Unlocking opportunity in uncertainty: escrow solutions for the commercial real estate sector

As developers, financiers, sellers, buyers and planners come together to negotiate long term arrangements concerning high capital value assets, the need to manage exposure and counterparty risk is an ever-present phenomenon.

Escrow accounts provide an ability to securely hold transaction payments with an independent third party, allowing counterparties to carry on business without shouldering performance risk on others.

In this short piece, our Escrow Services team explores a number of real estate scenarios which commonly benefit from the services of a professional and value-adding escrow agent.

Drip-fed Development Finance

As institutional money becomes an increasingly common feature of the UK real estate landscape, escrow accounts can provide the flexibility to allow investment funds to more easily drip-feed milestone payments and/or create dynamic funding partnerships with more traditional lenders.

By advance funding a commitment to escrow and allowing the escrow agent to drip feed the project, institutional investors can replicate the multi-drawdown disbursement schedules of a traditional bank facility which might otherwise be incompatible with their internal investment procedures.

Once in escrow, the cash not only provides a demonstration of the fund’s commitment to the developers, but can also be used to create preferred and deferred funding structures when partnering with bank finance.

With global real estate funds sat on huge reserves of committed capital and a continued emphasis on the sector from the world’s largest institutional investors, an escrow account can play an important role in the facilitation of institutional investment in commercial real estate.

Security for Forward Funding

As investors increasingly turn to pre-development assets in their search for value, forward funding has emerged as a popular option for those looking to unlock fixed returns, obtain tax efficiencies and maximise potential upsides. 

By holding cash security for obligations under the Development Funding Agreement, providing holdbacks and hosting deferred milestone instalments, escrow accounts have demonstrated their ability to complement forward funding structures and unlock negotiations between counterparties.

In addition, where the investor is represented by an SPV or JV vehicle without significant balance sheet assets, developers may require a line of sight to the contracted payment instalments prior to committing to the project. Pre-funding one or more milestone instalments into an escrow account can provide a useful ‘proof of funds’ solution to circumvent scenarios in which the credit proposition of one or more parties might otherwise prove prohibitive.

Commercial Landlord & Tenant Arrangements

Escrow accounts can provide a useful means to manage payment risk in a variety of situations concerning the leasing and letting of commercial real estate. These include: 

• acting as a source of security for rent default 
• a means to collateralise development/maintenance obligations
  
• as a condition for the approval of sub-lettings (particularly where the under tenant is of lesser covenant strength) 
  
• as a condition of granting waivers or other approvals, including change of use and development
  

The increasingly volatile macro-economic environment is contributing to growing uncertainty in the UK’s commercial real estate market, which may be reflected in an increase in requests for sub-lettings, rent holidays, waivers of development obligations, and a general return to the negotiating table for landlords and their chain of tenants and under tenants.

Wherever those discussions occur, escrow accounts can provide meaningful collateral and security, as well as robust protection against payment and counterparty risk. 

S106 Obligations

At times, planning permission for a site is conditional upon payments being made pursuant to s106 of the Town and Country Planning Act 1990, which aims to improve the local area or compensate for any strain the new development might place upon existing infrastructure. Escrow accounts have proved themselves as useful aggregation and ring-fencing pots in these circumstances, allowing developers to make contributions prior to formal submission to the relevant authorities.

These accounts can be particularly useful when contributions are requested on a per unit basis or when s106 payments are required as a condition of occupancy only at the time of sale.

The widespread familiarity of local authorities with these arrangements has meant escrow accounts continue to prove a useful tool to unlock discussions with town planners and as a condition to obtaining the necessary approvals to develop.

Barclays Escrow Services

With deep cross-industry knowledge and a team of dedicated professionals, our Escrow and Real Estate specialists work with their clients to provide flexible escrow solutions from the platform of a global financial institution. A dedicated relationship touch-point guides clients through the full escrow lifecycle from on-boarding to documentation, through to depositing and release of funds.

For more information or to discuss your needs, please contact Barclays Escrow Services