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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] Whilst this hook will mainly address the issue of real estate financing through debt capital and bank lending, it is fundamental also to consider the full capital structure: general considerations relating to equity capital in terms of the measurement of expected returns and collection procedures also apply to the real estate sector. A choice has therefore been made to dedicate greater attention to forms of debt capital which are specific to the real estate sector, giving only marginal consideration to problems relating to equity capital when issues relating to hybrid financing (such as mezzanine finance and preferred equity) are addressed.
  • [2] On financial risk please see also Chapter 5.
  • [3] In the book the term lender is mainly used for the bank, but the term financier is also commonly used synonymously.
 
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