The LMA Real Estate Finance Facility Agreement
Finance brief - 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.
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.