Issues in real estate financing

Robert McNally

18 January 2008

Finance arrangements

Investment finance

Development finance

Company purchase – trading business, tax saving

Securitisation – CMBS, conduit loans

REITs

Equity, joint ventures

Sale and leaseback, opco/propco, outsourcing

Property derivatives

Investment finance

Borrower purchasing or refinancing

Clean SPV, limited- or non-recourse finance

Term loan

Equity, shareholder agreement, subordination

Rent or operating income – net of deductions

Account waterfall

Loan to value

Interest cover

Investment finance - lending

Investment finance - property

Occupational leases

Certificate of title, report on title, overview report

Environmental, structural, valuation and other reports

Property management

Sale and purchase agreement

Insurance – joint or composite, prepayment, broker

Land Registry and other purchase or refinancing matters

Development finance - features

Borrower builds on real estate

Often combined with investment finance

Designer, engineer, contractor, surveyor et al

Step-in

Monitoring surveyor, project manager

Planning permission

Agreement for lease

Development covenants

Collateral

Real estate – legal mortgage

Shares in borrower – fixed charge

Immovables – fixed charge

Movables – fixed charge

Rental income – assignment of right to receive

Bank accounts – fixed charge, blocked (except current)

Duty of care agreement

Collateral

Agreements (including hedging, leases, construction, acquisition) – assignment of rights

Collateral warranties

Insurance proceeds – assignment of right to receive

Sale and purchase agreement – not unless put option

Possibly parent guarantee and further collateral

Others if relevant, eg intellectual property

Finance documentation

Facility agreement

Borrower debenture

Charge over shares in borrower

Subordination deed

Intercreditor deed

Duty of care agreement

Finance documentation

Hedging documents

Parent guarantee

Parent floating charge

Parent deed of indemnity

Collateral warranties

Cost overrun guarantee

Fee letters

Taxation

UK value added tax

- no VAT on sale or lease of commercial real estate

- election to waive exemption from VAT

- effect of election on tenants and purchasers

UK capital gains tax

- payable by landowner on disposal of real estate

- acquisition of real estate with low base cost

- effect on security and repayment

Taxation

Stamp duty land tax (UK)

- payable by purchaser on acquisition of real estate

- stamp duty payable at lower rate on company acquisition

- exemption in certain areas

General

- lenders may insist on borrower using relief

- loan facility

- reserve account

- parent deed of indemnity

- local taxes

Market

Securitisation – CMBS, conduit loans

UK margins decreasing

UK development activity slowing

European – Cevahir Shopping Centre

Equity

Joint ventures

Funds

Sale and leaseback, opco/propco, outsourcing

Hotels

REITs

SH Real Estate Finance Group

Richard Light

Robert McNally

Ted Harrison

John Fox

Clients include:

Royal Bank of Scotland

HSBC Bank

Fortis Bank

Bank of Scotland

Lloyds TSB Bank

London Development Agency

St Martins Property Group

London & Regional Properties