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CH APC > Property Finance & Funding > Flashcards

Property Finance & Funding Flashcards

1
Q

What are the main reasons for financing property?

A

Predominantly due to not having the required level of capital to pay for an investment.

Also provides exposure to leverage

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2
Q

What is leverage?

A

A strategy of using borrowed capital to increase the potential return of an investment

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3
Q

What is debt finance?

A

Where an investor or company (the borrower) takes out a loan or issues a bond to raise capital for an asset, portfolio, project or business.

Usually c. 5 years at an agree interest rate.

Lender had a charge or recourse over the asset in case of a default

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4
Q

What is a revolving credit facility (RCF)?

A

When a variable amount is available as a loan that can be drawn as required

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5
Q

What is equity finance?

A

When an investor, asset owner or company gives shares in the ownership in exchange for the capital

No promise to repay the investment and no interest rate

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6
Q

What do corporate financiers do?

A

They cover the interaction between capital, real estate and risk at various levels.

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7
Q

What are the 4 quadrants of property that corporate financiers operate over?

A

Public debt

Public equity

Private debt

Private equity

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8
Q

What are the finance structures available to investors?

A 
Equity
Commercial mortgage
Unsecured loans
Secured debt
Floating charges
Property development finance
Bridging finance
Mezzanine finance
Portfolio finance (or revolving credit facility)
Sharia finance
Joint Ventures (JVs)
Securitisation and bonds
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9
Q

What is equity finance?

A

The raising of capital through the sale of shares or equity in the company or asset

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10
Q

What is a commercial mortgage?

A

Most common type of lending.

Debt instruments secured against the underlying property whereby the lender lends a certain percentage of the property value for a fixed period of time.

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11
Q

What are unsecured loans?

A

A loan that is issued and supported only by the borrower’s creditworthiness, rather than being secured against an asset

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12
Q

What is secured debt?

A

Uses collateral from another asset such as a house, business or car as security.

Usually for a lower amount than required for a commercial mortgage.

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13
Q

What are floating charges?

A

A security, such as a mortgage or a lien, that has an underlying asset or group of assets which is subject to change in quantity or value.

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14
Q

What is property development finance?

A

Usually a short term loan used for the development of a new building project, or refurbishment of an existing property.

Interest rates tend to be higher than commercial mortgages.

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15
Q

What is bridging finance?

A

Short term loan to finance the purchase of a property.

Lender takes a first charge on the property and will seek an exit once the loan has come to term.

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16
Q

What is mezzanine finance?

A

Combines elements of debt financing and equity investment and is secured against the property.

Often helps property developers reduce their cash flow requirement, enabling them to finance projects that would normally require a larger capital share.

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17
Q

What is portfolio finance (or revolving credit facility)?

A

Long term business loan that is offered to property investors who have a number of properties.

Lender offers the ability to consolidate borrowing into 1 loan.

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18
Q

What is Sharia finance?

A

Islamic finance.

How corporations in the Muslim world, including banks, raise capital in accordance with Sharia.

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19
Q

What is a Joint Venture?

A

A business entity created by 2 or more parties, generally characterised by shared ownership, shared returns and risks and shared governance

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20
Q

What is securitisation/bonds?

A

Securitisation - the process through which an issuer creates a financial instrument by combining other financial assets then markets different tiers of repackaged instruments to investors.

Can encompass any type of financial asset and promotes liquidity in the marketplace.

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21
Q

What are the main risk factors associated with being a borrower or lender of debt finance?

A

Non-payment of interest

Capital depreciation of the asset

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22
Q

What are the key factors when modelling the performance or expected performance of a property or portfolio?

A

Loan to Value

Interest rate

23
Q

What is Loan to Value?

A

Ratio of debt to equity as a percentage of the overall property value.

24
Q

How great a LTV do commercial property lenders traditionally lend up to?

A

65% of the market value of the asset

25
Q

What is negative equity?

A

When the value of the property has fallen to a point where the borrower has lost value

26
Q

What is a syndication?

A

When multiple banks lend on the same asset

27
Q

What kind of investors invest in UK commercial property?

A 
Insurance company funds
Segregated pension funds
Collective investment schemes
REITs & Listed property companies
Private property companies
Traditional estates & charities
Private investors
28
Q

What is loan underwriting and what factors are considered?

A

Due diligence

The process of a lender determining if a borrower’s loan application is an acceptable risk.

