Property Finance Jargon and Legal Documentation

1. Property Finance Jargon and Legal Documentation Thursday 11 September 2008 Jonathan Lawrence, Partner, K&L Gates LLP jonathan.lawrence@klgates.com 020 7360 8242

2. Overview • Pack documentation introduction • Property finance glossary • Investment loan term sheet • Development loan term sheet • Loan and security documentation • Parties • Provisions

3. Borrower(s) • Borrower • Trading entity; or • Special Purpose Vehicle (SPV) company? • Single/Multiple • Multiple borrowers for multiple properties • Cross-collateralisation

4. Obligors or Borrower Group • Obligors • Guarantees may be required from shareholders in B / other entities in B’s group • Especially relevant where B is an SPV • Sponsor • Individual or entity “behind” the real estate acquisition, B and management of real estate • Not usually a party to loan documentation

5. The Finance Parties • Lender • Lends / Advances the funds • Identity of original lender may change during the term of the loan • Lender may reduce exposure to loan through syndication, securitisation or sub-participation

6. The Finance Parties • Facility Agent • Day to day administration of loan • Security Trustee • Holds security on trust for all Secured Parties • Controls enforcement process • Hedge Counterparty • B enters into a hedge with respect to all or part of its interest rate exposure under the loan with the hedging counterparty • e.g. fixed-to-floating interest rate hedge

7. Documentation • Term sheet • Loan agreement • Security documentation • Hedging documentation • Fee letters

8. The Loan Agreement • No standard format • Long form / short form

9. Purpose of the loan • Should always be set out in loan agreement • L not obliged to monitor the loan to make sure it is used for the purpose advanced • Quistclose Trust established

10. Tranching • Facility may be made up of a variety of loans / tranches • Together they are the facility • Each may be used for a different purpose • Greater flexibility – different terms

11. Interest • Usually based on aggregate of: • 1. Floating rate of aggregate of LIBOR/EURIBOR; • 2. Margin agreed between L and B (fixed or variable); and • 3. Any Mandatory Cost • Paid on each interest payment date (end of interest period) • Interest period generally 1, 3, 6 or 12 months • Interest may be capitalised

12. Representations and warranties • Statements of fact made by B or Obligors about certain matters of fact relating to themselves, their status and the underlying real estate • If untrue, L may call an Event of Default • Standard reps e.g. that it is solvent, that security has not been granted in favour of another party • Specific reps e.g. property specific concerns re environmental issues

13. Covenants • General • General obligations imposed on Obligors • Additional covenants for SPV • Negative pledge

14. Covenants • Property • Ensure that property will not fundamentally change during the term • Restrict development, granting of leases etc. • Insurance covenant • Application of insurance proceeds • Damage • Loss of rent

15. Covenants • Information • Delivery of information • Financial statements, annual accounts • Proceedings • Property reporting requirements (rental income, tenant details etc.)

16. Covenants • Financial: Loan to Value (LTV) • Day 1: L obtains credit sanction to lend up to a maximum percentage of the value of a property • Ongoing: Measures the ratio of current market value of a property against the then principal amount of the loan outstanding • If max % is exceeded due to fall in property prices, B will have to bring the loan into compliance by prepaying proportion of loan/disposing of property

17. Covenants • Financial: Interest Cover • Ratio of net rental income (gross rental income less certain deductions e.g. insurance premiums, tax) to B’s interest payment obligations • Test measures the ability of B to comply with its interest payment obligations • B’s interest payment obligations usually serviced from rental income • Can be “look back” or “look forward”

18. Covenants • Financial: Debt Service Cover (DSC) • Used when loan is amortising • Ratio of net rental income received versus B’s interest and principal payment obligations • Can be “look back” or “look forward” • Must be more than 1 to ensure B meets interest and principal obligations under the loan

19. Covenants • Financial • Remedy a breach of financial covenants by B paying additional funds into blocked reserve accounts • Funds will be deemed to reduce outstanding balance of the loans (LTV) or to supplement net rental income (Interest Cover and DSC) • May be released if B complies with financial covenants or applied to prepay loan if financial covenants not complied with • Restriction on number of times can remedy a breach in this way

20. Events of Default • Trigger events which may mean L cancels commitments and declares all amounts owing and immediately payable - Acceleration • L under no obligation to accelerate loan following event of default – may waive/renegotiate • B often allowed grace period • e.g. insolvency of obligor, non-payment of sums, misrepresentation, breach of covenant, material adverse change

21. Term and Prepayment • Term = length of lifespan of loan • L cannot prevent B repaying the loan prior to end of term • Prepayment not favourable for L as misses out on interest, therefore L imposes prepayment fees • L may require mandatory prepayment e.g. proceeds of sale

22. Principal • Loans are interest only or amortising • Interest only – B pays interest on each payment date and principal paid as bullet repayment on maturity date • Amortising – B repays specific amounts of principal on regular basis during term of loan

