LMA launches new commercial real estate finance development document13 May 2013
The LMA is pleased to announce the launch of its new recommended form of Single Currency Term Facility Agreement intended for use in real estate finance single property development transactions.
The REF Development Document project was begun, at the request of members, following the successful launch of the LMA REF Multiproperty Investment Facility Agreement in 2012. It signals the LMA's continuing commitment to expand its suite of documentation in the real estate finance sector, with a view to achieving greater efficiencies and standardisation across the market through the use of a common framework and language, enabling market participants to concentrate on the key commercial drivers which form the basis of their transactions.
The REF Development Document, which uses the same basic structure and "boilerplate" as the LMA Recommended Forms of Primary Documents for the investment grade market or, where relevant, the leveraged finance market, was put together and agreed by an experienced working party, consisting of representatives from banks (including in-house lawyers) and major City law firms.
Commenting on the document, Clare Dawson, LMA Managing Director, said:
"The new Real Estate Finance Development Facility Agreement demonstrates our commitment to expanding our documentation library in the real estate sector and is representative of the LMA's increased activity in this area of the market. Following a significant rise in both overseas and non-bank investment, we hope that the document will contribute to attracting new entrants to the market, and will also lead to more efficient and productive negotiation of documentation."
Simultaneous with the launch of its new document, the LMA is hosting its first annual real estate finance conference, where panels of senior market practitioners will identify key current trends and challenges in the real estate finance sector, and analyse the ways in which this sector may be brought back to health against a backdrop of economic uncertainty and increased regulatory scrutiny.
Further information is provided below:
1. What is the state of the real estate finance market right now?
There is no question that traditional bank liquidity has been impacted by the Eurozone crisis. Initially, there was a fear that this would lead to a severe credit crunch in the real estate finance market. However, the non-bank market appears to have reacted swiftly, and there are a number of players now entering the market – for example, European insurers, US insurers and funds. Furthermore, pockets of bank liquidity still remain. On the demand side, the market is reasonably balanced, at least for the time being.
2. What benefits will the new LMA document bring to the market?
The LMA document will bring numerous benefits to the market.
Firstly, increased efficiency resulting from the standardisation of boilerplate terms and the provision of a common and recognisable legal framework, with the ultimate aim of improving liquidity in the market. This is particularly important in the real estate finance market which, until recently, has not benefited from standardised documents (each lender/law firm tended to have its own precedent forms). A lack of standardisation can lead to increased negotiation and time taken for transactions to complete, and can make a market less attractive to new investors.
Secondly, the LMA reviews its documents on a regular basis, thus ensuring that they reflect current market practice, accommodate the current regulatory and legal framework and continue to meet the needs of participants in the market.
Finally, simultaneously with the launch of the LMA document, the LMA will be holding its first annual real estate finance conference, and will subsequently host a series of training events, both in London and major regional centres around the UK. These events are likely to be especially useful to new investors entering the market.
3. What type of real estate finance is this applicable to and what scale of investment – i.e large scale commercial real estate (or others)?
Firstly, the document is designed for syndicated loan transactions i.e. a loan where two or more institutions contract to provide credit to a particular corporate or group. Such a facility tends to be more suited to medium to large borrowers, with borrowing requirements in excess of £50 million.
Secondly, the document has been produced on the basis that the transaction is for the development of a property. Within this remit however, various optional provisions have been included in square brackets in order that a "menu of clauses" is available to the draftsman should those clauses be required. This is not to say that the document will not need to be adapted – depending on the structure and the commercial terms, it will need to be tailored to each individual transaction. This is in keeping with other LMA documents, which are intended to provide a sensible starting point and do not attempt to deal with the potential complexities of every possible type of transaction.
This new document follows on from last year's launch of the LMA's Single Currency Term Facility Agreement for use in real estate finance multi-property investment transactions.
4. Why would this documentation make institutional investors, such as pension funds and insurance companies, more likely to invest?
For new types of investor to the market, such as pension funds and insurance companies, standardisation of documentation makes the market more accessible. It is hoped that the creation of LMA real estate documentation, which can be used as a starting point for individual transactions, will make this market more attractive to such investors. Furthermore, as part of the launch, the LMA will be engaged in various educational events, some of which will be aimed at explaining the workings of real estate finance transactions to new investors.
5. Why do you expect the new document to be adopted by market participants?
LMA documentation is widely recognised within the corporate loan markets as a good basis for negotiation, and the LMA's documentation for use in real estate finance multi-property investment transactions has already had significant uptake in the real estate finance sector. It is anticipated that the LMA's approach to appropriate standardisation will continue to be attractive in the real estate finance sector in the same way as it has been in the corporate markets. In addition, the LMA corporate documents will already be familiar to many of the law firms and market participants active in this market.
It should be highlighted that the project was originally launched at the request of LMA members, following the successful launch of the LMA REF Multiproperty Investment Facility Agreement in 2012, many of whom are actively engaged in the real estate finance market and saw the need for greater efficiency by standardisation following the financial crisis, when management of legal risk and focus on tightly drafted documentation has become increasingly important. Accordingly, the real estate finance document was put together and agreed by an experienced working party, consisting of major real estate players from banks (including in-house lawyers) and major City law firms. This process should mean that the document is widely acceptable as a starting point within these institutions.