Contributors
What does Biodiversity Net Gain (BNG) mean to you as a lender? The answer is it will depend on who your borrower is.
Lending to a developer
If you are lending to a developer, here are some of the issues you should consider:
Where is the delivery of the BNG taking place?
If on-site, the risk is lower for the lender as the borrower and their professional team will have full control over the delivery of the BNG and its ongoing maintenance. The ongoing maintenance will run with the land and so at the point of final disposal the obligations will flow to the new purchaser. Additional professional fees for BNG advice are likely, but on the whole this is the least risk position for the lender.
If off-site, there is the additional cost of purchasing the BNG units (at market value) and the ongoing maintenance obligations (for 30 years). If BNG units are purchased from the Environment Bank, which at the moment is what we see most often, all maintenance responsibilities are fully funded and remain with the Environment Bank. Where BNG units are bought elsewhere, the landowner may seek to put the maintenance obligations onto the developer.
The lender will have security over the development site as usual, but not over the third party land where the developer may continue to have obligations, depending on the seller of the BNG units. These obligations will be legally secured via either a Section 106 planning agreement or a conservation covenant with perhaps a commercial agreement also being entered into. They will therefore need to be monitored outside of the security property obligations. This means more admin and likely more cost. In addition, there is slightly more risk to the lender as there are unconnected third parties involved (the owner of the land that has generated the BNG units), which causes an unknown.
If BNG credits are to be purchased under the Government scheme (as a last resort), the cost will be significant, particularly for development sites with rich bio-diversity.
A borrower will need to show that they have a proper management plan in place in order to give the lender certainty that any BNG obligations can be fully complied.
Who will carry out the ongoing BNG obligations?
The borrower will need to be clear if they will be responsible for the ongoing obligations for onsite BNG or if they will sub-contract them to a managing agent / land agent to deal with. If the latter approach is taken, does this lead to a need for a duty of care deed to the lender? Having a clear understanding on how the borrower intends to deal with the BNG obligations will give the lender clarity on what the security pack needs to look like.
Costs
Is the borrower fully on top of the additional BNG costs involved? As highlighted above, this will be in the form of additional professional fees, any ongoing maintenance obligations and the purchase of any biodiversity units or Government credits. These costs will obviously impact on the developer's cashflow and potentially the viability of a scheme.
Lending to a landowner
If your borrower client is a landowner who has land which has potential BNG units, as a lender you should consider the following issues:
Payments
How much is the landowner being offered? There is a market for BNG units which, whilst in its infancy at the moment, is likely to become more sophisticated as time passes. The landowner will need to consider the benefit of the capital sum being offered against the loss of any income that can be achieved on that land going forward. It must be remembered that the BNG maintenance obligations attach to the land for 30 years and so probably rule out any income generation on that land for that period plus potentially the cost of compliance. A lender will therefore need to consider how this will impact on the borrower's debt servicing and loan to value in their financial compliance reviews.
Structure of the agreement
This is still an evolving area, but the majority of BNG obligations we have seen so far have been secured using a Section 106 planning agreement. The lender will normally be required to be a party to the Section 106 agreement. You should take advice prior to signing one to ensure the obligations do not extend to the lender generally.
BNG is an evolving area both in terms of the commercial market and also legally, and therefore how a lender deals with requests around BNG will continue to evolve. Now is the time to get a grasp of the basic principles and how it might affect your current lending portfolio.
