On Wednesday 15 November, Macfarlanes hosted a breakfast panel discussion which focused on financing of operational real estate (OpRE). 

The expert panel comprised of:

• Farrah Brown of Nuveen Real Estate, Head of Debt Capital Markets, EU and APAC;
• George Cotterell of ARA Europe, Managing Director, Commercial Real Estate Debt;
• Andrew Lawrence of Sadel Group, Director; and 
• Jamie Snary of Apache, Executive Director, Asset Management and Operations;

and was moderated by Real Estate Finance partner, Laura Bretherton. 

From a lively and discussive session on the current market, we have identified six key takeaways.

1. Appetite for OpRE financing is growing exponentially and lenders are looking upon many operational sectors favourably, with the ability to drive strong rental growth and to reset rents frequently providing lenders with confidence in ICRs.
2. The identity of the operator is fundamental to the success of the transaction (and often intrinsic to the underwriting). In carrying out their due diligence, lenders will want to understand the operator’s business and track record in detail, including their often large and granular customer base. Borrowers, particularly in less mature operational sectors, are having to take prospective lenders on a journey, educating them on their sector to help them get comfortable.
3. There are a range of structural models used to access OpRE and lenders will want to design their security package according to where the income and value resides. Operator governance and the terms of operational service agreements are also likely to be of key interest to lenders.
4. A key negotiation point often centres around how much “control” lenders are willing to grant to the operator to continue to conduct their business from a cash flow perspective, whilst ensuring lenders have sufficient protection in the form of cash traps and sweeps.
5. In considering their enforcement options, the ability to “substitute” another operator will be a primary concern for lenders. It is easier for lenders to get comfortable in more mature operational markets, such as BTR, where there is an established pool of operators. Other very niche or emergent sectors however may be perceived as being too risky and more of a private equity play if there are very few operators who could step in.
6. As investments become more complex and less passive, transparency and good quality communication between lender and borrower will become increasingly important.

If you would like to discuss this in more detail, please do not hesitate to get in touch. You can also request a copy of our Operational Real Estate Report.