Introduction to real estate finance—the lending structure
Introduction to real estate finance—the lending structure

The following Banking & Finance guidance note provides comprehensive and up to date legal information covering:

  • Introduction to real estate finance—the lending structure
  • What are the key features of real estate finance?
  • Structure of a typical real estate finance investment transaction
  • Borrower entities in real estate finance transactions
  • Other key parties in real estate finance
  • Key documents in real estate finance
  • Key features of a real estate finance facility agreement
  • The key risks for lenders involved in financing real estate and how they mitigate them

What are the key features of real estate finance?

This Practice Note focuses on what is thought of as traditional real estate finance ie lending against the cash flow generated by a property. In its simplest form, traditional real estate finance involves a loan to a borrower which is repaid from the rental income of the borrower’s property. (Other methods of investing in real estate finance include sale and leaseback, real estate investment trusts, jersey property unit trusts and property derivatives. For more information, see: Methods of investing in real estate—overview).

Real estate finance transactions are either investment finance transactions or development finance transactions, depending on whether the property is being purchased as an investment (ie it is already generating revenue) or whether the property is being purchased to be developed. For more information, see Practice Notes:

  1. Real estate finance—investment facilities—key features, and

  2. Real estate finance—development facilities—key features

The Loan Market Association (LMA) has published standard form facility agreements for both investment and development real estate finance transactions which can be used as a starting point in these types of transactions. These are:

  1. the Single Currency Term Facility Agreement for Real Estate Finance Multiproperty Investment (LMA REF Investment Facility Agreement)—whereby a loan facility is provided to a borrower for it to purchase a property (or a group of properties).