The Loan Market Association’s (LMA) launch of its commercial real estate finance agreement reveals its intention to standardise documentation in more specific debt areas.
Clare Dawson, managing director of the LMA, said there is more new documentation in the pipeline.
“We’re focussing on areas where there is an active syndication market that doesn’t have LMA documentation,” Clare Dawson, managing director of the LMA told IFLR. “As well as this, we’re looking at markets where we think there is increased interest.”
Launched on April 16, the recommended form of single currency term facility agreement sets out a common framework and language for real estate transactions.
The documentation uses the same basic structure and boilerplate as the LMA recommended forms of primary documents for the investment grade market or, where relevant, the leveraged finance market.
The new agreement includes terminology for normal real estate finance account requirements. This is along with representations, financial covenants, undertakings, and events of default specifically relating to commercial real estate lending.
As well as focussing negotiations on commercial aspects of the documentation, it also sets a benchmark for new entrants.
This means that when new market participants work on their own deals, they will understand what parts they should be looking at and question whether they need to deviate from the LMA’s pre-agreed standard.
“Given that across the syndicated loan market there is a focus on bringing in new liquidity, one of the reasons for producing our agreement was to make it easier for new participants to get comfortable with lending in that market,” said Dawson.
A working party consisting of representatives from banks and city law firms put together and agreed the documentation. As well as its London launch, the LMA intends to present the documentation in regional centers around the UK.
Before its introduction, facility agreements in real estate transactions tended to follow existing LMA documentation.
But the recommended form does not provide for all structures and facilities. It is drafted on the basis that the transaction is for investment purposes only and not for the development of a property.
It also assumes a structure whereby a parent company establishes subsidiaries (all of which are incorporated in England and Wales) and that finance is provided to those subsidiaries for the acquisition of one or more properties.
Changes will need to be made where this is not the case.
Some have said the new form is drafted primarily from a lender perspective. This is in contrast to the investment grade LMA documents, which had input from the Association of Corporate Treasurers.
But Dawson disagreed with this view, saying that the law firms and banks on the working party were familiar with the borrowers’ concerns.
“There’s a wide spread of possible borrowers and transactions so we wanted to produce a document that would be a reasonable starting point for negotiations,” said Dawson. “We accept that in some circumstances it may need to be adapted.”
The document also contains a degree of optionality, allowing parties to select what seems most appropriate for their particular transaction, added Dawson.