1. Property Finance Jargon and Legal Documentation Thursday 11 September 2008 Jonathan Lawrence, Partner, K&L Gates LLP jonathan.lawrence@klgates.com 020 7360 8242

2. 2 Overview  Pack documentation introduction  Property finance glossary  Investment loan term sheet  Development loan term sheet  Loan and security documentation  Parties  Provisions

3. 3 Borrower(s)  Borrower  Trading entity; or  Special Purpose Vehicle (SPV) company?  Single/Multiple  Multiple borrowers for multiple properties  Cross-collateralisation

4. 4 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

5. 5 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

6. 6 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

7. 7 Documentation  Term sheet  Loan agreement  Security documentation  Hedging documentation  Fee letters

8. 8 The Loan Agreement  No standard format  Long form / short form

9. 9 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

10. 10 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

11. 11 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

12. 12 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

13. 13 Covenants  General  General obligations imposed on Obligors  Additional covenants for SPV  Negative pledge

14. 14 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

15. 15 Covenants  Information  Delivery of information  Financial statements, annual accounts  Proceedings  Property reporting requirements (rental income, tenant details etc.)

16. 16 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

17. 17 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”

18. 18 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

19. 19 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

20. 20 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

21. 21 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

22. 22 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

23. 23 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”

24. 24 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

25. 25 Security  Legal mortgage  Fixed charge  Assignment of rental income  Floating charge  Guarantees  Negative pledge

26. 26 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)

27. 27 Fixed charge  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

28. 28 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

29. 29 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

30. 30 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?

31. 31 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

32. 32 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

33. 33 Conditions Precedent (CPs)  Prior to advancing funds, L will insist on receiving certain documents and/or B satisfying other requirements  Corporate documentation and authorisations  Financial information  Property documentation and due diligence  Legal opinions  Miscellaneous

34. 34 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

35. 35 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

36. 36 Property documentation and diligence  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)

37. 37 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

38. 38 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

39. 39 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

40. 40 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

41. 41 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

42. 42 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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