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What is commercial real estate lending?

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Commercial real estate lending is provided to finance income-producing property that is to be built, refinance and restructure existing real estate financing, and acquire distressed or non-performing loans (NPLs).  The majority of real estate lending in Europe is used to finance new investment/acquisition of real estate or to refinance existing facilities, with lending for property development and unsecured real estate lending making up most of the rest.

The structure of a real estate financing transaction generally depends on its purpose, the location of the borrower/sponsor, the lender’s loan portfolio, the security package, and tax considerations.  Typically, a special purpose vehicle (SPV) is established in a suitable tax-efficient jurisdiction with clear and tested security and enforcement rules solely for the financing transaction.

Debt Downstreaming via an SPV

Lending in property development projects is commonly downstreamed to development properties (ProCos) via an operative special purpose company (SPV) that is owned by the developer/sponsor. This OpCo/ProCo structure allows for the subordination of the debt to any lending directly to the ProCos.

Source: Pecunica

Lending in property development projects is commonly downstreamed to development properties (ProCos) via an operative special purpose company (SPV) that is owned by the developer/sponsor. This OpCo/ProCo structure allows for the subordination of the debt to any lending directly to the ProCos.

Commercial real estate lending can be grouped by size and lender participation as either bilateral or multilateral and by type as acquisition, development and construction (ADC), bridge, or permanent financing.  Each type of financing is utilized for different purposes during the different phases in the life cycle of commercial real estate.

Lending/investment parameters depend on the investment criteria and the degree of desired exposure to a client or sector.   They include property's location, the transaction size, degree of leverage (senior, junior or mezzanine), asset type, and the lender’s investment horizon.  Stricter capital requirements in recent years have had a significant impact on the lending capacity and risk appetite of banks as traditional commercial real estate lenders.

Multisector transactions, in which security is spread across different types of assets, tend to be the most common of all commercial real estate lending, followed by transactions secured by offices.  Many lenders provide finance for any CRE sector – offices, shopping centers, mixed-use, retail, industrial, residential, and hotels, while some do not take exposure to certain sectors or asset classes (e.g., operational assets or development projects).

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