23. Payment mechanics • Property Managing Agent • Rental income paid into segregated trust account/held on trust by Managing Agent • Managing Agent responsible for paying net rental income into Rent Account • Duty of care agreement – Managing Agent owes L direct contractual duty of care • On interest payment date funds are applied in order – “waterfall”

24. Default interest • Additional interest which accrues on overdue amount in event that B or Obligor fails to make a payment under the loan • Usually around 2%-3% above the interest rate usually payable on the loan • Rate must not be set too high as it may be considered a penalty and non-recoverable

25. Security • Legal mortgage • Fixed charge • Assignment of rental income • Floating charge • Guarantees • Negative pledge

26. Legal mortgage • Over specified real estate • Transfer of legal ownership from mortgagor to mortgagee • Mortgagor has right to return of property and payment of any balance after satisfaction of mortgage (right of redemption)

27. Fixed charge • All other freehold and leasehold property • All buildings, fixture, plant and machinery on the property • All future interests in land • Benefit of all agreements relating to land • Right and interest in proceeds of sale of charged property • Amount standing to credit of all bank accounts • Book debts and other receivables • Goodwill and uncalled capital • Right to recover VAT on any supplies relating to charged property

28. Assignment by way of security • Rental income • Right to payment under all present and future insurance policies over any charged property • Rights against any tenants of property • Benefit of any hedging documentation • Rights under any development and acquisition documentation • Benefit of all contracts relating to property

29. Other security • Floating charge • Over all other assets of B not covered by the other security • Crystallisation • Share charge over shares in B • L has opportunity to take control of B • Choice to sell B rather than the property • Negative pledge

30. Practicalities • Security documentation must be correctly registered (“perfected”) • English company: Companies House • Non-English company: Slavenburg register • Land Registry • Deed of priority required? • Governing law – location of assets?

31. Guarantees • Especially relevant when dealing with SPV B with no trading history where real estate is sole asset • L should ensure the guarantor enters guarantee as a primary obligor and therefore has to immediately comply with any demand made on the guarantee without L having to first make demand of B • Guarantor likely to seek grace period

32. Why is the security package so important? • Security Trustee has certain control over all assets of B • Ideally only security over property itself is needed to recover the principal amount of the loan • Remaining security satisfies L’s underwriting in case the LTV covenant is breached

33. Conditions Precedent (CPs) • Prior to advancing funds, L will insist on receiving certain documents and/or B satisfying other requirements • Corporate documentation and authorisations • Financial information • Property documentation and due diligence • Legal opinions • Miscellaneous

34. Corporate documentation and authorisations • B and any Obligors must have taken necessary corporate action and obtained necessary approvals inc shareholder approval where necessary • Includes board minutes and directors’ certificates attaching constitutional documents

35. Financial Information • L likely to insist on seeing full details of any equity, shareholder loans and other finance are received before any loan is made • L will require copy of pro forma balance sheet of B (in the case of an SPV) together with a sources and uses statement detailing how the loan advance, any shareholder loans, other finance and any equity is to be utilised • Evidence that bank accounts have been opened

36. Property documentation and diligence • Report on title/certificate of title • Details of any leases and tenants • Copies of title documents • Insurance details • Physical inspection of property • Valuation/structural survey/environmental report (addressed to the Finance Parties)

37. Legal opinions • Provided by law firms from all relevant jurisdictions • Jurisdiction of incorporation of each Obligor and governing law of any Finance Document • Addressed to Finance Parties • Confirm e.g. that Obligor exists and has legal capacity to enter into Finance Documents • Opinion provider will often attempt to limit reliance

38. Miscellaneous • Evidence that L’s fees, costs and expenses in connection with transaction are paid upfront - usually deducted from gross advance • Deal specific CPs may be required e.g. documentation re any development or capital expenditure works • Sweeper CP – “any other documentation or evidence required by L” • If multiple drawdown is permitted certain CPs may be required for each drawdown

39. Utilisation / Drawdown • Specific procedure for drawdown • Notice to lender required • Likely that initial drawdown must be made during an agreed availability period • Overall number of drawdowns likely to be limited • CPs must be satisfied prior to drawdown

40. Assignment, transfer and Qualifying Lenders • L usually reserves right to freely transfer its interest in the loan provided that B does not incur any tax liability on its interest/other payments due to change in status of transferee – “Qualifying Lender” concept • Crucial that L can assign interest freely if it intends to syndicate/securitise the loan • Often prohibited for B and Obligors to assign rights and obligations without written consent of Ls

41. Tax • “Gross-up” obligation on B • Where L is a Qualifying Lender, if any amounts paid by B are reduced because withholding tax is imposed, B will have to gross-up so L receives amount it would have done notwithstanding the deduction of tax

42. Amendments and waivers • Amendment usually allowed with written consent of Majority Lenders and Obligors • Some amendments e.g. a decrease in margin will require consent of all Ls as they fundamentally affect the loan terms