CRE loans are fundamentally different from commercial and industrial (C&I) loans in terms of loan documentation, collateral, assignment and transfer restrictions, liquidity expectations and trading conventions, servicing requirements after the trade is settled, foreclosure and restructuring strategies, and tax treatment.
The structure of a real estate financing transaction generally depends on the purpose of the financing – development or investment, the location of the borrower/sponsor, the lender’s loan portfolio, the security package, and tax considerations. Where real estate development finance is typically leveraged project finance involving various facilities or tranches of varying seniority and risk, real estate investment finance commonly comprises only senior debt.
The availability of mezzanine debt in real estate finance depends on the market, ranging from limited to strong. Senior loans, stretch senior loans, whole loans and mezzanine debt are all common in the European real estate loan market. However, LMA CRE finance documents anticipate use of only single-currency fixed-term senior loans.
Senior lending predominates (46% of respondents) followed by stretch senior (23%) and whole loans (18%) [in the European CRE loan market].
The basic facility types used for US and European loan transactions are very similar. The LSTA publishes no template documents specifically for use in real estate finance, unlike the LMA. Instead, US documentation practice is traditionally based on the form of the lead arranger.