When/why would a lender or a borrower want to substitute security in a real estate finance (REF) transaction?

The reasons why a lender or a borrower may wish to substitute security in a REF transaction will largely be dictated by the business of the borrower, the nature of property investments that it owns and the prevailing economic climate.

The two most common scenarios are:

1. •

   where the lender has taken security over a portfolio of properties, it may have agreed with the borrower to include a mechanism in the loan and security documentation whereby properties in the lender's security package can be substituted for alternative properties

2. •

   where the borrower operates a business with a changing portfolio of investments, for example, an investment fund—such a borrower will be under commercial pressure to act swiftly when looking to acquire or dispose of properties and will want the ability, under its financing and security arrangements, to dispose of properties and replace them with new ones

Other reasons for looking to substitute security may be to release