Property Loans - tranches "parri passu".

I think you have to read that as 'all outstanding loans at the time of any shortfall' .. anything repaid is water under the bridge. However FC can probably confirm (but not on this forum, for some reason).

Well as you would expect I have put this to FC, but too soon for a reply just yet.

However, as a matter of equity it seems to me that all lenders in all tranches, repaid or otherwise, should bear their proportion of any bad debt. If this is not the case then the LGDV figure quoted for the loan proposal is misleading. The same figure is quoted in the details for each tranche, being based upon the total finance required. Mentioning "parri passsu" implies that all lenders in each tranche bear the same risk, which may not be the case.

Personally I usually avoid subsequent tranches so I hope I am wrong about recourse to lenders who have already been repaid. It only recently occurred to me that I could have an exposure of which I am unaware.

From a practical point of view, unless there is a property crash half way through selling the development after it has been completed, the most likely reason for a default is some sort of problem during the development phase - eg, the developer goes bust, there are technical problems, building reg problems (eg, not meeting energy saving requirements), planning permission problems etc. If so, then all loans would still be outstanding and would share the pain equally.
Of course, they could start selling units at less than the projected sales price and repaying the early loans and then run out of money for the later loans. However, I would hope that this would be picked up as part of Feeling Cautious monitoring procedures. Hmmm... I think I may have just made a case for the last loans being riskier than the first loans...

I looked at a few of the multi-tranche loans last night, and it appears that FC's intention may be for all of the loans to be co-terminus, thus simplifying this question.  The exceptions arise where the early tranches precede the later ones by many months, as development delays might push out the expected completion/sale date.  It will be interesting to see how FC deal with these situations.  For example, in the Richmond 7-tranche loan, Tranche 2 ends earlier than Tranche 1, and Tranches 3-7 all end within about 10 days of each other.  Clearly, it only becomes relevant in the event of a default very late in the process, which is probably something FC would pick up during one of their inspections.

Co-terminus only when there is a refinance or a single sale. Where a number of units are developed and sold to pay the loan they try to pay the first tranches off first (if the sums match) and you do find that some tranches have been paid off while others are yet to be repaid by later sales. Later tranches do carry a slightly higher risk on those loans.
Something to watch out for is a possible move to pari passu among separate projects, SPVs, by the same developers. This would spread risk. Already the excess security can be transferred among projects, which is good, but no further linkage please.

Reply received today from FC:

1) Typically, as each tranche is a separate loan contract with the borrower, each individual tranche will be paid at the end of the term period in line with the agreed length of the contract. Therefore tranches are paid sequentially in chronological order.

2) However, if the borrower was to enter a default situation, then all individual tranches will be ranked parri passu in terms of recourse and security. Therefore if a property loan was to be defaulted, recovery payments made will be distributed evenly between all of the loan tranches associated with that development.

3) Therefore in the situation you have highlighted, if a borrower was to default in between tranches being repaid, investors who have loan parts in the repaid tranches have been repaid fully and the contract held between themselves and the borrower has been completed, so they would not be expected to contribute towards the loss.

4) When a borrower in a property loan is in a position to start repaying investors, we assess not just the funds coming in to repay the earlier tranches, but also assess the residual value of the scheme. As such, we have a degree of certainty around future sales proceeds and repayment of all tranches.

5) While there is a risk that a borrower could default after the first tranche has been repaid but before any further tranches have been repaid, based on our experience the risk of this is low.

6) I hope this helps clarify the situation, and please do let me know if I can help with anything else.
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My comment:

I have added paragraph numbers so that I can refer to them. Happily it confirms what some of you have said, namely that once a tranche is repaid there is no further recourse to lenders in that tranche (para 3). So that's OK then.

Nevertheless it seems to me that there is a strange contradiction here. You can't take comfort from tranches being "parri passu" (on equal footing in terms of recourse and security, to quote FC's wording) because clearly that is not the case in the circumstance I mentioned (para 3). In fact "parri passu" seems only to apply if a default arises before the repayment of any tranch(es) (paras 1 and 2).

That seems inequitable to me. Nevertheless forewarned is forearmed and I shall continue to avoid subsequent tranches which, it seems to me, quite clearly are a higher risk.

Agreed. It also depends on the state of the development. If Tranche 1 is raised (15 months, say, with no CB) for a site that still requires demolition / clearance, and Tranche 5 is raised 6 months later, with the build now out of the ground and progressing to schedule, with 2% CB added and the term down to 9 months, I know which one I'd rather put my money into.