The lending structure in real estate finance

Real estate finance transactions are either acquisition finance transactions or development finance transactions, depending on whether the property is being purchased as an investment (that is, it is already generating revenue) or whether the property is being purchased to be developed.

This guidance note focuses on what is thought of as traditional real estate finance, that is lending against the cash flow generated by a property, typically with security over that real property. In its simplest form, traditional real estate finance involves a loan to a borrower which is repaid from the rental income of the borrower’s property, usually with the benefit of a mortgage over that real property. This guidance note discusses:

• • the structure of a typical acquisition finance transaction and development finance transaction;
• • the key parties and documents in real estate finance transactions;
• • the key features of a real estate finance facility agreement; and
• • a lender’s key risks in a real estate finance transaction and how these may be mitigated.

See The lending structure in real estate finance.

Real estate acquisition facilities — key features

Real estate acquisition finance facilities involve a loan to a borrower for it to purchase a property or a group of properties (or to refinance such a purchase). The financing is secured against the property being purchased (or refinanced) and the cash flow generated by the property (that is, rental income). The acquisition may also be to “land bank” the property for subsequent refurbishment or development (in which case, there may or may not be an income source to service interest on the loan and other servicing cash flow will be required).

This guidance note explains the key features of a typical real estate acquisition finance transaction, including the typical security package, intercreditor issues, drawdown mechanics, repayment and mandatory prepayment provisions, bank account and valuation requirements and other property-specific representations, covenants and events of default. Development facilities involve additional issues which are considered below.

See Real estate acquisition facilities — key features.

Real estate development facilities — key features

Real estate development finance facilities involve a loan to the borrower for it to purchase and develop a property (or a group of properties) or to develop a property (or group of properties) that it already owns. This financing is secured against the property, the development documentation and the future cashflow generated by the property (for example, rental income or the proceeds of settlement of off the plan sales) once the development (or part of it) has been completed.

Many of the features of a typical real estate acquisition finance facility will be applicable to real estate development finance transactions. For information on the key features of real estate acquisition finance facilities, see Real Estate acquisition facilities — key features.

This guidance note examines the key features of development facilities (for example, security over development documents and side deeds) and how they differ from acquisition facilities.

See Real estate development facilities — key features.