LMA launches new commercial real estate finance document16 April 2012
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 multi-property investment transactions. The REF Agreement was created in response to demand from members, who felt that an LMA recommended form would be a step forward in improving efficiencies within the real estate finance market, by providing a common framework and language for real estate transactions.
The REF Agreement, 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.
The document has been produced on the basis that the transaction is for investment purposes only and not for the development of a Property. It also assumes a structure whereby a parent company establishes subsidiaries (all of which are incorporated in England and Wales) and that finance is provided to those subsidiaries for the acquisition of one or more properties.
Commenting on the document, Clare Dawson, LMA Managing Director, said:
"The LMA Real Estate Finance Facility Agreement is a major step into an additional area of the syndicated loan market, and signals the LMA's commitment to expand its suite of documentation into more specific debt sectors so as to bring about the benefits in these markets which LMA documentation has already effected in the corporate lending sphere. We hope that it will be a useful starting point for law firms drafting facility agreements for real estate finance investment transactions and that it will lead to more efficient and productive negotiation of documentation."
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, although this remains muted, the market is actually 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 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 because, up until now, it 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. It can also mean that a market is 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 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 hold 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 investment purposes only, rather than 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 still 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.
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. Since there is currently no standardised approach within the market, it is hoped that the creation of the LMA document 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 already widely recognised within the corporate loan markets as a good basis for negotiation. It is anticipated that the LMA's approach to appropriate standardisation will be attractive in the real estate finance sector in the same way as it has been in the corporate markets. The LMA corporate documents will already be familiar to many of the law firms and market participants active in the real estate finance markets.
It should also be highlighted that the project was originally launched at the request of LMA members, many of whom are actively engaged in the real estate finance market and saw the need for greater efficiency by standardisation, particularly 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.