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APC I&F > Property Finance & Funding > Flashcards

Property Finance & Funding Flashcards

1
Q

• What are the sources of debt?

A

Commercial Banks, Insurance companies, Pension Funds, Debt Funds

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2
Q

• What are investment criteria?

A

This can be in terms of a minimum return on investment but also a specific asset type and sector.

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3
Q

• Why do parties use leverage?

A

To exacerbate return – but it also increases risk

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4
Q

• What is Debts impact on key return metrics?

A

Increase IRR should the interest rate be lower than the unlevered IRR

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5
Q

• What is a covenant?

A

A term of a loan that increases lender security – it puts the borrower under obligation to achieve. Such as ICR, DSCR, LTV/LTC and debt yield

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6
Q

• How do covenants protect a lender?

A

Ensures the solvency of the project - The borrower has enough income to sustain payments.

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7
Q

What is Loan to Value?

A

Loan/Value of the prop

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8
Q

What is Loan to Cost?

A

Loan/Total Costs of the project

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9
Q

Why is the covenant strength of a borrower important?

A

It gives confidence to the lender that the borrowers other projects and financial interests are in good shape and indicated their solvency/ risk of failure in the future. Also track record is important.

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10
Q

• What can be done to ensure that the facility is repaid?

A

Covenants, amortization, cash sweeps, early sales etc.

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11
Q

Do the sources of debt vary due to investment criteria?

A

Senior lenders - Lengthy internal processes, low LTV and low price points - look for long term sustainable income to repay interest on money they hold for clients. Same with insurers

Debt funds - See debt as an investment tool that sacrifices higher returns for higher security - pricing is higher than senior lenders but can be more reactive - targeting higher IRR - may do junior and mezz.

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12
Q

• What Information did you require for the investment memorandum?

A

Executive summary, sponsor and management overview, portfolio information, market information etc.

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13
Q

What is MOIC?

A

Multiple on invested capital : equity + Profit / equity

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14
Q

Four quadrants of the finance&funding market?

A

PE: Direct investment into RE - look to achieve capital and income growth
Public Equity: Stock exchanges - transparent and volatile - little capital required - REITs
Private Debt: Direct funding of real estate - looks at LTV and repayment
Public Debt: Investment in debt instruments on the SE - Income from borrower payments and priority over equity

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15
Q

Why does RE need debt?

A

Requires large sums on cash - would be restrained if nor debt available

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16
Q

What are the components of the capital stack?

A

Common Equity - Purest equity, benefit from upside (dividends and value), personal liability
Preferred Equity - Capped equity stake agreed
Mezz - Not secured on property, priority over equity - converted to equity in default
Junior - second mortgage, bridge funding gap and more expensive than senior
Senior - First charge on the asset, first to be paid, most security and cheapest

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17
Q

What is Cash on Cash? What about the levered case?

A

NOI/Equity Invested - Annual return based on cash invested

NOI - DS) / (Equity Invested - Debt

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18
Q

What is equity multiple?

A

Equity + Profit / Equity

Not time weighted

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19
Q

What are the main debt structures?

A

Interest only - interest expense paid over term and capital repayment made at end
Rolled - interest payments rolled until the end of term and paid with principal
Full amortization - repayment method under which payment remain constant and ensure the interest and capital repayment is made by the term of the loan
Partial amortization - Some amortization, outstanding repaid on term of loan

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20
Q

What is the difference between a floating and fixed interest rate?

A

Floating is based on a benchmark/indices (libor/sonia) plus a premium - interest rate varies on benchmark - market norm

Fixed is a set Interest rate throughout the term of the loan - fewer lenders and lower LTV and longer terms

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21
Q

What is ICR?

A

NOI / Interest payment

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22
Q

What is DSCR?

A

NOI / Interest payments + capital repayments

23
Q

What are some of the sources of equity?

A

Private investors - family based
Institutional investors - funds, large scale investors, pension funds (prime assets & locations)
REITs
Cross Border Investors

24
Q

What are the typical loan fees?

A

Condition to make loan and increase costs:

  1. Arrangement - paid on closing for lender DD, origination, loan docs and underwrite)
  2. Prepayment - penalty for early repayment
  3. Exit Fee - time of exit
  4. Non utilization / commitment fee
25
Q

What are some of the basic loan terms?

A 
Loan amount
Interest rate
Loan term
Amortization
Fees
26
Q

What is the difference between recourse and non recourse?

A

Recourse means the lender has security over all your assets - personally liable
Non recourse means the lender has security over just the asset

27
Q

What is an Revolving Credit Facility?

A

A loan where a pool of capital is made available to the borrower to be accessed as per their requirements. They are only charged on the capital drawn. Good for companies with unexpected outflows or expensive purchases. For operating purposes.

Features: Cash sweep, max amount, potential commitment, reuseability

28
Q

What is a SWAP rate?

A

When you swap your floating rate cashflow with a hedging counterparty so a fixed rate.
No upfront costs and cashflow stability but inflexible and charges for early exit.

29
Q

What is a Cap rate in hedging?

