In general terms Loan Notes have been around for a very long time and the first recorded Loan Note was in 45AD Roman times.
A Loan Note in itself is an interest bearing promissory note denoting the capital loaned, borrower’s name and address, the lender’s name and address, the terms and conditions, the Term and interest rate applicable. So, in the case of a Property Loan Note the capital advanced is used for property development and more often than not the purchase of land or property.
Depending on your view of the property and land values in the UK should give a little comfort. However this comfort is entirely dependent on the terms and conditions of the loan and specifically how any investment (Loan) is secured or not.
Loan Notes Security Types
The typical steps in the Property Development Loan Note include applying for planning permission from the local council and until they have the permission in writing the sensible developer will not act. Once the planning permission has been received and legally confirmed in writing funding will usually be sought.
The funding usually goes to a specially created limited company called a Special Purpose Vehicle (SPV) where all the land and property are held along with any liabilities. This ring-fencing helps protect the lenders (Investors) capital as there may be many projects in place at the same time. So, if one property development fails for any reason there is not a domino effect and the property developer remains stable. In this case your capital may be repaid from elsewhere by the developer.
Loan Notes Security
Ideally the best kind of security is to have your Loan Note secured against specific land and or property with values far outweighing your investment. The Loan Note ideally could be secured by a specific property and or land charge and, or an all assets fixed and floating company debenture. The all assets debenture then pulls in all company assets and not just those held in the SPV providing greater security.
A Corporate guarantee may also be offered and in effect this guarantee by the developers means that other parts of a Corporate Group may also guarantee the Loan Note.
Trustees are sometimes used by developers to watch over the developer’s property assets ensuring there is always sufficient to repay in a default situation.
Investment Check List
If you are considering direct property investment and concerned about security make sure you have the following Check List at hand:
- Are there Trustees in place and what is their function?
- Is there Corporate Guarantees in place (Following assessment of Guarantors assets and liabilities)
- Is there any Charge in place to secure your investment?
- Ideally a company all assets fixed and floating debenture (Charge) should be in place
- Is there a Special Purpose Vehicle in place?
Financial Services Compensation Scheme (FSCS)
Along with many other ‘investments’ such as stocks and shares Loan Notes are not covered by the scheme in the event of a company default. The Financial Conduct Authority does not regulate this area either so it is another reason to ensure you use the security checklist above.
If you have any questions you can email us on firstname.lastname@example.org or speak to sector experienced regulated advisor.