Real Estate Finance

property financingProperty financing transactions are usually classified as either investment  (residential) or development transactions.

Lending against the cash flow generated by a property is the most traditional form of property financing. In its simplest form, it involves a loan to a borrower which is repaid from the rental income of the borrower’s property. It is the most commonly used structure for investing in real estate.

Property Financing Transactions could involve finance for:

 *  Commercial Real Estate such as offices, shops, industrial buildings etc—to be repaid from the rent received from tenants (known as commercial real estate finance), or blocks of residential real estate, to be repaid from the sale of individual residential units (known as residential real estate)

The standard form facility agreements for both investment and development real estate finance transactions are:

*  An Investment Facility Agreement whereby a loan facility is provided to a borrower for it to purchase a property (or a group of properties)

*  A Development Facility Agreement whereby a loan facility is provided to a borrower for it to purchase a property (or group of properties) as well as providing funds for the development of the property (or properties)

Key parties in Property Financing

The key parties involved in a real estate finance transaction depend on the type of transaction. Due to the high value of the asset being acquired, there is often a syndicate of lenders involved in lending money to the borrower to mitigate the risk of each lender and to enable the borrower to borrow larger amounts and to obtain the best funding rates possible.

Investment Property 

In an investment real estate finance transaction, the key parties (in addition to the lender(s) and the borrower) will usually be:

   *  A valuer
   *  A managing agent, and
   *  The tenants


In a development property finance transaction, the key parties (in addition to the lender(s) and the borrower) will usually be:

*   The consultants with design responsibility for the development taking place, for example architects, mechanical and electrical engineers, quantity surveyors and structural engineers
*  The contractors who are appointed to carry out the development of the property; builders, electricians, plumbers etc
*  A managing agent. The borrower will usually appoint a managing agent to run the property once the development has been completed, and
*  The tenants of a commercial property or the purchasers of residential units.

The Role of the Lawyer

In some states (USA) involving investment and development real estate finance transactions, lawyers will also play a key role in negotiating all the documentation. Real estate lawyers will be of particular importance, providing reports to both the lender(s) and the borrower in relation to the title of the property being acquired and/or developed.

Key Documents 

 * The facility agreement, under which the lender(s) provide funding to the borrower to purchase the property and/or for its development
 * The appointment of the managing agent and the duty of care agreement: the managing agent will be appointed to manage the property and the appointment agreement will set out the terms of their remuneration as well as their rights and responsibilities
 * The property documents, including the sale and purchase agreement for the property, any title documents, any lease agreements entered into with the tenants
 * Certificate of title or report on title
 * Security documents, the lender(s) will want to take security over the property, often documented in the form of a mortgage over specific property
 * The valuation of the property, (appraisal)

Other reports which lender(s) may want to see depending on the type of property being purchased and/or developed), are:

 *  An insurance report, and / or
 *  An environmental report

In addition to the above, a development transaction will usually include the following key documents:

 *  The building contract this will set out the terms on which the building contractor is being employed by the borrower to carry out the proposed development
 *  Consultant appointments these will set out the terms on which other professionals are employed by the borrower in relation to the proposed development, ie the appointment of mechanical and structural engineers, plumbers, electricians etc
 *  Collateral warranties these pass the duty of care of the building contractor and other professionals owed to the borrower on to the lender(s)
 *  Completion certificate this is a certificate issued by the building contractor on completion of the development



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