real estate leasing beyond conventional financing
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Real Estate Leasing Beyond conventional financing. ALB National Conference Bucharest, 18.10.2007. Bogdan Cernescu Managing Director. Member of Erste Bank Group. Agenda. Introducing real estate leasing Real estate – a particular asset class Building up expertise and benefits - PowerPoint PPT PresentationTRANSCRIPT
A Member of Erste Bank Group
Real Estate LeasingBeyond conventional financing
Member of Erste Bank Group
Bogdan CernescuManaging Director
ALB National Conference Bucharest, 18.10.2007
A Member of Erste Bank Group
Agenda
Introducing real estate leasing
Real estate – a particular asset class
Building up expertise and benefits
Sample lease financing models
A Member of Erste Bank Group
What makes real estate different?
Real estate is a particular asset class/investment vehicle:
It enjoys a very long economic life and conserves value.
Each property also unique in its way.
Terms and conditions of sale/purchase may widely vary in time and space.
Market information is imperfect; market intelligence and thorough market research really make the difference!
Certain types of real estate transactions offer sometimes attractive tax benefits that may enhance their returns.
Properties may need substantial time for market exposure in order to capture the best price, time that may not be available to any given seller.
Buyers needs to act quickly sometimes given internal or external constraints.
A Member of Erste Bank Group
Real estate – understanding its key features
Physical propertyA clear-cut image of the quantity and quality parameters that define the property are of utmost importance when deciding upon the property potential. Are they available?
Time horizonReal estate prices go up and down in time. For prospective investor or financier trying to asses if the real estate property will appreciate or depreciate in value, it is of utmost importance to decide what time period is relevant. Short, medium or long-term?
Property rightsReal estate is more than brick & mortar properties; it is also a bundle of legal rights consisting of deeds, titles, liens, encumbrances, etc. Have they been studied?
Geographic areaReal estate is a spatial commodity, so its value is directly linked to what is going on around it. The question is therefore what is the relevant market area to be considered?
A Member of Erste Bank Group
Real estate – understanding its value drivers
When analysing real estate, value is the central concept.What are the key determinants of value?
The Property1. Location, location, location!2. Restriction on Use3. Improvements4. Property management
Transfer Procces1. Market research2. Promotion3. Negotiation power
Demand1. Economic outlook – upward
trends?2. Demands for new space3. Availability of funding
Supply1. Current supply of new space2. Prices and characteristics3. Similar properties/substitutes
A Member of Erste Bank Group
What makes real estate financing different?
Therefore financing real estate requires a holistic approach:
Thorough understanding of the key features of real estate and the risks associated to its financing.
Understanding of value creation and value drivers in real estate universe.
Building up particular expertise and competence that goes beyond „plain vanilla“ financing to legal, taxation, construction, plannning, arhitecture, etc.
Understanding Total Investment Cost and Total Ownership Cost principles.
Establishing functions and competences able to offer a comprehensive service range in addition to financing.
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Moving to a holistic approach
Ultimately leading to:
Value creation for customers in order to build up long-lasting partnerships.
Proving value to shareholders and financiers to attract more capital.
Enhanced risk management capabilities on both lessor and lessee‘s side.
Make it easier and cheaper!
A Member of Erste Bank Group
Beyond financing
Legal, tax & accounting expertiseTransaction modelling Advisory
Real estate valuationsInternal Real estate valuationsMarket knowledge and intelligence
Construction servicesMonitoring/Supervision (early warning capabilities)Project Management („technical lawyer“ of the investor)
Construction services & moreGeneral planner (from vision to reality)General contractor (turn-key delivery)Technical equipment planning (HVAC, elevators, etc)
A Member of Erste Bank Group
Particular strenghts & benefits
Asset risk know-how Wider range of property types eligible for financing – increased funding
availability; Longer financing term (i.e.15-20 years) – immediate release of liquidity and
less cash flow constraints; Flexible lease payments adapted to lessee‘s cashflow by undertaking higher
residual values. Monetization of hidden reserves via sale&leaseback.
Tax & accounting know-how Off-balance sheet structures; P&L optimization.
Construction know-how Management of the control of construction procedures and quality standards –
cost optimizations & savings. Lessees focus on their core business, less administrative hassle. The entire costs of leasing (e.g. costs for project documentation, planning
permission, transfer tax, other fees) can also be comprised into the Total Investment Costs.
A Member of Erste Bank Group
Possible structures and deal models
Conclusions:
The lessors‘s product understanding – both in terms of asset and counterparty risk are critical to offer a highly competitive and value-adding product.
The product goes beyond the border of traditional financing, ultimately aiming at optimizing the risk and benefits for both lessee/lessor.
Lessor can undertake the asset manager and construction specialist role.
A Member of Erste Bank Group
Sample real estate leasing models
A Member of Erste Bank Group
What could be financed?
Any commercial property* can be leased in principle:
Industrial and production halls.
Logistics premises/warehouses.
Shopping centers (retail centers, power centers, hypermarkets).
Office buildings.
Hotels and leisure ammenities.
* Income earning, not speculative properties.
A Member of Erste Bank Group
Possible structures and deal models
From simple to more complex models:
Finance lease.
Operating lease.
Long-term rentals.
Sale and leaseback.
Equity participation deals.
Asset vs. share deals.
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Possible activities (or any combination):Assistance with selection of location and landPurchase of existing real estate (=plot of land)Financing of the constructionProject management and project supervisionFacility and property management
Leasing Company= Financier, plus
Client- logistics of manufacturing company- public sector- development company- retail chain- hotel chain provider- etc.
Use of the property
Possible activities (or its combinations):Property useFurther sub-lease of the real estatePossible acquisition of the property at the contract end.
= Lessee
Lease instalment
Real estate leasing – generic priciples
A Member of Erste Bank Group
Possible activities (or any combination):Assistance with selection of location and landPurchase of existing real estate (=plot of land)Financing of the construction
Leasing Company
Tenants/End-users
Use of the property
Property use= Sub-lessee
Lease payments
Developer/ClientPossible activities (or any combination):Project management and project supervisionProject developmentProperty lettingFacility and property managementPossible purchase of the property after the contract expiry
Rent
= Lessee
Real estate leasing – even more complex
Use of the property
= Head-lessor
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Leasing Company = Financier & equity partner
Developer / Client
Property use
Tenant/Sub-lesees
majority share in the SPV
Developer/Client
Real Estate LeasingContract
= Lessee
minority share in the SPVi.e. property investment
SPV
Share purchase option in SPV
Real estate leasing – sophisticated
= Equity partner
A Member of Erste Bank Group
Possible structures and deal models
Conclusions:
Real estate leasing is an attractive form of capital asset financing, that combines advantages of rent and ownership of the asset.
It is a versatile product – models and structures can range from „plain vanilla“ finance leases up to complicated structured finance products featuring off-balance treatment and tax optimization.
Lessor undertakes a financial advisor role.
A Member of Erste Bank Group
Thank you for your attention!
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