Real Estate Leasing Beyond conventional financing

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


Agenda

Introducing real estate leasing

Real estate – a particular asset class

Building up expertise and benefits

Sample lease financing models


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.


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?


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


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.


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!


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)


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.


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.


Sample real estate leasing models


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.



From simple to more complex models:

Finance lease.

Operating lease.

Long-term rentals.

Sale and leaseback.

Equity participation deals.

Asset vs. share deals.


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


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


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



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.


Thank you for your attention!

For more details please contactImmorent Romania

8, Tudor Arghezi St, Unimed Building, 7th Floor, sector 2, Bucharest

+40 310 12 04; [email protected]

Documents

Real Estate Leasing Beyond conventional financing