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Property Finance & Funding Flashcards

1
Q

Talk me through a CPD session?

A

During my first week at the firm I completed a training session focused on providing an overview of the fundamentals of placing debt on residential developments as well as some key definitions and concepts that I would use throughout my time at the firm

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2
Q

What are the methods of financing developments from the perspective of a lender?

A

Senior debt
Mezzanine debt
Stretched senior
Joint venture

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3
Q

What costs are associated with debt structures

A

Retained interest cost
Arrangement fees
Broker fees
Penalty rates

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4
Q

In what circumstance would you use debt

A

When there is an equity gap
Majority of the time senior debt is most appropriate
Mezzanine appropriate for more experienced developers when there is a higher profit on cost
Not appropriate at certain levels of market liquidity

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5
Q

How do you securitise investments?

A
  • Charge against the property or the site

- Share charge on the borrowing entity

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6
Q

What is Loan to Value and how do you calculate it?

A
  • Amount of gross loan vs the total GDV of a development site
  • Shows the lenders exposure to the GDV
  • The closer the loan is to the value the higher the risk of the lender defaulting
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7
Q

What is Debt coverage?

A
  • A measurement of a firm’s available cash flow to pay current debt obligations
  • Net operating income (revenue - expenses)/total debt
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8
Q

What is gearing?

A

Is the relationship between a company debt and equity

Shows the extent to which a firm’s operations are funded by lenders versus shareholders
I.e. Financial leverage

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9
Q

What is Leverage?

A

The use of borrowed capital to increase the potential return of an investment.

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10
Q

What is Return on Investment?

A

Performance measure to assess the efficiency of an investment
measure the amount of return on a particular investment, relative to the investment’s cost
Value of investment - cost of investment / cost of investment

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11
Q

What is profit on cost?

A

Gross profit/total development costs

Target rate of return set against capital invested into a project

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12
Q

How can leveraging investments improve return on investment?

A 
Less equity contribution but proportionally more profit
Non leveraged example
100 invested
25 profit
25% ROI
Leveraged example
35 invested
10 profit
29% ROI
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13
Q

What is retained interest?

A

When interest is retained by the lender on Day 1

Helps protect the lender when lending on non-income producing assets

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14
Q

Different ways to model cash flows?

A

Operating
Cash generated by main business activities
Investing
Purchases of capital assets and investments
Financing
Proceeds of issuing debt and equity

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15
Q

What is financial modelling?

A

Method of calculating the impact of a future event or decision

Summary of an investments expenses and earnings

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16
Q

What is in your financial model?

A
  1. Deal summary
    development costs, financing assumptions, and sales assumptions
    Used to determine the economics and profitability of a project
  2. Cash flow model
    i. Revenue, expenses, finance (unlevered and levered cash flows included)
    ii. Shows the IRR of a project (aimof 15%)
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17
Q

What steps did you undertake in your due dilligence?

A
  • Financial modelling and sensitivity analysis
  • Commercial
  • Asset, project and market
  • Operational
  • Delivery teams experience
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18
Q

What are the risks with borrowing in a property funding situation?

A
  • Profit erosion through timing issues
  • Delays to projects when there is expensive funding in place can quickly reduce the profitability of a project to a developer
  • Potential for demotivation if developer has less skin in the game
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19
Q

Why did you commission a third party sales report?

A
  • To verify my findings

- This was a requirement of my investment committee

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20
Q

What research did you do on the local market?

A
  • Sales rates
  • Liquidity
  • Number of new schemes coming to the market
  • Planning search for anything that might impact the - - - Subject site
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21
Q

What background checks did you undertake on the borrower?

A

Anti-money laundering checks

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22
Q

What track-record checks do you undertake?

A

Experience with similar developments before

Experience developing using debt finance

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23
Q

What goes in to your presentation to investment committee?

A
  • Deal fundamentals
  • Financials
  • Track record of borrower
  • SWOT analysis
  • My advice on how to progress
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24
Q

What is included in your indicative terms?

