The financing process Flashcards
What should be carried out during financing process?
Due diligence = important process of factual and legal investigation
Provides analysis into relevant principal parties
Typically undertaken by a prospective buyer, lender or investor prior to entering transaction
Allows lender to make informed decision and, if so, on what terms = loan underwriting
What are the THREE main categories of due diligence?
LEGAL = focus on the legal title and ownership structure
FINANCIAL = focus on risk profile of ability of borrower to pay back loan. Will look at their track record, credit profile and rent payment security
ASSET = focus on the physical risk profile of specific asset. Risks such as age, structure, condition and location are prevalent in this area.
What types of financing documentation are there?
Loan agreements
Letters of undertaking
Corporate documents
Liens
Mortgage deed
Trust deed
Step-in rights
Guarantees and indemnities
Miscellaneous charges
Redemption
Deed of release
Charges and land registration
Covenants
What are loan agreements?
Set out loan terms from one party to another
Must contain a right of enforcement (when and how a lender can enforce its security)
The enforcement provisions should be tailored to reflect the nature of the secured asset
What are letters of undertaking?
An agreement / contract given by seller’s solicitors that they hold the completion monies for the buyer that will automatically be released from the undertaking when
completion takes place
What are corporate documents?
Include but not limited to shareholder and partnership agreements, board minutes and any other relevant corporate information that should be disclosed to the lender.
What are liens and the THREE main types?
A lien = a legal claim on area of real estate granting holder a specified amount of money on sale of the property
Used to ensure payment of a debt, with property acting as collateral against the amount owed. A commercial mortgage is the best example of a property lien.
3 types of liens: consensual, statutory and judgement
What is a mortgage deed?
Legal document that gives a mortgage lender a lien or security interest in a piece of mortgaged property
What is a trust deed?
Document that involves the transfer of the property or asset to a trustee so that it can be sold to raise money to pay to any creditors
What are step-in rights?
Allow 1 party to take the place of another, such as a lender stepping in to the shoes of the borrower, to take control of the property
What are guarantees and indemnities?
Generally in loan agreement and is a way lenders protect themselves from the risk of debt default
Guarantees and indemnities generally used when there are doubts about a borrower’s ability to fulfil its obligations under the loan agreement
What are miscellaneous charges?
These are charges that can be applied by the lender to the loan in certain circumstances such as late payment charges and legal costs
What is redemption?
Redemption is the return of the capital borrowed in the loan
In many circumstances a redemption penalty may be payable if the loan is repaid early
What is a deed of release?
A deed of release of debt is a letter agreement in the form of a deed that releases a borrower from a debt that it owes
What are land registry charges?
The Land Registry holds an electronic land registration record of each property that is registered in the form of the registers of title
With a commercial mortgage / loan, a legal charge is usually registered with Land Registry record for security
Anyone buying a property that is subject to a legal charge must ensure the seller pays off the mortgage on completion otherwise the buyer will be subject to the lender’s power of sale
What are covenants and the TWO categories?
Loan covenants = generally classified in 2 categories: restrictive or financial
They are a condition within loan agreement requiring borrower to fulfil certain conditions / prohibits the borrower from undertaking certain actions or activities
If the borrower does not act in accordance with covenants, the loan can be considered in default and the lender has the right to demand payment
Why might you re-finance on a property / investment?
Reasons for refinancing may include:
- desire for increased flexibility
- reduction in restrictive covenants
- a cheaper loan may be available
When might refinancing take place?
Refinancing may be required when:
- Current loan comes to an end
- During life of loan and replacing existing debt with another debt obligation under different terms
What costs should be considered when re-financing?
There may be redemption penalties for existing loan in event of early repayment, so need to consider economic benefit of doing so
Existing lender may discuss refinancing of existing loan but may come at a cost
What are swaps?
Generally, when lenders provide a fixed loan to a borrower they bare the risk of interest rates going up
They can hedge this risk in capital markets using ‘swaps’
Swaps = agreements (usually between banks) that swap a floating rate for a fixed rate
When they need to be broken early they usually have some sort of early penalty then ends up getting passed down to the borrower
