FOUR FAST FACTS ON: PROPERTY FINANCE OCTOBER 2022
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What is property finance?
Facility types
Property and real estate finance are umbrella terms for lending against real estate assets. Credit analysis for real estate finance is focused on the value of the underlying real estate asset and its revenue stream (for example, rental income).
Development facilities are used where the borrower intends to undertake the development of the property. Acquisition facilities are used for financing the purchase of real estate assets. Investment facilities are used in relation to developed assets (and it is possible to flip a development facility into an investment facility following completion of the development).
Property finance can take many different forms, from the most basic residential mortgage transactions to complex commercial deals, including construction financings.
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Each facility type takes a slightly different approach in relation to the underlying covenants, events of default and conditions to drawing, to align with the credit risk of the financing. For example, a development facility has much stricter controls around drawdowns.
Depending on their nature, property finance transactions tend to be documented under either an investment facility, an acquisition facility or a development facility, in each case with accompanying security and other transaction-specific agreements.
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Other documentation
Key considerations
Due diligence is an important aspect of property finance. Lenders will typically want a full picture of the underlying property titles, leases, building contracts, insurance policies and any other key contracts.
The main consideration on any property finance transaction will be the nature of the underlying asset (for example, is it a retail, office, logistics or a hotel asset?) and how that asset will generate revenue in order to service the debt.
It is common for lenders to require that direct agreements or tripartite arrangements are entered into with key parties to protect their position in relation to the underlying key contract should a default scenario arise. For example, it would be typical for a tripartite deed to be entered into with the contractor to ensure that the lenders can step in and complete the development if the borrower defaults.
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BANKING & FINANCE Disclaimer: This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to its content.
The level of supervision and/or control that the lenders want to maintain will also be a factor. New Zealand’s real estate finance market is made up of a mix of bank and non-bank lenders, and the risk appetite of different lenders can vary widely.