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6.2.2 Term Sheet for the Financing of a Real Estate Portfolio

THE BANKS AND THE BORROWER

Lending banks: Bank X and Bank Y with equal shares, potentially in relation to different credit facilities;

Agent bank: Bank X;

Borrower: the company Z.

The lender reserves the right to establish a pool of banks to disburse the loan, or to syndicate the transaction either before or after it is concluded. The loan is granted under a club deal between two banks that reserve the right to grant one or more loan facilities, though they remain committed to granting the entire loan.

Portfolio divestment simulation

FIGURE 6.8 Portfolio divestment simulation

Cash flows from the operations

FIGURE 6.9 Cash flows from the operations

STRUCTURE OF THE OPERATION AND PURPOSE OF THE LOAN

Lines A1, A2, and A3: medium-term loan following payment of part of the net purchase price for the properties to be mortgaged.

PROPERTIES TO RE MORTGAGED ("SECURITY PROPERTIES")

The portfolio comprises the properties described in the enclosed document.

LOAN AMOUNT

For Line Al, the Amount is capped at the lowest of either:

• €15,000,000;

• 40% of the market value of the Security Properties as determined by an appraiser appointed by the Agent Bank;

• 40% of the purchase price for the Security Properties.

For Line A2, the Amount is capped at the lowest of either:

• €15,000,000;

• cumulatively with line Al, 60% of the market value of the Security Properties as

determined by an appraiser appointed by the Agent Bank;

• cumulatively with line Al, 60% of the purchase price for the Security Properties.

For Line A3, the Amount is capped at the lowest of either:

• €15,000,000;

• cumulatively with lines Al and A2, 70% of the market value of the Security Properties as determined by an appraiser appointed by the Agent Bank;

• cumulatively with lines Al and A2, 70% of the purchase price for the Security Properties.

The ICR for the total amount loaned must not be lower than 150%, the LTV must not exceed 70% of the current value of the portfolio, and the LTC must not exceed 80% of the acquisition price of the portfolio.

Figure 6.10 shows the amounts loaned for each line.

The amounts loaned for each line

FIGURE 6.10 The amounts loaned for each line

The financing lines have been divided because they have different risk profiles. Furthermore, the banks have reserved the right to subscribe to the lines separately (for example, Line A1 Bank X, Lines A2 and A3 Bank Y).

Lines AI, A2, and A3: drawdown in one or more instalments upon payment of one or more advances on the purchase price of the Security Properties.

TERM OF ALL OF THE LINES GRANTED

Three years.

The term is in line with the borrower's strategy of purchasing the portfolio of properties and then selling them individually to third parties.

REPAYMENT

Lines A1, A2, and A3: repayment will be within three years from the signing of the loan agreement out of the proceeds of the sale of the properties or in one single instalment after three years.

The loan will be repaid as sale procedures are concluded in relation to the sale of the individual properties. In particular, in relation to each individual sale, the borrower will repay at least 120% of the amount of the loan allocated to the corresponding unit according to criteria to be agreed to between the bank and the borrower.

Based on the release pricing requested, an allocated loan amount table is drawn up (Figure 6.11) allocating a quantity of debt to each property, which must be repaid at the time of sale.

Allocated loan amount table

FIGURE 6.11 Allocated loan amount table

OPTIONAL REPAYMENTS

Full or partial loan prepayment will be permitted upon any expiry of quarterly interest periods subject to a minimum of 30 days' notice in writing to the Bank and subject to the payment to the Bank of a prepayment fee equal to 100 bps for each full year of prepayment before maturity. The 1% penalty will not be due in the situations specified in the “Loan Repayment Procedures”.

Figure 6.12 shows the Release Price for every divestment.

The release price according to sale forecast

FIGURE 6.12 The release price according to sale forecast

INTEREST RATE AND MARGIN

For all of the credit facilities, a floating rate based on the EURIBOR 3 month rate, plus a margin for the Bank.

The borrower must hedge against the interest rate risk in a manner deemed appropriate by the Bank.

Per year for the full term of the loan:

• Line A1: 2.5%;

• Line A2: 3%;

• Line A3: 3.5%.

The margins are different because the Lines have different risk profiles. Moreover, the Bank could require that a Cap is stipulated (as in the previous case study) in order to hedge against the risk of an interest rate rise leading to payments of financial charges reaching unsustainable levels. The financial sustainability analysis is conducted assuming a value for the EURIBOR (0.50%) which is higher compared to market conditions at the time the loan is granted (e.g. 0.20%). Considering the short-term nature of the loan, it was chosen not to simulate hedging for interest rate rises.

FREQUENCY OF PAYMENTS

Quarterly in arrears.

FEES

• Flat-rate organization and conclusion fee: equal to 1.2% of the overall amount committed, due upon drawdown.

• Loan management fee due to the Agent Bank: equal to €50,000 per annum, to be paid quarterly.

Figure 6.13 shows the interest rates for every financing line.

