Banks Risk Race to Bottom With Back Leverage for Property Deals (1)

When developers needed an extra £500 million ($671 million) for a state-of-art revamp of Deutsche Bank AG’s former London headquarters this year, adding a roof garden and three stories on top, the financing didn’t come from a regular commercial real estate loan.

Instead, the money arrived via a multi-layered structure set up by NatWest Group Plc and Cheyne Capital Management that’s become an increasingly popular form of financing in Europe. Known as back leverage, the complex and relatively opaque system allows banks to apply more favorable capital treatment to their lending.

The redevelopment site of 75 London Wall, the former Deutsche Bank headquarters, in the City of London on Dec. 9.

Photographer: Betty Laura Zapata/Bloomberg

Driven by a funding vacuum caused by post-financial ...