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1.4.2 Property Financing to Cover Financial Requirements

Also for property loans the main guarantee provided is the establishment of a first ranking mortgage over one or more properties of the company or of the company shareholders. The ability to repay the loan is generally assessed on the basis of a profitability indicator of the company (usually EBITDA[1]).

However, these loans are closer to corporate loans that are related to the business carried on by the borrower and to its capacity to generate cash flows through its core business (which for example may involve manufacturing, commerce, or the provision of services by anything from a major conglomerate through to a small trader).

In some cases, guarantees are offered by a company which, like the borrower, belongs to an aggregation of companies, all of which are legally independent in terms of their assets and corporate identity, but which are associated on an organizational level (a group of companies). The business group will generally be headed by a parent company, which may be a pure holding company when it directs and controls the other companies through the holding of equity interests, or operational when its role is limited in carrying out the economic and financial functions necessary in order to guarantee the orderly activity of the subsidiary companies.

Generally speaking, the existence of a business group will not always constitute sufficient justification to permit a company to provide guarantees in favour of another company from the same group. In several jurisdictions (especially those influenced by the Civil Law) it is necessary that there are also some indirect benefits for the guarantor, resulting from the pursuit of a group interest. If the asset in relation to which the loan guaranteed is requested will have a positive impact for all of the companies involved (including both the guarantor and the guaranteed company), this will establish a justified reason for the guarantee. However, if there is no such interest then the guarantee will have no effect. For this reason, the business plan which can justify the provision of sureties by one of the companies in the group for the debts of another group company should be rigorously documented. This financial and investment plan has to be agreed to by all group companies and provides for the distribution of benefits between all parties in line with the costs incurred.

Property loans intended for companies are generally granted by banks which also carry on corporate financing business or which have a bank or division operating in this sector within the reference banking group.

1.4.3 Structured Real Estate Financing

Structured real estate financing operations (the project finance approach) will preferably be directed at SPVs. The separation between the real estate project to be financed and the operations of the sponsors of the asset will ensure that they are economically and financially isolated (ring-fenced financing) and will in turn benefit both the sponsors of the asset as well as the lending banks.

The parties involved in the due diligence process for the loan application (surveyors, financial analysts, and lawyers) working for structured real estate financing companies will require a high degree of specialization in the real estate sector.

The following chapters will focus on structured bank lending (according to a project finance approach) directed at financing commercial real estate operations; residential loans to private individuals and corporate loans are not the focus of this book.

  • [1] EBITDA, or Earnings Before Interest, Taxes, Depreciation and Amortization, is a profitability indicator focusing on the company's income which is based solely on gross ordinary revenues, that is before interest (financial management), tax (tax management), depreciation of assets, and amortization.
 
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