Speakers
Phillip Ashton
Director, Banking
Singer & Friedlander

Philip Freedman CBE
Senior Property Partner
Mishcon de Reya

Nakato Kiwana
Senior Solicitor, Real Estate Team
McGrigors London

Daniel E. Larkin
Partner, European Real Estate Practice Head
Squire Sanders Dempsey
London

Paul Lavercombe
Director
Deloitte & Touche LLP

Andy Leahy
Managing Director
Bespoke Property Group Limited

Matthew Lindsay
Head of Property Finance Group
Mishcon de Reya

Michael Lister
Partner
Clydesdale Bank PLC

Lyndon Miles
Manager, High Yield Finance
Investec Bank (UK) Limited

Ian Stockdale
Senior Partner, West End Property Finance Team
Clydesdale Bank PLC

 

Lending with a Profit Share
The Background

Why do developers give up profit to the lender?
• To make own funds go further
• To make more deals
• To grow the business and reputation
• To spread the risks
• Gearing impact
• Very high return on own funds

State of the participation market:
• Why are lenders participating?
• Falling interest rates on lending to property sector
• Debt vs mezzanine vs equity
• Where does senior debt end and mezzanine start?
• Where does mezzanine end and equity start?
• Mezzanine-only providers
• Finding the lender
• Private mezzanine in syndicate

Basic concept of deal:
• LTC or LTV?
• Slicing of the profit
• Profit share or IRR return?
• Minimum share to lender?
• Interest on mezzanine?
• Does extra reward compensate for increased risk?

Legal issues:
• Legal arrangements
• Purpose of documents
• Key legal issues
• How many solicitors involved?
• Who pays legal costs?
• SPV or not?

Developer vs lender structure:
• Project based or relationship?
• Involvement of lender
• Diligence and controls of lender
• Who calls the shots?
• Branding of development by lender
• Juggling the parties to keep the deal in play
• What if things go wrong?

Legal structures when borrowing and lending
• Conditions precedents for drawdown on funds
• Legal structures for protecting the bank’s security
• Joint Venture structures
• Calculation of profit for the profit share
• Exit routes for the bank and the developer
- Terminating the Joint Venture
- Exit fees
- Put and call options
• Happy ever after?

Tax issues in participation lending
• Character of payments
• Withholding tax
• Impact on tax groups
• Transfer pricing
• Other pitfalls

Panel Session
The art of evaluating the offer
What are the issues that developers considering this type of financial arrangement need to think about? During this session they will be discussed, particularly the following:
• Comparing offers
• Risks to the developer
• The cost of risk sharing

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Showcasing the Lenders
‘Our approach and what we are looking to fund’

• What they provide
• What do they charge?
• Extent and cost of professionals
• Bank fees other than mezzanine return
• Terms of loan
• Documentation required
• Evaluation of deal
• Strength and experience of developer/builder

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Investec Bank
• As providers we do both senior and mezzanine lending.
• We are more equity – in that we are paid most of our return after the senior debt has been repaid either in the form of an exit fee or profit share or both.
- Our product has elements of debt and equity but is neither – it is a hybrid.
• The interest on mezzanine is mostly the excess rents after any costs associated with the property (e.g. management fees, insurance (if not paid by the tenant), maintenance (if not paid by the tenant) etc.) and less any senior debt service – i.e. interest plus capital repayments.
• The lender will appoint its own project managers to oversee the development and control costs etc.
- Lenders will want to know who the developer is and developer’s track record.
- The lender will want to know who the builder is (building contract will be charged by the lender), the financial position of the builder to ascertain whether the builder is good for any cost overrun guarantees etc.
- Track records and experience of the architect and QS are also important.
• Under the Inter-creditor Agreement the senior lender must always be repaid first. The senior lender can decide what amount to sell for even if this is less than what it is owed meaning that the mezzanine lender receives nothing.
- Only once the senior lender is paid may the mezzanine lender possibly recover any capital outstanding.

Clydesdale Bank
One developer, one lender, one high loan to cost facility, one set of documentation - keep things simple.
Clydesdale Bank's PRDL - the Participating Residential Development Loan.
Aimed at experienced, financially strong, operators developing mainstream residential property for sale - let our capital help you to spread your capital further.
High loan to cost, normally maximum 90%, high loan to value normally maximum 75%.
Participation fee to Clydesdale Bank, range 2.5-4% of GDV.
Key benefits of our PRDL for the developer:
- The borrower keeps control of the development
- Straightforward documentation
- Only one lender.

Singer & Friedlander is a specialist banking group offering products and services in corporate and private banking, investment management, asset finance and specialist finance.
Our clients benefit from a direct working relationship with senior property bankers, who will maintain a close involvement throughout the life of each transaction.
We are always happy to discuss a transaction ‘in principle’ and we will give a rapid indication of what we think we can do to help. We often provide finance for special purpose vehicles and have funded developments for existing clients outside the UK.
We are happy to consider mezzanine finance on the merits of the proposal and for a higher reward structure, usually related to the success of the transaction.
Joint Ventures:
• Different types of joint venture
• What can go wrong?
• Mitigation of problems
• Future business
• Tax implications
• Conclusions