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2.3 LOANS FOR DEVELOPNENT PROJECTS

Various contractual techniques may be used in order to finance development projects based on the work in progress (WIP). An initial conditional loan agreement specifies the term of the loan and the duration of the initial pre-amortization period during which construction work is to be carried out. Subsequently, individual loan instalments will be disbursed during the pre-amortization stage (namely, the stage during which interest only is paid) initially agreed to. Consequently, all instalments will have the same amortization period, although they may have a different pre-amortization period. A maximum time limit for the repayment of the loan is agreed which may also be amended upon disbursement (as well as the agreed interest rate, which may also be amended). Building construction will subsequently be financed by preliminary disbursements to finance development costs. Upon conclusion of construction works, the definitive loan agreement will be concluded, which will regulate the amortization system (e.g. capital repayments) for the sums financed, consequently determining the interest rate, the frequency of repayments, and the definitive terms of the loan.

2.4 PARTS AND STAGES OF A STRUCTURB) LOAN

A structured real estate loan comprises various stages. In order to ensure clarity of explanation, these will be first listed in logical sequence according to the order in which they occur; subsequently their salient points will be described:

1. initial meeting between the bank (lender) and the client (borrower) in order to analyse the real estate project and the related financial requirements (see paragraph 2.4.1);

2. technical appraisal and feasibility analysis of the real estate project:

• analysis of expected costs and revenues;

• market and catchment area studies;

analysis of operating income and definition of the financial plan;

• estimate of open market value and mortgage lending value of the property (see paragraphs 2.4.2 and 2.4.3);

3. financial due diligence or solvency analysis of the parties involved:

• borrowing company and group; building company;

• buyer;

• tenants;

4. legal due diligence, during which the contract and related guarantees are prepared (see paragraph 2.4.5);

5. tax due diligence, during which the tax law aspects of the loan agreement and the implications of the new loan and the related guarantees on the borrower's fiscal position are ascertained;

6. identification of the risk mitigation instruments identified during the creditworthiness, legal and technical analysis, and the resulting finalization of: security package; insurance policies; hedging of interest rate risk; contractual covenants;

7. identification of the transaction's credit risk in accordance with the various approaches contemplated under the Basel Accords;

8. loan pricing, also on the basis of the results of the credit risk assessment;

9. issue of an offer to the borrower (term sheet, see paragraph 2.4.1);

10. negotiation of the terms and conditions proposed in the term sheet and acceptance;

11. continuation of the review stage: drafting and negotiation of the loan agreement and of the security package;

12. conclusion of the agreement, issue of guarantees and insurance policies;

13. monitoring of the loan involving a control of guarantees and contractual covenants;

14. syndication or securitization of the loan, if appropriate.

 
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