act, which are encumbered with debt secured by retention of title, movable property pledge, or similar, may only be included in the institution's lending base if the relevant accessory is specified in the loan file.

Paragraph 3. In lending against accessories encumbered with debt secured by retention of title, movable property pledge, or similar, the institution must deduct the existing encumbrance when determining the loan amount.

Paragraph 4. For office and commercial properties, hotels, etc., private residential properties for rent, and properties covered by Section 18, paragraphs 1-3, and Sections 19, 20, and 24, the institution must state which gross rent, operating expense, capitalization factor, and calculation for hotels, pursuant to Section 14, and properties covered by Section 21, and which net operating surplus, add-on to net rent, and add-on to profitability calculation result, pursuant to Section 13, have led to the applied lending value. The institution must further state a justification for the estimated annual expenses for the property's maintenance in the loan file.

Paragraph 5. For properties lent as office and commercial properties, or private residential properties for rent, and properties covered by Sections 20 and 24, the institution must state in the loan file the floor area and estimated market rent per square meter of floor area, pursuant to Section 12, paragraph 1, for each of the property's individual categories of premises. If the lease agreements allow it, the institution must further state the actual rent per square meter of floor area for each premise category.

Paragraph 6. For properties valued at the reproduction cost less depreciation and obsolescence, pursuant to Section 27, the institution must state in the loan file for each of the property's individual categories of buildings which reconstruction or acquisition costs and which values, including deductions for depreciation and obsolescence, the institution has used as the basis for valuation.

Paragraph 7. For nursery and agricultural properties covered by Section 22, the institution must state, in addition to the total market value, the values of land, farm buildings, main house, and livestock in the loan file.

Paragraph 8. In construction on leased land, the loan's maturity must not exceed the agreed lease period. The institution must further have the right to step into the lease agreement in the event that the lessor terminates it due to the debtor's breach of the lease agreement.

Chapter 3
Valuation of Individual Property Categories

Valuation of Owner-Occupied Dwellings and Holiday Homes

Section 8. If the property, which is not subject to forced sale, was sold between independent parties less than 6 months prior to the time of the offer, the institution's lending value must not exceed the cash price according to the purchase agreement or deed calculated in accordance with the Act on Intermediation of Real Estate, subject to paragraph 2.

Paragraph 2. Paragraph 1 does not apply if the parties' relationship with each other provides grounds for assuming that the sales price does not reflect a market price, pursuant to Section 2, paragraph 1. Furthermore, paragraph 1 does not apply if significant value-increasing construction work has been carried out after the time of sale, or if reservations regarding this have been made in the loan offer.

Valuation of Office and Commercial Properties

Section 9. In the valuation of office and commercial properties, the institution must conduct a profitability calculation pursuant to Sections 10-12, which, with add-ons and deductions in accordance with Section 13, forms the maximum for valuation.

Section 10. The profitability calculation must be conducted by dividing the property's annual net rent including add-ons, pursuant to Sections 11 and 12, by the market's yield percentage.

Paragraph 2. The market's yield percentage must among other things reflect the relevant property type in the area, the property's character, and the security for maintaining the net income of the property.

Section 11. By net rent is meant in this order the property's gross rent, pursuant to Section 12, paragraphs 1-4, that accrues to the lessor, with deduction of operating expenses incurred by the lessor.

Paragraph 2. The net rent after paragraph 1 may be increased by an add-on corresponding to the interest on a usual deposit and prepaid rent for comparable premises, unless the actual prepaid rent or deposit is less, or the deposit has been replaced by a guarantee from a credit institution or others. The interest must not exceed the discount rate.

Paragraph 3. If operating support is granted to the property in accordance with the Act on Sanitation, the Act on Urban Renewal and Housing Improvement, or Chapter 4 of the Act on Urban Renewal and Development of Cities, which does not cease upon change of ownership, the net rent after paragraph 1 may be increased by a special add-on. The add-on to the net rent must not exceed the part of the operating support granted in relation to the expenses approved by the municipal council that result in an increase in the property's utility value and that have formed the basis for the calculation of the rent increase. The discounting of the add-on to the net rent is conducted using an interest rate that corresponds at most to the discount rate, reduced by the current inflation rate, but at least 0 percent. If operating support is granted for services on index loans, the operating support for a corresponding nominal loan may instead be used as the basis.

Section 12. The gross rent for premises may not be estimated higher than the gross rent that they may be assumed to be let for, taking into account the institution's knowledge of the most recently concluded lease agreements for and the offering of comparable premises with regard to location, type, size, quality, equipment, and condition of maintenance (market rent). If comparable properties with newer rent offerings are not found in the premise area, the market rent is estimated taking into account the market rent level for comparable premises in comparable premise areas. In setting the market rent, unchanged use of the premises must not be assumed, unless it is very likely that re-letting of the premises could be conducted for the same use.

