Property Finance

A holistic guide to financial and legal issues of real estate financing

Property financing pertains to the various sources of capital invested in real estate assets. Built on a solid theoretical background, Property Finance features relevant case studies that cover the most common issues in property lending and financing. You will learn the policies surrounding debt and equity resources, preferred equity, mezzanine debt, and other hybrid forms in both general and country-specific terms. The first, general section of the book addresses real estate lending at an international level, financial cash flows, and the main clauses of financing agreements. The second, country-specific section discusses the more relevant element of European markets with a focus on the United Kingdom, France, Germany, Spain, and Italy.
* The book uniquely focuses on real estate financing exclusively, instead of on investment, valuation, or REITS
* A mix of theoretical and practical examples provides useful explanations followed by immediate practical cases
* A frequently updated website complete with errata corrige, updates, new spreadsheets, useful data, and other features accompanies the information in the book

Featuring practical case studies and a holistic approach to real estate financing topics, Property Financing is the ideal handbook to applicable financial and legal issues for financial students and managers.

Foreword by Prof. Dr. Junhai Liu xi
Foreword by Prof. Dr. Matthias Thomas xiii
Preface xv
Preface to Part Two xvii
Acknowledgements xix
List of Figures xxi
Reader's Manual xxiii
Part One
Chapter 1 Introduction to Property Financing 3
1. 1 Forms of financing: Debt and equity 3
1. 1. 1 Debt 4
1. 1. 2 Equity 6
1. 2 A different approach to property financing 6
1. 3 Corporate finance and project finance 7
1. 4 Bank financing 8
1. 4. 1 Property Loans to Private Individuals 9
1. 4. 2 Property Financing to Cover Financial Requirements 9
1. 4. 3 Structured Real Estate Financing 10
1. 5 Fund raising, securitization, and syndication 10
1. 5. 1 Traditional Funding and Securitization 11
1. 5. 2 Funding for Real Estate Loans and Syndication 12
1. 5. 3 Syndication of Real Estate Loans 13
Chapter 2 Structured Real Estate Financing 15
2. 1 Bank roles 17
2. 2 Bank loan contractual forms 17
2. 3 Loans for development projects 18
2. 4 Parts and stages of a structured loan 18
2. 4. 1 Analysis of the Transaction and Term Sheet 19
2. 4. 2 Real Estate Valuation 21
2. 4. 3 Basics of Property Appraisal 23
2. 4. 4 Due Diligence Process 32
2. 4. 5 Legal Due Diligence 32
Chapter 3 Loan Agreement 33
3. 1 Object and purpose of the loan 34
3. 2 Conditions precedent 34
3. 3 Amount of the loan 35
3. 4 Interest rates 36
3. 5 Interest rate risk hedging 38
3. 5. 1 Interest Rate Cap 38
3. 5. 2 Collar 38
3. 5. 3 Interest Rate Swap 38
3. 6 Loan allocation 41
3. 7 Loan repayment schedule 43
3. 8 Fees 43
3. 9 Frequency of drawdown and procedures 45
3. 10 Events of default 46
3. 11 Property insurance 48
3. 12 Representations and warranties 49
3. 13 Duty to provide information 53
3. 14 Costs, taxes, and ancillary charges 56
3. 15 Contractual covenants 56
3. 15. 1 Balance Sheet Covenants 57
3. 15. 2 Financial Covenants 57
Chapter 4 Loan Repayment, Interest, and Renegotiation 63
4. 1 Bullet payments 63
4. 2 Pre-amortizing (semi-bullet) 63
4. 3 Balloon payment 64
4. 4 Fully amortizing repayment plans 65
4. 4. 1 Fixed-Capital Loan Repayment Plan 66
4. 4. 2 Floating-Rate Loan Repayment Plan 68
4. 4. 3 Loan with Interest Rate Caps 71
4. 5 Other repayment schedules 73
4. 5. 1 Negative Amortizing Constant Payment Loan 73
4. 5. 2 Declining Payment Loan with Constant Amortizing 74
4. 6 Restructuring and renegotiation of real estate loans 75
4. 6. 1 Grant of a New Loan 76
4. 6. 2 Deferral of Payment Deadlines 76
4. 6. 3 Restructuring Arrangement 77
Chapter 5 Effects of Financial Leverage on Real Estate Investments 79
5. 1 An illustration of financial leverage 80
5. 2 The effects of an increase in volatility 81
5. 3 The effect of financial leverage on returns 82
5. 4 The effect of financial leverage on risk 82
5. 5 "No Free Lunch" 84
5. 6 The mechanics of financial leverage 84
5. 7 The effect of the spread 85
5. 8 A brief summary of when to use financial leverage 86
Chapter 6 Structured Real Estate Financing Case Studies 89
6. 1 Structured financing for an income producing property 90
6. 1. 1 Description of the Transaction 90
6. 1. 2 Term Sheet for an Income Producing Property 90
6. 2 Structured financing for a real estate portfolio acquisition 100
6. 2. 1 Description of the Portfolio Acquisition 100
6. 2. 2 Term Sheet for the Financing of a Real Estate Portfolio 101
6. 3 Financing of a real estate development project 113
6. 3. 1 Description of the Residential Development Project 113
6. 3. 2 Term Sheet for the Development Project Loan 113
6. 4 Financing a shopping centre: Credit application 121
6. 4. 1 Players Involved 121
6. 4. 2 Financial Analysis and Key Figures 126
6. 4. 3 Risk Appraisal 128
6. 4. 4 Risk Rating and Risk-Reward 131
6. 4. 5 Conclusion and Recommendation 131
Chapter 7 Hybrid Forms of Financing 133
7. 1 Description 133
7. 2 Procedures for establishing mezzanine finance and cost 137
7. 2. 1 The Debt Component 137
7. 2. 2 Equity Kicker 139
7. 3 Covenants in a mezzanine financing 140
7. 4 Economic mechanics of hybrid financing 141
7. 4. 1 Mezzanine Financing for an Income Producing Property 142
7. 4. 2 Preferred Equity for Development Projects 144
7. 5 Waterfall payout agreement 148
7. 6 Intercreditor agreement 154
Chapter 8 Basel Accords and Effects on Real Estate Financing 159
8. 1 Basel II 160
8. 2 Basel III 160
8. 3 The Basel Accords and real estate financing 161
8. 4 Standardized Approach 162
8. 5 IRB Foundation and Advanced methods 163
Part Two Outline of the most relevant legal issues in selected jurisdictions
Chapter 9 China 171
Chapter 10 England and Wales 177
Chapter 11 France 185
Chapter 12 Germany 201
Chapter 13 India 207
Chapter 14 Italy 215
Chapter 15 Spain 229
Authors 235
Giacomo Morri 235
Antonio Mazza 235
Alessandro P. Scarso 236
References 237
Index 241