Credit assessment of real estate investment facilities is based primarily on the loan-to-value of the properties and the net operating income that the properties generate.

Special purpose vehicles (SPVs) are set up to ensure that they have no assets, liabilities (financial or otherwise) or operations outside the transaction.  This is done to ensure lenders' recourse against the obligors to all of the SPV’s assets, the proceeds from the properties and the obligors’ shares and to limit the claims to only the finance parties to the transaction.

The security that the lenders are provided in a REF investment transaction is broad.  Security is given over:

  1. All of the assets of each obligor in the form of a security agreement;
  2. The shares granted by the company’s shareholder in the form of a shareholder's security agreement;
  3. A subordinated creditor’s security agreement over any subordinated debt provided to the shareholders; and
  4. Any other document evidencing or creating security over any asset to secure any obligation of any obligor to a secured party or other document designated as such.

In real estate finance, it is essential that the income generating capacity of the collateral is carefully analyzed and fully understood.  The loan-to-value (LTV) of income-producing property is largely determined by its net operating income (NOI) and loan repayment is primarily dependent on the property’s ability to service debt from cash flow as measured by the debt-service coverage ratio (DSCR).

Demand for financing is down due to fewer sales transactions, but the refinancing market remains active.  New loans have more restrictive credit standards, such as lower loan-to-value ratios and more assurance on future revenue streams.

The proceeds from the sale of a property or a borrower’s shares is first applied to repaying the relevant loan.

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