Paragraph 2. If premises in the property are let at a rent exceeding the market rent after paragraph 1, the rent is not transaction-determined, the tenant is independent of the property owner, and the tenant's right of assignment is conditional on the mortgagee's approval, the present value of the excess rent may be added to the profitability calculation result, provided that an assessment of the tenant's solidity, the size of the excess rent, and the length of the notice period makes it prudent. The requirement in the first sentence, that the tenant's right of assignment must be conditional on the mortgagee's approval, may be waived if the tenant remains liable for the rent payment for the entire notice period regardless of assignment. If the tenant has incurred very large expenses for special fittings at their own expense, this may be included in the assessment of whether it is prudent, pursuant to the first sentence. The discounting of the excess rent is conducted using an interest rate that corresponds at most to the discount rate, reduced by the current inflation rate, but at least 0 percent.

Paragraph 3. If premises in the property are let to tenants independent of the property owners at a lower rent than the market rent for the premises after paragraph 1, and the rent is not transaction-determined, the actual rent plus a maximum of 2 years of agreed or validly notified rent increases must be used as the basis. This does not apply, however, if the lease has been terminated, or if it is obvious that the actual rent can be demanded increased according to rental legislation or the lease agreement to a level corresponding to the market rent after paragraph 1, subject to Section 13, paragraph 2.

Paragraph 4. The applied gross rent must not significantly exceed the level at which the tenant can demand the rent reduced in accordance with rental legislation or the lease agreement.

Paragraph 5. The actual operating expenses, including possible ground rent, at the time of the loan offer are used as the basis for the calculation, if incurred by the lessor. The operating expenses must, however, not be set lower than the operating expenses commonly applicable for comparable properties. The annual expenses for the property's maintenance are estimated at the amount that may be estimated to be used annually over a period of 10 years from the time of the offer to bring and keep the property in normal maintenance condition. The actual operating expenses must be estimated exclusive of maintenance expenses, pursuant to Section 13, paragraph 1. If a future gross rent is used as the basis, pursuant to paragraph 3, the future operating expenses in the relevant year must be used as the basis.

Section 13. If it is expected that maintenance work etc. must be carried out in the property over a period of 10 years from the time of the offer, the profitability calculation result must be reduced by at least the present value of the expenses therein in today's prices and to the extent that the maintenance expenses included in the net rent, pursuant to Section 12, paragraph 5, do not contain amounts for maintenance etc. Discounting must be conducted using an interest rate that corresponds at most to the discount rate, reduced by the current inflation rate, but at least 0 percent.

Paragraph 2. If a rent that is significantly higher than the actual rent is used as the basis based on a regulation possibility in rental legislation or the lease agreement, pursuant to Section 12, paragraph 3, the profitability calculation result must be deducted an amount corresponding to the lower rent in the period until the full rent increase takes effect.

Paragraph 3. If a plot of land can be sold from the property, the profitability calculation result may be added a value thereof, pursuant to Section 25, paragraph 2, and Section 26.

Valuation of Hotels etc.

Section 14. In the valuation of hotels, restaurants, spa properties, holiday centers, campsites, golf courses, and similar, the institution must conduct a profitability calculation that forms the maximum for valuation by dividing the probable net surplus before interest and depreciation by the market's yield percentage, pursuant to Section 10, paragraph 2. The institution must critically verify the loan applicant's accounts and budget assumptions in this connection. Section 13, paragraphs 1 and 3, apply correspondingly.

Paragraph 2. If the property is leased out and the loan applicant cannot present the lessee's accounts or budgets, the valuation must be conducted by multiplying the current annual lease payment by the capitalization factor. If the owner bears expenses for the building's operation, the annual lease payment must be reduced by the annual expenses therefor. The institution must critically assess the size of the lease.

Paragraph 3. Even if the property's operation is not based on commercial principles, the profitability calculation must be conducted based on a probable annual net surplus that can reasonably be achieved through normal operation considering the property's character and location.

Paragraph 4. The value of inventory and operating equipment, regardless of whether this is necessary for the operation of properties covered by paragraph 1, must be deducted at its current value in the valuation after capitalization of the net surplus.

Paragraph 5. Notwithstanding paragraphs 1-3, properties with good alternative use possibilities may be valued according to the valuation rules for the property category that constitutes the relevant alternative use possibility, pursuant to Sections 10-12.

