Property Finance and Funding

What are the three sources of sebt?

• Senior debt

  • Clearing and challenger banks, insurance companies, debt funds and alternative lenders

  • Lower cost, lower leverage

• Subordinated debt

  • Mezzanine - fills gap between senior debt and equity

  • Sponsor/JV equity - institutional partners, often structured with a promote

  • Private equity real estate funds - higher return targets, typically shorter hold periods

• Alternative and specialist

  • Bridging finance - short term and higher cots - used for fast completions or repositioning

  • Forward funding/forward commitment - an investor funding a development for the completed asset

  • CMBS - securitised commercial mortgage debt

What are the four main debt metrics?

• LTV - loan to value - loan amount as % of property value

• LTC - loan to cost - loan as % of total development cost

• ICR/DSCR - interest/debt service coverage ratio - Net rental income / interest or debt service

• Gearing - debt as % of capital

What are the four factors in pricing a loan?

• Margin - lender's return over reference rate, reflecting risk of asset, sponsor and sector

• Arrangement fee - lender's fee for structuring and committing facility

• Exit and prepayment fees - payable on repayment or refinance, especially where rate has been fixed or swapped (breaking a swap early can be expensive)

• Hedging - interest rate swaps or caps are usually required on floating rate facilities

What are the four types of lender security over a loan?

• Legal charge - a fixed charge registered against the property itself

• Debenture/floating charge - security over the borrower's other assets

• Assignment of leases & insurances - rights over the income steam and insurance proceeds are assigned to the lender as additional security

• Guarantees and step-in rights - parent company or sponsor guarantees plus lender's right to step in or appoint a receiver on default

What are the five steps of the financing process for a given tranche?

• Term sheet - heads of terms setting out pricing, leverage and key conditions

• Due diligence - lender reviews asset, tenants, title and sponsor's track record

• Valuation - independent RICS Red Book valuation supports lending decision

• Documentation - facility agreement, security documents and conditions precedent are drafted

• Drawdown - conditions precedent satisfied, funds drawn and security put in place

What are three examples of financial covenants?

• LTV

• ICR

• DSCR

What are four examples of non-financial covenants?

• Reporting

• Restrictions on further charges

• Disposal restrictions

• Insurance requirements

What is cash trapping/cash sweeping?

Excess cash being trapped in an account or swept and used to pay down debt rather than distributed to equity

What is the capital stack?

The percentage of acquisition financed by each of senior debt, subordinated debt and equity

What is the gearing effect?

Debt being accretive to returns as the unlevered return exceeds the cost of debt

What is a refinancing wall?

A cluster of loan maturities in a falling or tightening market forcing sales as refinancing on similar terms isn’t available

What is bridging finance?

A short term loan used to provide funding until longer-term finance is secured

How are Paloma’s unit trusts governed?

Paloma's unit trusts are Jersey-registered. Jersey-domiciled unit trusts are governed by Jersey fund legislation and regulated by the Jersey Financial Services Commission (JFSC), with UK regulatory and tax obligations potentially also applying.