Property Finance Jargon and Legal Documentation
Thursday 11 September 2008
Jonathan Lawrence, Partner, K&L Gates LLP
jonathan.lawrence@klgates.com
020 7360 8242
Overview
 Pack documentation introduction
 Property finance glossary
 Investment loan term sheet
 Development loan term sheet
 Loan and security documentation
 Parties
 Provisions
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Borrower(s)
 Borrower
 Trading entity; or
 Special Purpose Vehicle (SPV) company?
 Single/Multiple
 Multiple borrowers for multiple properties
 Cross-collateralisation
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Obligors or Borrower Group
 Obligors
 Guarantees may be required from shareholders in B /
other entities in B’s group
 Especially relevant where B is an SPV
 Sponsor
 Individual or entity “behind” the real estate
acquisition, B and management of real estate
 Not usually a party to loan documentation
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The Finance Parties
 Lender
 Lends / Advances the funds
 Identity of original lender may change during the term
of the loan
 Lender may reduce exposure to loan through
syndication, securitisation or sub-participation
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The Finance Parties
 Facility Agent
 Day to day administration of loan
 Security Trustee
 Holds security on trust for all Secured Parties
 Controls enforcement process
 Hedge Counterparty
 B enters into a hedge with respect to all or part of its interest
rate exposure under the loan with the hedging counterparty
 e.g. fixed-to-floating interest rate hedge
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Documentation
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Term sheet
Loan agreement
Security documentation
Hedging documentation
Fee letters
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The Loan Agreement
 No standard format
 Long form / short form
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Purpose of the loan
 Should always be set out in loan agreement
 L not obliged to monitor the loan to make sure it is
used for the purpose advanced
 Quistclose Trust established
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Tranching
 Facility may be made up of a variety of loans /
tranches
 Together they are the facility
 Each may be used for a different purpose
 Greater flexibility – different terms
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Interest
 Usually based on aggregate of:
 1. Floating rate of aggregate of LIBOR/EURIBOR;
 2. Margin agreed between L and B (fixed or variable);
and
 3. Any Mandatory Cost
 Paid on each interest payment date (end of interest
period)
 Interest period generally 1, 3, 6 or 12 months
 Interest may be capitalised
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Representations and warranties
 Statements of fact made by B or Obligors about
certain matters of fact relating to themselves, their
status and the underlying real estate
 If untrue, L may call an Event of Default
 Standard reps e.g. that it is solvent, that security
has not been granted in favour of another party
 Specific reps e.g. property specific concerns re
environmental issues
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Covenants
 General
 General obligations imposed on Obligors
 Additional covenants for SPV
 Negative pledge
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Covenants
 Property
 Ensure that property will not fundamentally change
during the term
 Restrict development, granting of leases etc.
 Insurance covenant
 Application of insurance proceeds
 Damage
 Loss of rent
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Covenants
 Information
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Delivery of information
Financial statements, annual accounts
Proceedings
Property reporting requirements (rental income,
tenant details etc.)
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Covenants
 Financial: Loan to Value (LTV)
 Day 1: L obtains credit sanction to lend up to a
maximum percentage of the value of a property
 Ongoing: Measures the ratio of current market value
of a property against the then principal amount of the
loan outstanding
 If max % is exceeded due to fall in property prices, B
will have to bring the loan into compliance by
prepaying proportion of loan/disposing of property
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Covenants
 Financial: Interest Cover
 Ratio of net rental income (gross rental income less
certain deductions e.g. insurance premiums, tax) to
B’s interest payment obligations
 Test measures the ability of B to comply with its
interest payment obligations
 B’s interest payment obligations usually serviced
from rental income
 Can be “look back” or “look forward”
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Covenants
 Financial: Debt Service Cover (DSC)
 Used when loan is amortising
 Ratio of net rental income received versus B’s
interest and principal payment obligations
 Can be “look back” or “look forward”
 Must be more than 1 to ensure B meets interest and
principal obligations under the loan
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Covenants
 Financial
 Remedy a breach of financial covenants by B paying
additional funds into blocked reserve accounts
 Funds will be deemed to reduce outstanding balance
of the loans (LTV) or to supplement net rental income
(Interest Cover and DSC)
 May be released if B complies with financial
covenants or applied to prepay loan if financial
covenants not complied with
 Restriction on number of times can remedy a breach
in this way
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Events of Default
 Trigger events which may mean L cancels
commitments and declares all amounts owing and
immediately payable - Acceleration
 L under no obligation to accelerate loan following
event of default – may waive/renegotiate
 B often allowed grace period
 e.g. insolvency of obligor, non-payment of sums,
misrepresentation, breach of covenant, material
adverse change
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Term and Prepayment
 Term = length of lifespan of loan
 L cannot prevent B repaying the loan prior to end of
term
 Prepayment not favourable for L as misses out on
interest, therefore L imposes prepayment fees
 L may require mandatory prepayment e.g. proceeds
of sale
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Principal
 Loans are interest only or amortising
 Interest only – B pays interest on each payment
date and principal paid as bullet repayment on
maturity date
 Amortising – B repays specific amounts of principal
on regular basis during term of loan
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Payment mechanics
 Property Managing Agent
 Rental income paid into segregated trust
account/held on trust by Managing Agent
 Managing Agent responsible for paying net rental
income into Rent Account
 Duty of care agreement – Managing Agent owes L
