Property Finance

An International Approach

Giacomo Morri, Antonio Mazza

• Publisher: Wiley
• Year: 2014
• ISBN:
  9781118764381
• Edition: 1
• Topic: Commerce
• Subtopic: Finance

A unique, international approach to optimal real estate financing

Property Finance is an authoritative guide to both the financial and legal issues surrounding real estate financing. Unique in its exclusive focus on the topic, this book builds from a solid theoretical foundation to provide practical tools and real-world solutions. Beginning with a discussion of the general issues encountered in real estate finance from an international perspective, the authors delve into country-specific information and set out the legal peculiarities of eight important countries (Germany, France, Italy, Spain, China, India, England and Wales) by asking questions of relevance to the leading local law firms specializing in real estate financing. The reader may thus consider in greater depth the problems relating to any given country and compare and contrast the positions under different legal systems.

Examples with numerical calculations and contract excerpts enhance the explanations presented, and are immediately followed by practical case studies that illustrate the mechanisms at work. The companion website features downloadable spreadsheets used in the examples, power point presentations, as well as real estate news and more.

Property financing entails many sources of capital, including both debt and equity resources as well as hybrid forms like preferred equity and mezzanine debt. Knowing how to work with these avenues is important to ensuring financial sustainability in real estate assets. Property Finance covers the most common issues encountered, helping readers prepare for and find a way around possible roadblocks.

• Consider the issues surrounding real estate lending at an international level
• Compare and contrast the positions under different legal systems
• Develop an international perspective on cash flows and financing agreements
• Use powerful tools to structure financing and gauge its effects on property financing

The success of a real estate investment is dependent upon optimal financing, and a mere bird's eye view of the topic does not fully prepare investors for issues ahead: Property Finance provides a knowledge-based approach to real estate investment, detailed information and powerful tools.

Part One

Chapter 1
Introduction to Property Financing

The concept of financing, understood in its broad sense, embraces all sources of capital investment and, as such, the definition covers both debt and equity indiscriminately. The term financing is indeed taken to apply to any form of capital which may be used to finance an investment project, ranging from the more traditional forms to those which are more innovative, and including both the use of equity capital as well as the various forms of debt capital.¹

The procedures for investment financing are extremely important since they make it possible to improve the investment's ultimate economic result due to the lower cost of the invested capital when debt is used. Moreover, in order to undertake a profitable investment, it must also be financially sustainable, e.g. it must be possible to secure the necessary resources. Eventually, this must all occur in a balanced manner in order to ensure that there is not an excessive financial risk due to the fixed cost of interest payment.² Indeed, were the latter to exceed a certain threshold, it would reduce the economic benefit of lower capital costs and, at the same time, make the investment overly complex due to the excessive restrictions imposed by lenders.³

1.1 Forms of financing: debt and equity

The various forms of capital used to finance an investment can be arranged along a continuum ranging from the two extremes of (pure) debt and (pure) equity. In order to understand where best to place each form of financing it may be of assistance to define some of the main characteristics of these two main forms.

1.1.1 Debt

Debt capital is characterized by:

• an explicit cost defined under contract;
• the absence of any link between its cost (e.g. leading to different remuneration for the lender) and the actual return of the investment financed;
• tax deductibility in most cases.

The cost of debt is explicit since it depends upon a contractual agreement between the borrower⁴ and the lender. This cost is precise and defined and (subject to certain limits such as in cases of default) is independent of the actual return of the investment financed since a set amount of money must be paid. Furthermore, the procedures and maturity dates for repayment are determined in advance and specified under contract.

Moreover, under most tax regimes, interests on debt are tax deductible,⁵ thereby contributing to enhance the equity's return by reducing the tax burden. Although the financial advantage of using debt⁶ results from this characteristic, debt financing continues to be used for various reasons, even where there are no tax benefits, such as:

• capital rationing (lack of equity capital);
• risk diversification;
• increase in projected earnings (in return for a greater risk);
• greater control over management.

Real...