Property development SPV - acting for borrowers in funding transaction

Our clients were seeking funding for the development and construction of a new office park in a brownfield location and we were instructed to advise them once they had agreed terms with lenders. They had set up a Special Purpose Vehicle (SPV) created for the project and had agreed secured finance of £8 million, by way of instalments. The financing package included :-

• a Facility Agreement,

• Debenture

• Fixed Charge

• Cross Guarantee.

Crucially, the financing terms needed to be robust enough to satisfy the Funder but also enable our borrower clients to obtain either secondary finance to develop other areas of the site or sell off parts of the site.

Key tasks and challenges on this transaction included :-

Terms of the Facility Agreement

We reviewed the Heads of Agreement between the SPV and the Funder and advised on the commercial terms of the proposed funding and in particular the extent of the proposed security to be taken by the Funder. We concentrated on the reporting elements of the Facility Agreement to ensure that they weren’t too onerous and open to inadvertent breach, the release of staged payments to ensure continuity of construction and the material breach provisions to ensure that neither provision was too onerous and/or restrictive to both the present and the future development of the site.

Terms of the Debenture, Fixed Charge and Cross Guarantee.

The Funder was looking to secure the funding by way of a First Fixed Charge over the development site and take a Floating Charge by way of a Denture over the SPV as well as additional security by way of a Cross Guarantee from the developer. We negotiated the documentation with specific emphasis as to what circumstances could constitute a material breach which would enable the funder the crystallise the security and take possession of the site and the funders obligations to account to the SPV for any excess funds received if the Debenture and Fixed Charge were crystallised and enforced.

Flexibility for future funding of the site

Because this development represented only the initial tranche of the site it was important that the SPV retained the ability to raise additional and alternative finance against the remainder of the site and as a consequence the terms of the Facility Agreement were drafted in such a manner to ensure that the SPV retained the ability to take additional finance and that the extent of the site the subject of the Fixed Charge was limited to the specific area of the development leaving the balance free for additional funding and/or sale if required.

Dealing with lender Due Diligence

Because the funders were lending against an undeveloped brownfield site with limited value until the development was completed their lawyers undertook a detailed Due Diligence exercise against the development site, the SPV and the Developer to satisfy themselves that the security taken covered the funding allocated.

Negotiation and Drafting of the Financing Documents.

The Facility Agreement was structured to allow the drawdown of phased funding against construction milestones but with additional security being taken against the site and both the SPV and the Developer. The security package needed to reflect this but also be limited to the extent of the funding drawn down. It was particularly important that the Developer had the ability to obtain alternative finance secured against other areas of the site for future developments.

The terms of the Developers existing funding and security package required agreement to be negotiated with one of their existing funders to step back and allow the Development Funder to take prior security for a fixed period of time. This necessitated an Intercreditor Agreement being negotiated between all parties to reflect the structure of the funding and the priority of recovery.

Meeting time critical deadlines

We had to ensure that the extensive suite of documents underlying the Facility Agreement and Security Package where in final form for completion and draw down before the SPV could enter the Construction contract to commence works. Time was at a premium to ensure that the construction works commenced at the beginning of spring to enable the works to take place over the summer period.