FOUR FAST FACTS ON: PROPERTY FINANCE DECEMBER 2023
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What is property finance?
Facility types
In very basic terms, property finance is an umbrella term for lending against real estate assets. Credit analysis for property finance is focused on the value of the underlying real estate asset, and its revenue stream (e.g., rental income or sale proceeds).
Investment facilities are used where borrowers are looking to “bank” land for future development or to hold property assets post-development; acquisition facilities are used for the purchase of completed developments; and development facilities are used where borrowers intend to undertake the development themselves.
Property finance can take many different forms, from the most basic residential mortgage transactions, to very complex commercial property development deals.
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Depending on their nature, property finance transactions tend to be documented under an investment, acquisition or development facility, in each case with accompanying security and other transaction-specific documentation.
Key considerations
Other documentation
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Due diligence is an important aspect of property finance. Titles, leases, sale and purchase agreements, building contracts, insurance policies, management agreements and QS reports are crucial for completion of developments, and/or following completion, ensuring the borrower’s ability to repay lenders. In addition, it is common for lenders to enter into direct agreements with key parties, such as contractors, to ensure they can complete the development if the borrower defaults..
Each facility type has a different approach to representations, undertakings, events of default and conditions precedent, tailored to the risk/credit profile of the transaction. These are supplemented by transaction specific provisions, which will be determined by the nature of the borrower, and the property and development type.
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The underlying property asset is a crucial determining factor for what needs to be taken into account in the finance documentation, and the due diligence process will factor heavily into determining what key protections need to be included. The level of supervision that the lender wants to maintain at various stages in a property development must also be considered. New Zealand’s real estate finance market is made up of a mix of bank lenders and non-bank lenders such as real estate credit funds. The risk appetite of different lender types can vary widely.
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.