LMA Real Estate Finance Documentation Update
01 August 2012
By Mark O'Neill, Partner, Allen & Overy
On 23 April, 2012, at the LMA’s early evening seminar held at Allen & Overy’s London office, the LMA launched the
latest addition to its primary documents: a Facility Agreement for real estate investment transactions in England, Wales and Scotland. This article provides an overview of the new Agreement and some of the key issues raised and discussed during the development process.
The working party
During the early part of 2011, a number of the participants in the London real estate finance market came to the conclusion that there would be a benefit in having access to a facility agreement that reflected current ‘market practice’.
The Agreement is the result of the hard work and commitment of representatives of some nine banks and eight law firms active in the UK real estate finance market and the LMA. The banks were Barclays, Deutsche Pfandbriefbank, Deutsche Postbank, Eurohypo, HSBC, Lloyds, RBS, Santander and Societe Generale. In addition to Allen & Overy, the law firms were Addleshaws, Burness, BLP, Cameron McKenna, Clifford Chance, DLA Piper and Simmons & Simmons. The Commercial Real Estate Finance Council (CREFC) was also represented.
- a single currency term loan facility;
- corporate borrowers and guarantors incorporated in England and Wales;
- properties located in England, Wales or Scotland;
- the transaction structure is as illustrated in the diagram below;
- the loan is provided on a floating rate basis with interest rate hedging provided separately (guidance is give in relation to fixed rate loans);
- the Hedge Counterparties are parties to the Agreement to regulate the relationship between the Finance Parties and to allow the Hedge Counterparties to benefit from the security;
- the facility is used for investment in a portfolio of properties rather than for development and assumes a portfolio of properties rather than a single property;
- the financial covenants consist of historic and projected interest cover covenants and a loan to value covenant;
- security is granted over the assets of the holding company and each property-owning borrower, and over the shares in the holding company; and
- any debt provided by the sponsor is subordinated, and security is granted over that subordinated debt.
Unlike in most other areas of commercial finance, in real estate finance, although the use of companies is common, we also see the regular use of partnerships, limited partnerships, limited liability partnerships and unit trusts, as well as combinations of these vehicles. The Agreement assumes that the vehicles will be companies – this is still the most common structure and allowed closest alignment of the Agreement to existing LMA templates.
- in future there may be scope to combine these provisions.
Relationship with other LMA primary documents
the investment grade facilities agreement is an unsecured document, and the leveraged finance facilities agreement contain security agent provisions;
- some provisions considered boilerplate in the investment grade or leveraged market are not viewed in the same way in the real estate finance market; and
- the boilerplate includes provisions that users may consider more detailed than would be typical for a real estate finance transaction.
What is market practice?
- first, approaches to documentation develop over time. In some cases, some members felt that certain approaches had become market, whilst other members disagreed;
- secondly, various lenders (and, indeed, borrowers and sponsors) have their own policy points, which of course they would like to see reflected in documentation.
- Efficiency – from a conceptual perspective, the more standardised the documentation, the more time that can be spent on those aspects of the transaction that are important to the participants.
- Supervision – whilst most lenders will have existing house views on documentation, their ability to control this is somewhat limited insofar as they are involved in syndicated loan transactions – particularly if the lender concerned is not an arranger. So a document more generally accepted in the market place should help.
- Loan book management – we have seen recently a good deal of focus by lenders on managing their loan books. Frequently this has involved selling off loan books or using loan books as collateral, either for central bank or private sector funding initiatives, and these processes are made more efficient, and potentially enhance the portfolio, where there is a greater degree of consistency in the product.