Introduction to Real Estate Finance – Legal Aspects

Course overview

Real estate finance is an important area. The UK commercial property market has of course flourished over the last few decades. Even after the recent credit crunch it continues to be attractive to foreign investors in particular. Yet lenders need to be more careful than ever to ensure that all risks are properly covered, and well-drafted legal documents are vital

This course provides an introduction to the legal aspects of debt finance for real estate. After an overview of the market, parties and legal structure for loan finance, it explains the key concerns for lenders in a property investment facility and how those are addressed in the documentation. That will be followed by a review of the security package for the facility. The additional specialised provisions and security included in a facility for funding a property development project will then be considered, and finally there will be an overview of some other funding structures.

This is an introductory course for those with little or no familiarity with real estate finance. A more advanced, document-focused course, ‘Real Estate Finance Loan and Security Documents’, is also available.

Course content

Introduction to real estate finance

• Investment vs development finance
• Typical sites
• Funding providers
• The market
• Debt vs equity

Structure of real estate finance

• Typical structure for investment facility
• Parties

Key features of real estate finance

• Limited recourse
• SPV as owner/borrower
• Lenders’ main focus
• Loan to value ratio

Due diligence and initial requirements

• Leases
  • Rental income
  • Other key terms
• Tenant creditworthiness
• Valuation
• Title report
• Searches
• Structural survey
• Environmental report
• Insurance
• Security

Financial ratios

• Loan to value ratio
• Interest cover

Ongoing monitoring

• Management of property
• Amendment of occupational leases; grant of new leases
• Insurance
• Information supply
• Other undertakings
• Events of default

Cash management

• Bank accounts

Hedging

Security package

• Mortgage of land
• Assignment of rental income
• Assignment of insurances
• Charges over bank accounts
• Debenture/floating charge
• Charge over borrower shares
• Parent guarantee?
• Registration of security
• Notices of assignment/charge
• Duty of care agreement
• Non-disturbance agreement

Subordination of equity funding

Documenting real estate finance

• Facility agreement
  • Loan Market Association (LMA) form
  • Layout of provisions
  • Representations and warranties
• Security documents
• Subordination agreement

Structure of a development finance facility

• Structure
• Project parties
  • Building contractor
  • Professional team
  • Monitoring surveyor
• Project documents
  • Agreement for lease
  • Building contract
  • Professional team appointments
• Exit options
• Additional due diligence and initial requirements
• Drawdown pre-conditions
• Additional security for lenders
  • Collateral warranties
  • Step-in rights
• Monitoring the project
  • Monitoring surveyor’s role
  • Information supply; site meetings
  • Budget; cost overruns
  • Other undertakings
• Practical completion
• Arrangements for interest on loan

Other funding structures

• Real estate sale and lease-back
• Securitisation
• Opco/Propco