A

Borrower reimbursed if floating rate surpasses set rate. Rate never rises past IR and strike. Ceiling to possible fluctuations but upfront cost and volatility remains.

30
Q

What information did you request for the three retirement living homes transaction?

A

Their debt requirements - Loan amount and expected pricing
Site analysis including planning permission
Expected Revenue - GDV
Timeline
Track Record - previous experience at operation
Specification of product
Locations and demographics

31
Q

What was the opportunity in the retirement living sector?

A

Infancy compared with Aus, NZ and US - Undersupply
UK 65+ Population expected to grow by 20% by 2027 - Increasing demand
UK 65+ have £1.6 trillion Equity in their homes
Rising expectations for high quality, hotel style accommodation across UK markets - retirement living is viewed more as a lifestyle choice rather than a ‘last resort’

32
Q

What were the macro factors at play in the debt market? Why a lower LTC?

A

COVID

LTV and LTC had fallen as lenders wanted to reduce risk exposure - Lower LTC therefore attract more potential lenders.

33
Q

What currency was used in the Data Centre Transaction?

A

Euros - Euro denominated fund for EU expansion and currency hedging.

34
Q

What are some of the intricacies of the Data Centre Market?

A

Mechanical – Shield, heating and air handling
Electrical – 100% uptime
Security

35
Q

What do you look at when comparing data centres?

A

Capacity which is recorded in MW - this site had a potential capacity of 28.8MW

36
Q

What is a debt yield? Why was it lower for the data centre originally?

A

NOI/Debt Quantum
Shows years it would take to repay debt at current NOI
It was lower due to the CAPEX schedule - Once online the revenue and NOI would increase meaning the number of years to pay back the debt would fall.

37
Q

What was the capital expenditure on the data centre for?

A

Construction of the second module that includes two data halls with 4.8MW capacity - Hyperscaler tenant already in place for one of the data halls

38
Q

What would you look for on a data centre inspection?

A 
Flood risk
Security
Access
Air handling
Power
39
Q

Why are data centres a good investment?

A

Demand:
i. Increasing adoption of cloud computing, digitisation, and virtualisation by major enterprises
ii. Increasing global IP traffic due to improving broadband and other internet mediums
iii. The growing usage of social media as well as content based online media services
Sticky - require serious investment

40
Q

Which lenders where approached for the data centre?

A

European Senior Lenders and Global Investment Banks - Have the knowledge and funds required to complete the transaction.

41
Q

What deep dive was done on the shopping park tenants? Were there any issues?

A

Financial Statement were reviewed from companies house - Revenue, operating profits etc.
Dun & Bradstreet reports regarding financial stability over the next 12 months
Although some retailer were struggling - 60% of rent was generated by household names

42
Q

• Why do shopping parks have more defensive characteristics?

A

Accessible, convenient and stress free for the consumer
Flexible (transport) and cost effective for retailers, with low construction and relatively low occupancy costs compared to city centre locations.
Click and collect

43
Q

• How was the shopping park valued?

A

Investment Method - Taking into account the perceived risk of the retail sector - 10% yield

44
Q

Why are debt funds able to be more reactive?

A

Commercial banks tend to have extensive processes and requirements to be met prior to drawdown - they are usually the cheapest form of debt.
Debt funds are mutual funds focused on direct investment, usually sector or tranche specific. The are more proactive with lending, but charge a higher price.

45
Q

Why wouldn’t there be many lenders in the market for the RCF?

A

Risk averse market in the COVID pandemic - no foresight on what the money for
The last time the client raised funds was prior to the GFC
Expectations were the same
Senior lenders strict processes and covenants - oversight and committees
Debt funds could be more flexible on pricing and processes
Presented our findings -

46
Q

• What did the IM focus on given no specific property?

A

Given no specific property the focus was on track record and potential acquisitions

47
Q

• What was the structure of the company, why did they require equity?

A

They were the operator – they would operate the sites.

48
Q

• Do you distribute the materials to any lenders or potential partners?

A

No, an NDA was signed. Ensures that the information won’t be used for any other purposes than the DD on the deal and will be destroyed upon declining. Also, regulations around who it can be shared with.

49
Q

What is Sonia?

A

Sterling Overnight Index Average

SONIA is based on actual transactions and reflects the average of the interest rates that banks pay to borrow sterling overnight from other financial institutions and other institutional investors.

50
Q

What are the key differences between development funding and investment financing?

A 
Pricing
Drawdown
Commitment Fee
Income
Repayment
Term
51
Q

What is an NDA?

A

NDA or non-disclosure agreement is a binding contract between two or more parties that prevents sensitive information from being shared

52
Q

What is a whole loan?

A

A single loan that covers both the senior and mezzanine tranches.

Preferred to the number of parties - obviously price dependent.

53
Q

What is a the difference between a forward funding and a forward purchase?

A

Delivery of payment
Forward funding is a payment over the construction period to fund the development
Forward payment is an agreement to buy the site at PC

54
Q

What is a CP?

A

In a loan agreement, a condition that must be satisfied by the borrower before it may request a drawdown and the lender is obliged to lend.

APC I&F (20 decks)

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