How Does Senior Debt Apply to Real Estate Investment
If explained purely in finance terms, senior debt is a loan that is commonly issued in the form of senior notes. These kinds of debts are also typically known as senior loans. Such a loan or debt has the priority over the other unsecured or junior debts that are owed by the issuer.
Moreover, senior debts tend to have a greater seniority in the capital structure of the issuer than all the subordinate debts.
Moving on ahead, here in this article we’ll discuss how senior debts are used in commercial real estate investment and how they’re used for property financing. You can get more details about the senior debt financing by visiting stamfordcapital.com.au/services-item/senior-debt-funding.
Senior Debts in Property Financing
If you’re a property developer and you’re looking for a loan or perhaps you’re a lender in search for investment opportunities, then one of the options available to you is senior debts. A senior loan is sort of a debt financing in which the financial institution that issues the loan will always get the benefit of priority claim over the asset that is provided by the borrower in the name of security. That is why this type of loan is called a senior loan because it gets precedence over the rest of the unsecured junior loan claims that exist against the borrower.
In Case the Borrower Defaults
If the borrower defaults then the property that was used as a security against the loan will be claimed to repay the senior loan before the repayment or the settlement of any other creditors’ junior claims. Senior loans are generally of longer durations and usually range between one to five years.
Senior Debts in Real Estate Investment
If someone has taken a senior loan for a real estate project development then the loan will be granted in terms of the percentage of the total development cost of the project. This cost will be exclusive of all the financing cost. You can say that the lenders who are in the business of loaning money and earning it back with interest over the loaned principal amount will get the legal right to foreclose the property if the borrower defaults and is unable to pay the loan back.
But how does this foreclosing benefit the lender? They’re not the property and real estate developers, so how would this foreclosure get their money back? What the lenders of senior loan will do in this case is that they will ensure the completion of the property as soon as they can and liquidate it, i.e. sell it off quickly to earn back the unpaid or outstanding principal on their loan. This amount they’ll recover by claiming and liquidating the property will also include the accrued interest as well.
Most of the real estate and property developers prefer to acquire senior debts because of its benefits. Some of the key benefits of acquiring senior debt include strong relative yields with low-interest rate risk, secured status in the capital structure, low volatility than high yielding bonds, and portfolio diversification.