Factual and legal investigation
Research
Analysis and discover into the borrower, asset, sponsor and other principal parties

29
Q

What are the main categories of due diligence within the financing process?

A

Legal - focus on the legal title and ownership structure

Financial - focus on the risk profile and ability of the borrower to pay back the loan (track record, credit profile, rent payment scheme)

Asset - focus on the physical risk profile of the specific asset (age, structure, condition and location)

30
Q

What are financial covenants and what are the categories they fall into?

A

Conditions within the loan agreement that the borrower is required to fulfil or that prohibit the borrower from undertaking certain actions or activities

Two categories - restrictive and financial

31
Q

Explain refinancing

A

The replacement of an existing debt obligation with another debt obligation under different terms

32
Q

What are the reasons for refinancing?

A

Increased flexibility

Reduction in restrictive covenants

Cheaper loan

33
Q

What fees are associated with borrowing?

A 
Arrangement fee (1% of loan)
Exit fee (1/2% of loan or GDV)
Broker fee (1%)
Valuation fee
Professional Fees
34
Q

What is loan to cost?

A

LTC is a metric used to compare the amount of loan as a percentage of the total build costs.

Usually approx. 90%

35
Q

What is Loan to gross development value?

A

LTGDV is the maximum loan expressed as a percentage of the GDV.

Usually approx. 80%

36
Q

What will a lender consider when deciding to offer terms?

A 
Purpose of the loan (investment, development etc)
Length or term or loan
Track record of borrower
The property/project
Developer/investor
37
Q

What kind of debt terms did you get on the supermarket?

A

Private bank - approximately 3%, 50-55%

Challenger bank - 4% over LIBOR, 65%

38
Q

What sort of terms did you get for the equity broking instruction?

A

Initial interest indicated a 3-3.5x return on equity and 26-29% IRR over a 4-5 year holding period.

39
Q

What are typical terms for investment finance?

A

Margin ranges from 1.5% - 7% but is heavily dependent on the borrower, the property and the borrowers track record. It is also dependent on the required returns of the lender.

40
Q

What are typical terms for development finance?

A

Ranges from 3.5% - 9% over SONIA. Again, depends heavily on the scheme. Whether it’s forward sold, fully let etc.

41
Q

What is SONIA?

A

LIBOR (inter bank lending rate) is being phased out and SONIA is generally what banks are pricing against as a floating rate. It’s the sterling overnight index average.

SONIA - Backwards looking base rate

42
Q

What other rates are banks lending over?

A

Depends on the bank. Base rate, GILTS (fixed), SONIA, LIBOR, Swaps.

Swaps can help hedge the risk of floating rates falling.

43
Q

What’s happening in the debt market currently?

A

There is a lot of risk with COVID at the moment, however banks are lending for the right product.

Track record is more important than ever at the moment.

44
Q

What were the terms of the NDA?

A

I was prohibited from disclosing the information of the investment to any third party unless they had also signed the NDA for a period of 5 years or until the investment had been made.

45
Q

Why do you lever up/borrow debt?

A

Exposes you to leverage. Generally happens when you don’t have enough capital for a project/investment. The debt has an interest rate and is paid back at the end of the term.

46
Q

What determines the interest rate?

A

The borrower, the property, the track record of the borrower, the lender’s cost of capital

47
Q

Rank the banks mentioned (international, private, challenger, family office).

A

International - big, cheap cost of capital, big portfolio
Private/challenger - smaller and needs higher returns.
Family office - more expensive cost of capital and requires higher returns

48
Q

What is an interest rate broken down into?

A

Cost of capital + a margin

Risk free rate + premium

49
Q

What does LIBOR mean?

A

London Interbank Offer Rate

50
Q

What is SONIA?

A

Sterling Overnight Index Average

51
Q

What are LIBOR and SONIA?

A

Rates at which banks base their risk free rate. Generally an interest rate will be offered at LIBOR/SONIA plus a margin.

52
Q

What is a normal LTV?

A

When I was working in the real estate finance team, an LTV would generally be around the 60% mark. However due to COVID, this has changed.

Many banks are now looking at the debt yield (Net Operating Income/Total amount of debt) as it is a better indicator of a borrower’s ability to repay the loan. Looking for approx. 8%.

53
Q

What is an Interest Cover Ratio?

A

How many times the net operating income covers interest

54
Q

What is a DSCR?

A

Debt service cover ratio

EBITDA(NOI)/Interest+principal (total debt)

CH APC (8 decks)

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