A
  • Gross loan
  • Loan length
  • Arrangement fee
  • Broker fee
  • Interest rate
  • Conditions
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25
What goes in to a loan agreement?
Who are the parties of the agreement - Developer - Mezzanine lender (seperate or senior) Background of the deal - loan for construction of... Definitions/interpretations - broker fee means... - collatoral warranty means... Appendicies - construction programme - cost budget
26
What is an inter-creditor deed? Why did you advise that particular attention be paid to the inter-creditor deed?
A document which outlines who gets repaid first. By advising on senior lender buy out rights this would be protecting our position as a junior lender
27
What is a buy-out clause? Why did you advise it?
- A pre-emptive right in favour of the mezzanine financier - It means that they can purchase the senior financier’s debt in certain circumstances - Buy out right timed so senior lender cannot charge the borrower penalty rates and erode the chance of mezzanine being paid back - By buying the senior lender out at a fixed amount the mezzanine lender then becomes the first charge lender and first to be repaid, improving their chances of their investment being returned in the case of increased project timescales
28
How is your investment securitised?
x
29
What is stretched senior debt?
Combines senior debt and junior (or subordinated debt) into one package. Typically at a lower average cost to the borrower than a separate senior loan and junior piece
30
Salford - Why was 18% profit on cost too low?
If in this instance that profit levels began to erode, the level of profit that the developer would take away from the project would become incredibly small. This would inevitably impact their motivation to complete the project
31
How does Property compare to other asset types as an investment?
Not as liquid as stocks However, can provide a passive income stream and the potential for substantial appreciation
32
Identify the factors that affect the ability to obtain finance to fund any investment project.
- Borrower experience - Deal fundamentals - Proposed equity contribution - Existing lenders - Market/locational factors
33
Identify appropriate sources of finance and understand the principles that apply to securing finance for different purposes.
Debt | Equity
34
How do you advise maximising the viability of a funding situation?
Balance return on equity with finance costs to find optimumpoint of funding structure For any given project
35
What individual property matters impact its ability to obtain finance?
- Asset - Location - Age - Occupation In relation to development sites: - Market liquidity - Borrower experience - Equity contribution - GDV - Build costings
36
How does the ability to obtain property funding impact the market?
Access to funding stimulates development. Through that, the wider job market is envigarated. The quantity of new homes increases satisfying customer needs
37
How do you ensure risk is managed for your investors?
- Diversified portfolio - Ensure thorough due diligence at underwriting stage - Ensure that they are aware of your investing strategy (through clear IM)
38
What was the objective for your fund?
- Return investors 8% coupon rate annually
39
What was your investment criteria?
- Medium sized schemes (5-50 units) - Nothing over £700 psf sales values - Lend to experienced developers - Sit behind reputable senior lenders
40
What is a fund?
- A structure where at least three investors’ capital is pooled together and managed as a single entity with a common investment aim
41
What is an Investment Committee?
- An external committee of senior property professionals, who approve decisions in respect of the strategy of potential acquisitions or disposals
42
How did you benchmark performance of an investment?
- Dependent on whether timescales were met | - Covenants and obligations of loan agreement met
43
What is a Close-ended Fund
- Limit on the amount of capital it can take in at any one time
44
Open-ended Fund
- No formal limit on the amount of capital it can take in
45
What are the principles of the FCA?
The FCA seeks to conduct its business with: - Intergrity - Skill, care and diligence - Financial prudence
46
What FCA permissions did ZSL have?
The right to control, but not hold, clients’ money
47
How do the FCA regulate firms?
Through: - Regular meetings with senior management - Regular reviews of business models and strategy
48
What activities does the FCA seek to prevent?
- Insider trading | - Unauthorised business
49
What penalties can the FCA impose when a firm is in breach of regulation?
The FCA can: - Withdraw a firm’s authorisation - Prevent a firm from carrying out regulated activities
50
What factors will affect the performance of your assets over the next five years?
- Anticipated market movements over the hold period, e.g. rental and capital growth - The anticipated state of the property at the end of the hold period, both in physical (e.g. refurbishment) and tenure / leasing terms
51
How do you determine the viability of a project?
- By comparing a project’s forecast return against its required return, using a Discounted Cash Flow - By running sensitivities on various asset management scenarios to determine which produces the most favourable risk / return profile
52
How would you typically appraise a potential acquisition?
1. Gather all information relevant to the property | 2. Prepare a cash flow to determine whether the property’s forecast returns exceed its required returns
53
What is debt?
An obligation to pay a sum of money to a party in the future
54
What is peak adverse debt
The point at which your cumulative debt is at its highest
55
How do phased drawdowns work?
Borrower is only allowed to draw down funds to fund specific elements of a project Relies on monitoring surveyor relaying accurate information to the lender on project progress
56
What is a non-utilisation fee?
Fee charges on cash that hasn't been drawn down but set aside for a loan
57
How would a profit share funding situation work?
Lender gets two types of return from an investment: 1. Interest rate 2. Profit share
58
What is a Condition Precedent (CP)?
- Planning - Certain % of pre-sales - Monitoring surveyor in place
59
Can you use pre-sales to fund a developmetn
Have to obtain a bond from the insurance market Relies on you performing on the contract
60
Name another method of funding a development?
Forward funding
61
What is forward funding?
E.g PRS Partner funds the finance at preferential interest rates Agreement to purchase the asset on completion at a lower capital amount
62
Benefits of forward fundin
Eliminates certain amount of risk for the developer Guaranteed sale on completion
63
What is an Investment memorandum?
Shows our lending criteria and focus Describes what you actually do as a business: - Invest funds in to property developments - In resi property - Always take a first or second charge on the property Attached to application form
64
If there is an issue with a specific development how does this impact your portfolio?
- Impacts the overall weighted portfolio LTGDV Mitigated by: - Monitor LTGDV on a portfolio basis Lenders secured against the wider portfolio.
65
On what basis did you raise funds
Not on a case by case basis Discretionary how we invest the funds
66
What goes in to a Loan Agreement?
- Loan agreement - Security agreement - Personal guarantees - Inter-creditor deed (deed of priority)
67
Why is senior debt cheaper?
8%-115 senior development finance - First charge - Repaid first - Go up to a lower LTGDV (60%)
68
What is financial modelling?
Forecasting future potential outcomes based on current assumptions
69
What are the inputs of a property financial model?
Timings - purchase date - planning period - construction period - sale period Revenue - Net areas - GDV - Sales growth Development costs (S-Curve vs. Straight line) - Construction costs - Professional costs - Contingency - Planning costs
70
What are the outputs of a property financial model?
- IRR - NPV - PoC
71
How can you provide financial modelling advice whilst not being regulated by the FCA?
* Models are at a property level only rather than providing returns at a fund level * Relate to the acquisition and disposal of specific assets * Developed in relation to Investment Memorandum and Client investing assumptions * Show the indicative returns based on the assumptions used
72
What is an Equity Multiple?
For every £1 contributed its how much you get back

DJ (26 decks)

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