Covenants in real estate development facilities

In a development (or construction) facility agreement, the borrower will borrow money to develop a property (which may it may already own or lease or is acquiring). Therefore, the covenants applicable to real estate acquisition facility agreements often apply equally to a real estate development facility agreement (other than those restricting development), with additional covenants required in relation to the development aspects of the transaction.

Many of the usual covenants (also referred to as undertakings) for a typical bilateral or syndicated loan facility will also apply (in some form) to a real estate acquisition and development finance transaction.

There will also be further financial covenants (eg cost to complete and loan to cost ratio) that will apply to real estate development facilities in addition to those typically specified for acquisition facilities (usually loan to value in nature). These covenants are essential in regulating the conduct of the borrower throughout the life of the project, from both a construction and commercial standpoint and will also cover arrangements (or side deeds) with project third parties, such as builders and major tenants.

This guidance note looks at the additional development-specific covenants which may apply in a real estate development transaction and the key considerations when drafting them.

See Covenants in real estate development facilities.