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DWF Law LLP
Real Estate Finance Market Update 26 February 2020
Introduction
— Who we are
— What we'll cover
— Secured SPV lending – a common example
— Alternative lenders
— Market update
— Lending Terms
— Debt resolution
— Hot topics
— Questions
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About DWF
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Property finance – what we mean – SPV senior loan structure
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SHAREHOLDER/INVESTOR
BORROWER
Senior Lender
Hedge Counterparties
Security Agent
Security over all assets
Security over shares and subordinated debt
Subordinated Debt
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Property finance – what we mean – SPV senior/mezzanine loan structure
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MEZZANINE BORROWER
COMPANY
Senior Lenders
Hedge Counterparties
Security Agent
Security over all assets
Security over shares and subordinated debt
SENIOR SHAREHOLDER
MEZZANINE SHAREHOLDER
SENIOR BORROWERS
MezzanineSecurity Agent
Subordinated Debt
Subordinated Debt
Security over all assets
Security over [all assets/shares and mezzanine subordinated debt]
Security over all assets
Mezzanine Lenders
Who is lending and whyType of Loan Type of Lender Why + -
Bridging Loan Specialist non-bank LenderChallenger Bank
Short term lending *12m or less) to bridge an event (such as purchase pending planning)Lenders looking for retention of borrower (especially development finance and whole lifecycle)
QuickCheaper transaction costs Less due diligence
Expensive rateCommoditised (no “relationship building”)Higher risk (for lender)
Senior Loan (single asset, investment or development
Specialist non-bank LenderChallenger BankUK BankInternational BankInsurerPension Fund
Traditional secured lending product – cornerstone of the market
Wide marketFlexibility in lending termsCommoditised (sub-£10m)Bespoke/LMA (over £10m)
Transaction process longer than aboveIncreased due diligenceHigher transaction costs
Senior Loan (portfolio, investment or development)
Specialist non-bank LenderChallenger BankUK BankInternational BankInsurerPension Fund
As above but for a portfolio of properties
As above As above, plus consideration need to be given to covenants, cures, disposal and prepayment regime
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Who is lending and whyType of Loan Type of Lender Why + -
Senior and Mezzanine Loans (single asset or portfolio, investment or development)
Specialist non-bank LenderUK BankInternational BankInsurer (senior only)Pension Fund
Can achieve higher leverage (LTV) than a senior loan, less equity in a deal
Higher leverageSpreading riskHigher return but increased risk (for lender at mezzanine level)
More riskIncreased documentation (intercreditor) and diligenceExpensive transaction costs
Loan on Loan Financing Investment BankChallenger BankUK BankSpecialist non-bank lender
A non-bank lender may wish to raise debt secured on its loan portfolio, to leverage its own investors investments
FlexibilityIncreased leverage for a non-bank lender
Loss of control for the lender if the deal goes wrong (has to answer to its funder)Capital adequacy issues for the loan on loan lender
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Alternative lenders
— What is “alternative”?
— Who is providing these loans?
— Challenger Banks
— Insurers/Pension Funds
— Specialist Non-Bank Lenders and Funds
— Investment Banks
— Why are they involved?
— Differences with “mainstream”
— Key areas of growth
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Market update
— Core assets
— Retail
— Offices
— Industrial
— Alternative assets
— Student housing
— Build-to-rent
— Senior living
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Market update – Student Housing
—Mature and recognised as “mainstream”
—Still very interesting for foreign investors (US/Middle East/Asia)
—Private sector still growing, possibly reaching capacity in certain towns but still lack of capacity in others
—Closer to traditional CRE than the other “alternative asset classes”
—Brand important to the foreign student market
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Market update – Build a Rent
— Generating a lot of interest
— Relatively new and untested in the long term
— BTR cannot be de-risked as easily as other assets (no pre-sales)
— Affordable living obligations – NPPG v local planning requirements
— Tax considerations
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Market update – Senior living
— A growing market but still in its infancy in the UK
— Higher returns compared to other asset classes
— Senior living deals becoming popular, with a number of different models
— However….
— Limited pool of lenders
— Reputational risk/confidence issues in market (Four Seasons, Southern Cross)
— Highly regulated industry and operator – CQC – good for transparency but additional hurdles
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Lending terms
—Documentation trends
—Execution timetables extending
—Enhanced due diligence (other than from bridge lenders)
—Lenders allowing more operational flexibility (more freedom for certain actions without Lender consent)
—Some (not all) lenders operating a more “pragmatic” approach post default
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Debt resolution
—Debt resolution options
— Refinance and de-leverage
— Collateralisation of single asset deals
— Consensual debt restructuring
— Enforcement options and processes
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Hot topics
—Brexit
—Benchmark rate transition
— LIBOR
— Alternatives
— Green Lending and Sustainability
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Questions?
16© DWF 2020 | Confidential / Highly Confidential
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James MurphySenior AssociateT +44 (0)20 7645 4510M +44 (0)7715 240 019E [email protected]
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Richard HolmesPartnerT +44 (0)333 320 3176M +44 (0)7812 094633E [email protected]
© DWF 2020, all rights reserved. DWF is a collective trading name for the international legal practice and multi-disciplinary commercial business comprising DWF Group plc and all of its subsidiaries and subsidiary undertakings of which, the entities that practice law are separate and distinct law firms. Please refer to the Legal Notices page on our website located at www.dwf.law for further details. DWF's lawyers are subject to regulation by the relevant regulatory body in the jurisdiction in which they are qualified and/or in which they practise.
This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information and makes no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability or suitability of the information contained herein.
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