The LMA Real Estate Finance Facility Agreement
02 July 2012
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The Loan Market Association (the
"LMA") launched its real estate finance facility
agreement in April. We think that the agreement will (and
should) be welcomed. As the LMA acknowledges, however,
it is no easy task to produce a "one size fits all" agreement, and
the aim is more modest. Indeed the LMA points out that it
will be impossible to use the agreement without amendments or
additions. Matters such as updated valuations and
covenant-cure mechanics will have to be negotiated on a case by
case basis. Additional property-specific representations and
undertakings may be needed if the document is used for a
single-property facility.
The agreement envisages a senior single
currency term loan facility to finance multiproperty transactions,
with the properties located in England and Wales or Scotland.
Loans will be advanced to single-property owning borrowers, while
equity and subordinated debt will be downstreamed from a holding
company. Guarantees are given by the parent and each
borrower. Security will be held by a security trustee, but
the LMA has not prepared standard form security and subordination
documents. The facility is for investment rather than
development purposes.
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Finance may be provided on a fixed or a
floating rate basis, and detailed provisions are included for a
floating rate loan with hedging. Hedge counterparties are
made parties to the loan agreement, and it is assumed that interest
payments under the facility and settlement dates under the hedge
will be a number of days after the relevant rental payment
dates. Quite deliberately, however, the agreement does not
seek to resolve certain issues relating to hedging on which there
is no market consensus, such as the increasing desire of hedge
counterparties to have a say in relation to termination and other
matters. No indemnity provision is included on prepayment of
a fixed rate loan.
Financial covenants are limited to loan to
value and interest cover, rather than being driven off financial
statements. Interest cover may be tested on a historical or
forward looking basis. Restrictions on assignment by lenders
of their interests are weaker than in the other LMA forms.
Certain provisions from the other LMA forms are omitted, since they
are not considered market practice in the real estate finance
market.
A major benefit of industry standard
documentation is the adoption of a common framework and language,
and a reduction in the negotiation of "boilerplate" provisions,
although provisions from the LMA's investment grade and leveraged
acquisition finance agreements had already been widely adopted in
real estate finance documents. At 162 pages, however, the new
agreement may prove too heavy for some transactions, and a degree
of simplification is likely to be appropriate when it is used for
bilateral single-property transactions, quite apart from stripping
out the syndication provisions. Exampled of provisions
requiring simplification are the provisions for bank accounts,
which envisage no fewer than four bank accounts for receipt of
various payments (not untypical in the syndicated market), and
those for property protection loans to be made by the lenders
without request by the borrowers, to remedy a borrower's failure to
pay rent under a headlease and insurance premiums.
While accepting, with the LMA, that the
variety of real estate investment finance transactions means that
the agreement will need to be tailored to any particular
transaction, and should not be followed slavishly, our view is that
it provides a very useful starting point. In due course, the
agreement is also likely to influence lenders' own standard forms
of document.
For further information, please contact
Robert
Cooke, Partner in the Finance Group at Field Fisher
Waterhouse LLP.