The financing process

Question 1

What should be carried out during financing process?

Answer 1

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

Question 2

What are the THREE main categories of due diligence?

Answer 2

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.

Question 3

What types of financing documentation are there?

Answer 3

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

Question 4

What are loan agreements?

Answer 4

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

Question 5

What are letters of undertaking?

Answer 5

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

Question 6

What are corporate documents?

Answer 6

Include but not limited to shareholder and partnership agreements, board minutes and any other relevant corporate information that should be disclosed to the lender.

Question 7

What are liens and the THREE main types?

Answer 7

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

Question 8

What is a mortgage deed?

Answer 8

Legal document that gives a mortgage lender a lien or security interest in a piece of mortgaged property

Question 9

What is a trust deed?

Answer 9

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

Question 10

What are step-in rights?

Answer 10

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

Question 11

What are guarantees and indemnities?

Answer 11

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

Question 12

What are miscellaneous charges?

Answer 12

These are charges that can be applied by the lender to the loan in certain circumstances such as late payment charges and legal costs

Question 13

What is redemption?

Answer 13

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

Question 14

What is a deed of release?

Answer 14

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

Question 15

What are land registry charges?

Answer 15

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

Question 16

What are covenants and the TWO categories?

Answer 16

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

Question 17

Why might you re-finance on a property / investment?

Answer 17

Reasons for refinancing may include:

• desire for increased flexibility
• reduction in restrictive covenants
• a cheaper loan may be available

Question 18

When might refinancing take place?

Answer 18

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

Question 19

What costs should be considered when re-financing?

Answer 19

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

Question 20

What are swaps?

Answer 20

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