REAL ESTATE FINANCE
In periods such as the one we live in, there is this burning desire to be your own boss and of course move closer to being self-sufficient. One sector that is really very lucrative is the real estate sector or what we call the ‘’PROPERTY SECTOR’’, a close study would reveal that in order to delve into such an enterprise; one would need a considerable amount of financing. And that’s where the problem lies. Naturally the sources of funds can be via personal savings, help from family members, borrowed funds etc. The act of obtaining these funds is what is referred to as ‘’REAL ESTATE FINANCE’’.
Real estate finance is traditionally the process of lending or borrowing, most often involving a third party that is neither the buyer nor seller of the property in question. It is described generally as lending against the cash flow generated by a property and it is the most traditional form of funding that exists. It involves a loan to the 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.
PARTIES INVOLVED IN A REAL ESTATE FINANCE INVESTMENT TRANSACTION
In addition to the lender and borrower who are the key/primary parties in any real estate finance investment transaction, other parties involved are;
- The valuer
- A marketing agent
- The tenants
HOW IT WORKS
Due to the high value of the asset in question, the key parties that will make such transaction a success depends on the type of transaction involved. There is often a syndicate of lenders involved in lending money to the borrowers to reduce the risk to each lender and to enable the borrower to borrow larger amounts and of course get the best lending rates possible.
WHERE DOES THE SECURITY COME FROM
In such a transaction, the lender will normally take a share charge from the parent company of the borrower and will also take security from the borrower and its operating subsidiaries. These securities can come in form of;
- A mortgage
- A mortgage mandate
- A pledge over receivables
- A pledge over bank accounts
- A pledge over shares
- A Pledge over movable assets etc.
THE ROLE OF THE LAWYER
Lawyers will always play a role in any type of real estate finance transaction be it investment or development real estate finance transaction. Their roles include;
- Negotiating all the documentations
- They provide reports on the lender (s) and the borrower in relation to the title of the property being acquired and/or developed
The vital documents required in both real estate transactions are;
- 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 property documents, including the sale and purchase agreement for the property, any title documents, any head lease and the lease agreements entered into with the tenants
- Certificate of title or report on title
- Security documents