Residential & Commercial Loan Note Investments
A Guide To Developer Loan Notes
Development finance, traditionally provided by banks, has evolved in recent years. The lengthy time frames involved in decision making and initial resistance from banks to lend directly after the economic crisis in 2008, has resulted in property developers seeking alternative and more creative routes to raise funding…
What is a developer loan note?
Residential & commercial property developers have various financing options available prior to construction, one such instrument is a developer raise capital via a loan note.
A loan note is in effect an “I Owe You” between the Investor or investors and the property developer. This legal document outlines the terms and conditions of the loan along with a stipulated fixed amount of interest over the duration of the agreement.
Key differences to be aware of are the security of the loan note in reference to the associated asset. Secured and unsecured loan notes exist with varying levels of risk associated to the investment.
Secured loan note agreements are linked to either the investment asset or developers’ assets and offer security in event of a default on the conditions outlined in the loan note instrument.
Unsecured loan notes offer no such security and are therefore deemed as a higher risk investment.
Stages Of Loan Note Investments
The 5 simple stages involved in standard loan note investments:
- A Property developer agrees the terms of the loan note: financial amount to be raised, the duration, conditions and interest rates associated to the loan. The developer’s lawyers then draft the documentation and build the loan note agreement.
- The Loan Note is offered to investors directly by the developer or a third-party promoter.
- Single or multiple investors lend the developer the required funds on the terms associated to the legal agreement.
- Interest payments are made according to the conditions outlined in the loan note for the duration of the loan term.
- On completion of the loan note term the original invested capital is returned to the investor again in keeping with the terms outlined in the agreement
Loan Note Jargon
The key phrases you should be aware of relating to loan note agreements:
The property developer or company that is borrowing funds and issuing the loan note.
The legal document outlining the conditions of the loan note.
The fixed interest payments* made by the issuer to the holder of the loan note. Interest payment schedules will vary from loan note to loan note, some common schedules include: Monthly, quarterly or annual payments, rolled up coupons paid on maturity and even advance interest payments.
*Generally, loan note interest percentages are fixed, however in some instances variable interest may apply
The conditions and schedule for interest payments.
Details of the loan agreement including the issuer and holder of the loan note, the dates of issue and maturity along with the conditions and stipulated interest rate.
The cancellation of the loan note agreement, this occurs once all interest payments have been made and initial capital has been returned in full.
A convertible loan note can be traded for shares in the capital of the issuing party. The loan note instrument will detail the number and type of shares and outline when the exchange is actioned.
It is advisable to fully understand the terms that are outlined in the loan note instrument prior to investing, ensure that you are clear on the conditions that you are agreeing to.