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Property Finance: An International Approach


Praise for Property Finance

"When I have to choose a book among hundreds of competing works on the same topic in the bookstores, I usually pay more attention to the reputation and the background of the authors. Giacomo Morri, Antonio Mazza and, as far as the editing of the country reports is concerned, Alessandro P. Scarso finished this book not only on the basis of many years of teaching and research, but also on the basis of their rich experience in the practice on property finance. As a Chinese legal scholar, I personally have benefited greatly from reading this book. I encourage readers to share the valuable knowledge presented in this book."
—Prof. Dr. Junhai Liu, Director, Business Law Center, Renmin University of China, Vice Chairman, China Consumers' Association and Vice Chairman & Secretary General, China Consumers' Protection Law Society

"The authors have filled an urgent need created by the recent global financial crisis and related globalization (and intertwining) of international investment, finance, and real estate sectors: namely, a practical guidebook, useful to the practicing lawyer, business professional and academic alike, on modern international project finance. The authors have done an admirable job of explaining in logical detail the basics of international project finance and common core principles among nations, and the reader is provided with practical case studies and financial models to elucidate the major principles set forth. This book comes highly recommended to anyone seeking a deeper understanding of modern international project finance."
—Paul Varela, Founding partner of Varela, Lee, Metz & Guarino, LLP, Tysons Corner, Virginia - San Francisco, California Recognized as outstanding construction lawyer by Chambers USA, Best Lawyers in America, and Super Lawyers

"Benefiting from many years of research, teaching and professional experience, Giacomo Morri and Antonio Mazza, together with the collaboration of Alessandro P. Scarso, have written an excellent book, covering all the relevant aspects of real estate financing and investing. With seven different country reports, a number of case studies and a friendly writing style, Property Finance represents not only an excellent reference for both researchers and practitioners, but also required reading for anyone interested in the financial, legal and regulatory aspects of real estate financing."
—Prof. Andrea Sironi, Rector, Bocconi University

"A valuable contribution to the emerging body of knowledge on global property finance, particularly for its much needed comparative treatment of real estate processes in some of the most important international markets."
—Prof. Dr. Manish Srivastava, Professor of Real Estate Finance & Investments, New York University / Adjunct Professor of Real Estate Development, Columbia University

"Antonio Mazza and Giacomo Morri, the authors of this book on property finance, solve the perceived dichotomy between real estate practitioners and academia in an ideal way. Mazza and Morri provide a unique property finance textbook that is based on robust economic and finance principles and comparable to those in the area of managerial finance."
—Prof. Dr. Matthias Thomas, Chief Executive Officer, INREV (European Association for Investors in Non-Listed Real Estate Vehicles)

"The authors have adopted an inter-disciplinary approach which successfully pairs the explanation of the core skills required in the field of property finance with the outline of the most relevant legal issues in selected jurisdictions, in the strong awareness that decisions specifically relating to real estate financing cannot occur in isolation from the statutory framework."
—Prof. Giovanni Iudica, President, ESCL (European Society of Construction Law) / Professor of Civil Law, Bocconi University

GIACOMO MORRI, Ph.D., MRICS, is Senior Professor in the Accounting, Control, Corporate Finance and Real Estate Department at SDA Bocconi School of Management and Lecturer in Real Estate Finance at Bocconi University. He is Past-president and Board Member of the European Real Estate Society. He also sits on the board of several real estate companies and works as freelance advisor.

ANTONIO MAZZA is Teaching Fellow at SDA Bocconi School of Management. He has been working for almost 25 years in the real estate market for both Italian and foreign banks and he is currently General Manager of "Aareal Bank AG" Italy and board member of several Italian companies within the "Aareal Group". He is Professional Member of the Royal Institution of Chartered Surveyors and a member of several Italian Banking Association.

