Hedging issues in real estate finance transactions

Hedging is often required in a land facility or a construction project to manage interest rate exposure during the construction phase or term phase where the funding is provided at a variable interest rate. In a construction context, hedging can still be required in the construction phase, even though no revenue is produced to service interest and the interest is being capitalised. Hedging enables the interest rate to be fixed and therefore provides some certainty for project costs and budgeting purposes.

This guidance note discusses:

• • the common types of derivatives in real estate finance;
• • commercial considerations regarding the identity of the hedge counterparty, whether it be a lender or a third-party hedge provider;
• • the key documentation issues concerning hedging, including the need to ensure that the facility documentation and hedging documentation are aligned (particularly relating to defaults and circumstances where hedges or swaps can be terminated or “closed out”); and
• • intercreditor issues associated with hedging.

See Hedging issues in real estate finance transactions.