1. Property Finance Jargon and Legal Documentation Monday 14 September 2009 Jonathan Lawrence, Partner, K&L Gates LLP

2. 2 UK Real Estate Finance Market – 2009 Savills research  Some 22 banks currently willing to lend, out of which 10 are German and 8 are British  £20m now considered “big ticket”  H1 2009:  26 deals with a value between £50m and £100m  63 between £20m and £50m  64 between £10m and £20m

3. 3 Overview  Pack documentation introduction  Property finance glossary  Investment loan term sheet  Development loan term sheet  Loan documentation  Parties  Provisions

4. 4 The “Finance” in Property Finance  Equity  Debt  Senior  Mezzanine  Intercreditor

5. 5 Borrower(s)  Borrower  Trading entity  Special Purpose Vehicle (SPV) company  Single/Multiple  Multiple borrowers for multiple properties  Cross-collateralisation

6. 6 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

7. 7 The Finance Parties  Lender  Lends / Advances the funds  Identity of original lender may change  Lender may reduce exposure to loan through syndication or sub-participation (and, before the crisis, securitisation)

8. 8 The Finance Parties  Facility Agent  Day to day administration of loan  Security Trustee  Holds security on trust for all Secured Parties  Controls enforcement process  Intercreditor issues  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

9. 9 Documentation  Term sheet  Loan agreement  Security documentation (next session)  Hedging documentation  Fee letters

10. 10 The Loan Agreement  No standard format  Long form / short form

11. 11 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  BUT Quistclose Trust established

12. 12 Interest  Usually based on aggregate of:  1. Floating rate of aggregate of LIBOR/EURIBOR;  2. Margin (interest rate) 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

13. 13 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

14. 14 Covenants  General  General obligations imposed on Obligors  Additional covenants for SPV  Negative pledge

15. 15 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

16. 16 Covenants  Information  Delivery of information  Financial statements, annual accounts  Proceedings  Property reporting requirements (rental income, tenant details etc.)

17. 17 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/renegotiate terms

18. 18 Covenants  Financial: Interest Cover  Ratio of net rental income (gross rental income less certain deductions e.g. insurance premiums, tax) versus 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”

19. 19 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

20. 20 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

21. 21 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

22. 22 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

23. 23 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

24. 24 Payment mechanics  Property Managing Agent  Gross 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”

25. 25 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

26. 26 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

27. 27 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

28. 28 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 the loan  Often prohibited for B and Obligors to assign rights and obligations without written consent of Ls

29. 29 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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