Foreword by Prof Dr Junhai Liu xi

Foreword by Prof Dr Matthias Thomas xiii

Preface xv

Preface to Part Two xvii

Acknowledgements xix

List of Figures xxi

Reader’s Manual xxiii

Part One

Chapter 1 Introduction to Property Financing 3

11 Forms of financing: debt and equity 3

111 Debt 4

112 Equity 6

12 A different approach to property financing 6

13 Corporate finance and project finance 7

14 Bank financing 8

141 Property Loans to Private Individuals 9

142 Property Financing to Cover Financial Requirements 9

143 Structured Real Estate Financing 10

15 Fund raising, securitization, and syndication 10

151 Traditional Funding and Securitization 11

152 Funding for Real Estate Loans and Syndication 12

153 Syndication of Real Estate Loans 13

Chapter 2 Structured Real Estate Financing 15

21 Bank roles 17

22 Bank loan contractual forms 17

23 Loans for development projects 18

24 Parts and stages of a structured loan 18

241 Analysis of the Transaction and Term Sheet 19

242 Real Estate Valuation 21

243 Basics of Property Appraisal 23

244 Due Diligence Process 32

245 Legal Due Diligence 32

Chapter 3 Loan Agreement 33

31 Object and purpose of the loan 34

32 Conditions precedent 34

33 Amount of the loan 35

34 Interest rates 36

35 Interest rate risk hedging 38

351 Interest Rate Cap 38

352 Collar 38

353 Interest Rate Swap 38

36 Loan allocation 41

37 Loan repayment schedule 43

38 Fees 43

39 Frequency of drawdown and procedures 45

310 Events of default 46

311 Property insurance 48

312 Representations and warranties 49

313 Duty to provide information 53

314 Costs, taxes, and ancillary charges 56

315 Contractual covenants 56

3151 Balance Sheet Covenants 57

3152 Financial Covenants 57

Chapter 4 Loan Repayment, Interest, and Renegotiation 63

41 Bullet payments 63

42 Pre-amortizing (semi-bullet) 63

43 Balloon payment 64

44 Fully amortizing repayment plans 65

441 Fixed-Capital Loan Repayment Plan 66

442 Floating-Rate Loan Repayment Plan 68

443 Loan with Interest Rate Caps 71

45 Other repayment schedules 73

451 Negative Amortizing Constant Payment Loan 73

452 Declining Payment Loan with Constant Amortizing 74

46 Restructuring and renegotiation of real estate loans 75

461 Grant of a New Loan 76

462 Deferral of Payment Deadlines 76

463 Restructuring Arrangement 77

Chapter 5 Effects of Financial Leverage on Real Estate Investments 79

51 An illustration of financial leverage 80

52 The effects of an increase in volatility 81

53 The effect of financial leverage on returns 82

54 The effect of financial leverage on risk 82

55 “No Free Lunch” 84

56 The mechanics of financial leverage 84

57 The effect of the spread 85

58 A brief summary of when to use financial leverage 86

Chapter 6 Structured Real Estate Financing Case Studies 89

61 Structured financing for an income producing property 90

611 Description of the Transaction 90

612 Term Sheet for an Income Producing Property 90

62 Structured financing for a real estate portfolio acquisition 100

621 Description of the Portfolio Acquisition 100

622 Term Sheet for the Financing of a Real Estate Portfolio 101

63 Financing of a real estate development project 113

631 Description of the Residential Development Project 113

632 Term Sheet for the Development Project Loan 113

64 Financing a shopping centre: credit application 121

641 Players Involved 121

642 Financial Analysis and Key Figures 126

643 Risk Appraisal 128

644 Risk Rating and Risk-Reward 131

645 Conclusion and Recommendation 131

Chapter 7 Hybrid Forms of Financing 133

71 Description 133

72 Procedures for establishing mezzanine finance and cost 137

721 The Debt Component 137

722 Equity Kicker 139

73 Covenants in a mezzanine financing 140

74 Economic mechanics of hybrid financing 141

741 Mezzanine Financing for an Income Producing Property 142

742 Preferred Equity for Development Projects 144

75 Waterfall payout agreement 148

76 Intercreditor agreement 154

Chapter 8 Basel Accords and Effects on Real Estate Financing 159

81 Basel II 160

82 Basel III 160

83 The Basel Accords and real estate financing 161

84 Standardized Approach 162

85 IRB Foundation and Advanced methods 163

Part two Outline of the most relevant legal issues in selected jurisdictions

Chapter 9 China 171

Chapter 10 England and Wales 177

Chapter 11 France 185

Chapter 12 Germany 201

Chapter 13 India 207

Chapter 14 Italy 215

Chapter 15 Spain 229

Authors 235

Giacomo Morri 235

Antonio Mazza 235

Alessandro P Scarso 236

References 237

Index 241