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1.2 A DIFFERENT APPROACH TO PROPERTY FINANCING

A different way of conceptualizing financing is to consider the two parties, the shareholder (equity) and the bank (debt), simply as two partners which contribute capital to the same investment in different ways. The equity contribution will grant entitlement to control or manage the transaction[1] and to a residual payment after the partner bank has been remunerated. The bank, by contrast, on the one hand has less control (or even indirect control through covenants and guarantees), but nonetheless has a priority right to payment.

However, it must be recalled that taxes play an important role within the capital structure,[2] since the weight of the capital provided by the two partners has a different effect on the net result. Essentially, a high investment by the bank partner (e.g. the presence of a high level of debt financing) has an effect on taxes (since interests are deductible) and hence on the net remuneration of the other partner providing equity capital.

When analysing a real estate financing deal it is appropriate to put oneself in the shoes of the sponsor[3] of the initiative (usually the equity investor) who has to assess the sustainability of the capital structure; the same considerations work taking into account the (apparently) different perspective of the bank (the lender). In any case, the aims of the two parties should be aligned with each other, that is in searching for investments which correctly remunerate invested capital. It is accordingly clear that the techniques for analysing the investment should not be different for the sponsor of a project (the equity investor) and the bank (the debt investor or simply the lender).

  • [1] This term will be used with reference to the real estate investment to be financed.
  • [2] On capital structure choices in the property sector: • on the European market please see Morri and Cristanziani (2009) and also Brounen and Eichholtz (2001); • on the U.S. market please see Feng et al. (2007) and Morri and Beretta (2008); • on the U.K. market please see Ooi (1999).
  • [3] The term "sponsor" usually refers to the partner which brings capital (equity), expertise, strategies, and possibly contacts for the success of the project.
 
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