Using loan notes to fund property development projects

The structure outlined below is taken from our guide on the Top 5 Ways UK Property Developers can raise Development Finance from Private Investors. (To request your free copy of the guide, email us at info@lcnproperty.com

This article appears in the January edition of our Newsletter Creating Wealth Through Property

A loan note is essentially just an IOU – a piece of paper recording a promise to repay a loan, usually with interest, on specified terms. It is an effective way of recording loans from multiple lenders on the same terms. Loan notes may be:

• Secured or unsecured
• Listed on a stock exchange, or unlisted
• Transferable or not transferable

This example relates to loan notes which are unlisted, and which are secured by a first or second fixed charge over the underlying property. The benefit of the security would typically be held by an independent entity which is regulated by the Financial Conduct Authority or equivalent financial services regulator. The main reasons for involving a security trustee are as follows:

• If the beneficiaries of the security are too numerous for them all to appear on the relevant register (such as the Land Registry in the case of a charge over property).
• If the composition of the group of beneficiaries is likely to change over time (such as in the case of loan note holders) – appointing a security trustee in this situation avoids the inconvenience and cost of transferring the underlying security each time a new beneficiary is added or an existing beneficiary transfers its interest.
• In order to demonstrate independence from the originator of the debt obligation, the chargor or the subject matter of the security. If something goes wrong and the security needs to be enforced, the security trustee would act impartially in taking the necessary steps to enforce the security and distribute the proceeds of enforcement to those entitled.