SECURITY

• First ranking mortgage over the Security Properties.

• Commitment not to grant mortgages and/or establish third party rights detrimental to the Bank over the properties.

• Pledge over 100% of the shares of the SPV.

• Commitment by the shareholders of the borrower not to change the shareholder structure.

• Commitment that loan capital repayments will have priority over the repayment of any shareholder loans and/or infra-group payables.

• Commitment not to grant and/or take out new loans and not to distribute dividends and/or return equity to shareholders without the prior written approval of the Bank.

• Insurance policies over the Security Properties, issued by a primary standing insurance company approved by the Bank, accompanied by proof of payment and with the Bank as the designated beneficiary. The coverage limit under these policies must be equal to the amount loaned or the rebuilding cost of the properties to be mortgaged, if higher.

Interest rates for a real estate portfolio acquisition lending

FIGURE 6.13 Interest rates for a real estate portfolio acquisition lending

• Hedging against the interest rate risk approved by the Bank. The rights resulting from such contracts must be assigned to the Bank.

• Assignment and payment into an escrow account with a pledge in favour of the Bank of all (current and future) rental or lease payments made, including prepayments, by the tenants and/or tenants of the Security Properties, as well as any other income which may result from the management of the properties.

• Assignment of any surety issued by the tenants and/or tenants of the Security Properties to secure payment of the relative rental and/or lease payments.

• Payment into an escrow account with a pledge in favour of the Bank of all income received as deposits, advance payments, and/or settlement of sale prices of the Security Properties either as a whole or individually.

• A mandate to sell the Security Properties issued to a party approved by the Bank.

COVENANTS AND OTHER CONDITIONS

In addition to the standard contractual conditions for operations of this kind, the loan will be subject to the following additional conditions:

• The Loan to Value Ratio (LTV, equal to the ratio between the amount of the loan and the value attributed to the property provided as security by the appraiser appointed by the Bank) may not exceed 70% at any time during the term of the loan.

• Interest Cover Ratio (ICR, equal to the ratio between the total sum of the annual rents generated by the property provided as security and the amount of annual interest due to the Bank) may not fall below 150% at any time during the term of the loan.

• Provision to the Bank of the borrower's accounts each year within 30 days of approval.

• Provision to the Bank of an up-to-date report on the borrower's accounting situation at least once every half-year.

• Provision to the Bank of a report on progress in the marketing of the Security Properties at least once per quarter.

• A commitment to bear any charge, including notary's fees, taxes, and duties relating to the Security Properties as well as the relative insurance premiums.

• A commitment to inform the Bank of any event which may have a negative effect on the borrower's capacity to honour its contractual obligations.

• The Bank shall be entitled to visit the Security Properties at least once per quarter.

DOCUMENTS REQUIRED AT THE START OF THE LOAN APPLICATION PROCESS

Provision to the Bank of the following documentation:

• a copy of this document signed on every page by the legal representative of the Company (the borrower) as acceptance;

• verification of the solvency of the current tenants of the Security Properties;

• a survey of the Security Properties carried out by an appraiser approved by the Bank certifying compliance with town planning and administrative regulations as well as the sustainability of the rental payments provided for under current leases.

REQUIRED ACTION PRIOR TO CONCLUSION OF THE LOAN AGREEMENT

In addition to the usual conditions applicable to these types of operation, conclusion shall be conditional upon:

• establishment of all of the Securities listed above;

• corporate, legal, and tax due diligence.

DOCUMENTATION REQUIRED PRIOR TO CONCLUSION OF THE LOAN AGREEMENT

In addition to that typical for this type of operation, provision to the Bank of the following documentation:

• copies of the loan agreement;

• duplicate of the mortgage registration;

• a definitive report prepared by the notary/lawyer instructed attesting the first ranking registration of the mortgage in favour of the Bank in the relevant land registers;

• an original version of a bankruptcy certificate for the borrower attesting that the company is not bankrupt and that no applications have been made seeking a declaration that it is bankrupt;

• the original of a pledge in favour of the Bank of the insurance policies specifically required under the Securities;

• a true copy of the deeds of purchase for the Security Properties.

Figure 6.14 sets out the three loan facilities relating to the purchase, assuming that Line A3 is repaid first, followed by Line A2. Figure 6.15 summarizes the Purchase Line including covenants tests.

Finally, Figure 6.16 summarizes the cash flows for the operation (real estate cash flows and levered cash flows) and the cash flows from the loan facility, along with the relative annual IRR, which represents the cost of the loan. It is noted that, due to the fact that the cost of the debt (on average 4.49%) is lower than the return at operating level (19.01%), the final return (final levered cash flow) is significantly higher (49.71%).

FIGURE 6.14 Detailed breakdown of the loan facilities

Summary of loan facilities and covenants

FIGURE 6.15 Summary of loan facilities and covenants

Cash flows and return

FIGURE 6.16 Cash flows and return

 
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