direct contractual duty of care
 On interest payment date funds are applied in order
– “waterfall”
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Default interest
 Additional interest which accrues on overdue
amount in event that B or Obligor fails to make a
payment under the loan
 Usually around 2%-3% above the interest rate
usually payable on the loan
 Rate must not be set too high as it may be
considered a penalty and non-recoverable
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Security
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Legal mortgage
Fixed charge
Assignment of rental income
Floating charge
Guarantees
Negative pledge
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Legal mortgage
 Over specified real estate
 Transfer of legal ownership from mortgagor to
mortgagee
 Mortgagor has right to return of property and
payment of any balance after satisfaction of
mortgage (right of redemption)
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Fixed charge
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All other freehold and leasehold property
All buildings, fixture, plant and machinery on the property
All future interests in land
Benefit of all agreements relating to land
Right and interest in proceeds of sale of charged property
Amount standing to credit of all bank accounts
Book debts and other receivables
Goodwill and uncalled capital
Right to recover VAT on any supplies relating to charged
property
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Assignment by way of security
 Rental income
 Right to payment under all present and future
insurance policies over any charged property
 Rights against any tenants of property
 Benefit of any hedging documentation
 Rights under any development and acquisition
documentation
 Benefit of all contracts relating to property
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Other security
 Floating charge
 Over all other assets of B not covered by the other
security
 Crystallisation
 Share charge over shares in B
 L has opportunity to take control of B
 Choice to sell B rather than the property
 Negative pledge
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Practicalities
 Security documentation must be correctly registered
(“perfected”)
 English company: Companies House
 Non-English company: Slavenburg register
 Land Registry
 Deed of priority required?
 Governing law – location of assets?
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Guarantees
 Especially relevant when dealing with SPV B with
no trading history where real estate is sole asset
 L should ensure the guarantor enters guarantee as
a primary obligor and therefore has to immediately
comply with any demand made on the guarantee
without L having to first make demand of B
 Guarantor likely to seek grace period
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Why is the security package so important?
 Security Trustee has certain control over all assets
of B
 Ideally only security over property itself is needed to
recover the principal amount of the loan
 Remaining security satisfies L’s underwriting in case
the LTV covenant is breached
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Conditions Precedent (CPs)
 Prior to advancing funds, L will insist on receiving
certain documents and/or B satisfying other
requirements
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Corporate documentation and authorisations
Financial information
Property documentation and due diligence
Legal opinions
Miscellaneous
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Corporate documentation and authorisations
 B and any Obligors must have taken necessary
corporate action and obtained necessary approvals
inc shareholder approval where necessary
 Includes board minutes and directors’ certificates
attaching constitutional documents
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Financial Information
 L likely to insist on seeing full details of any equity,
shareholder loans and other finance are received
before any loan is made
 L will require copy of pro forma balance sheet of B
(in the case of an SPV) together with a sources and
uses statement detailing how the loan advance, any
shareholder loans, other finance and any equity is
to be utilised
 Evidence that bank accounts have been opened
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Property documentation and diligence
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Report on title/certificate of title
Details of any leases and tenants
Copies of title documents
Insurance details
Physical inspection of property
Valuation/structural survey/environmental report
(addressed to the Finance Parties)
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Legal opinions
 Provided by law firms from all relevant jurisdictions
 Jurisdiction of incorporation of each Obligor and
governing law of any Finance Document
 Addressed to Finance Parties
 Confirm e.g. that Obligor exists and has legal
capacity to enter into Finance Documents
 Opinion provider will often attempt to limit reliance
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Miscellaneous
 Evidence that L’s fees, costs and expenses in
connection with transaction are paid upfront usually deducted from gross advance
 Deal specific CPs may be required e.g.
documentation re any development or capital
expenditure works
 Sweeper CP – “any other documentation or
evidence required by L”
 If multiple drawdown is permitted certain CPs may
be required for each drawdown
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Utilisation / Drawdown
 Specific procedure for drawdown
 Notice to lender required
 Likely that initial drawdown must be made during an
agreed availability period
 Overall number of drawdowns likely to be limited
 CPs must be satisfied prior to drawdown
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Assignment, transfer and Qualifying Lenders
 L usually reserves right to freely transfer its interest
in the loan provided that B does not incur any tax
liability on its interest/other payments due to change
in status of transferee – “Qualifying Lender” concept
 Crucial that L can assign interest freely if it intends
to syndicate/securitise the loan
 Often prohibited for B and Obligors to assign rights
and obligations without written consent of Ls
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Tax
 “Gross-up” obligation on B
 Where L is a Qualifying Lender, if any amounts paid
by B are reduced because withholding tax is
imposed, B will have to gross-up so L receives
amount it would have done notwithstanding the
deduction of tax
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Amendments and waivers
 Amendment usually allowed with written consent of
Majority Lenders and Obligors
 Some amendments e.g. a decrease in margin will
require consent of all Ls as they fundamentally
affect the loan terms
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