Valuation of Private Residential Properties for Rent

Section 15. In the valuation of private residential properties for rent, the institution must conduct a profitability calculation pursuant to Sections 10-12, which, with add-ons and deductions in accordance with Section 13, paragraphs 1 and 3, and Section 17, paragraph 1, forms the maximum for valuation, subject to Section 17, paragraphs 2 and 3.

Paragraph 2. Notwithstanding Section 12, paragraph 3, the agreed rent in accordance with the Act on Private Urban Renewal or Chapter 5 of the Act on Urban Renewal and Development of Cities may be used as the basis without reduction for subsidies. Similarly, the full rent without reduction for subsidies according to the Act on Urban Renewal and Development of Cities may be used as the basis.

Paragraph 3. For properties covered by Section 18 or Section 18 b of the Act on Temporary Regulation of Housing Conditions, the present value of expenses for necessary maintenance work etc., pursuant to Section 13, paragraph 1, is reduced by positive balances on maintenance accounts at the time of the offer.

Paragraph 4. Notwithstanding Section 12, paragraph 3, the market rent after Section 12, paragraph 1, may be used as the basis if the actual rent has been set taking into account taken index loans.

Section 16. The property's operating expenses are calculated in accordance with Section 12, paragraph 5, with the addition of expenses for the lessor's maintenance obligation as mentioned in Section 21 of the Rental Act. The expenses for the lessor's maintenance obligation are calculated at the amount set aside after Section 22 of the Rental Act. If the tenants have partially taken over the maintenance obligation by agreement, the lessor's expenses are calculated at a proportional amount in accordance with Section 22, paragraph 2, of the Rental Act.

Section 17. If the lessor of a private rental property for year-round residence resides in the property, the property contains a lease that is vacant in accordance with the rules of rental legislation, or the property contains a lease that is time-limited and according to the lease agreement ceases within 2 years, the result of the profitability calculation may be increased by an add-on corresponding to 75 percent of the value of an owner-occupied apartment of the same size and condition in the relevant area. If this add-on is included in the profitability calculation, the net rent must be reduced by the gross rent of the relevant apartment, while the operating expenses remain unchanged.

Paragraph 2. The profitability calculation may for the rented part (remaining property) in a property divided into owner-occupied apartments for year-round residence be replaced by a valuation corresponding to 50 percent of the value of a corresponding number of non-rented owner-occupied apartments of the same size and condition in the area, provided that the institution, considering the number of apartments and the Rental Act's provisions on exchange rights, finds it prudent.

Paragraph 3. For leases let between family members in direct ascending or descending line, and which are covered by Section 2, paragraph 1, of the Order on Delimitation of Property Categories and Redemption of Loans upon Transition to Another Property Category, but which are exempted from the category of owner-occupied dwellings for year-round use pursuant to Section 2, paragraph 3, of the Order on Delimitation of Property Categories and Redemption of Loans upon Transition to Another Property Category, the profitability calculation may be replaced by a valuation corresponding to the value of a corresponding non-rented property.

Valuation of Public Housing and Private Cooperative Housing etc.

Section 18. In the valuation of private cooperative housing properties, the institution must conduct a profitability calculation pursuant to the provisions in Sections 10-12 with add-ons and deductions in accordance with Section 13, paragraph 1, subject to paragraphs 2 and 3.

Paragraph 2. The rental income of private cooperative housing properties is determined as follows:

1. For properties located in a regulated area and put into use before 31 December 1991, the rent is determined at the value of the lease. This means the rent that can be charged for a comparable lease that is subject to cost-based rent, pursuant to the Act on Temporary Regulation of Housing Conditions. For leases that have been substantially improved, pursuant to the Act on Temporary Regulation of Housing Conditions, the rent may be determined at most at the amount that the local rent board can approve.

2. For properties located in an unregulated area and put into use before 31 December 1991, the rent is determined at the value of the lease, pursuant to the Rental Act.

3. As the property's rental income for properties put into use after 31 December 1991, market rent in accordance with Section 12 is used.

4. Notwithstanding Section 12, paragraph 3, the agreed rent in accordance with the Act on Private Urban Renewal or Chapter 5 of the Act on Urban Renewal and Development of Cities may be used as the basis without reduction for subsidies.

5. Notwithstanding Section 12, paragraph 3

6. The Order contains provisions that implement parts of Directive (EU) 2019/2162 of the European Parliament and of the Council of 27 November 2019 on the issuance of covered bonds and public supervision of covered bonds and amending Directives 2009/65/EC and 2014/59/EU, Official Journal of the European Union 2019, No. L 328, page 29.

Statutory Gazette A
2022 Published on 8 June 2022
31 May 2022. No. 807.
Ministry of Industry, Business and Financial Affairs, Danish Financial Supervisory Authority, file no. 21-012144 CQ002224

31 May 2022. 2 No. 807.