Structuring of finance

I. Principles

Before approving even the minimum requirement for a credit transaction of this nature, all banks first check whether the requested credit transaction is in accordance with its strategic focus:

  • The quality of the debtor as a future partner
  • Location and quality of the real estate
  • Compatibility of the customer’s request with the bank’s internal guidelines for a credit transaction of this type

II. Cash flow based repayment potential

A cash flow summary for the desired credit term is produced from the credit application and real estate based operating data (income and expenditure) together with a list of questions as follows:

  • Sustainability of lease income
  • Calculation of credit risk on lease income
  • Realistic expenditure calculation
  • Customer’s index / inflation expectations
  • Subleases (as a prediction factor for the demand situation [appraisal of exercising or waiving of main tenant options]).

The sustainability of the lease income is checked by means of the cash flow analysis:

  • Dependence on
    • Small, individual tenants
    • Large tenants
  • Location
  • Re-letting potential
  • Third party usability.

III. Terms and conditions

The detailed aspects are now examined, such as:

  1. Interest conditions, possible use of hedging instruments (cap, floor, collar, cross-currency swap, currency swap, currency options, forward swaps, swap options and forward rate agreements etc.);
  2. Reporting and the use of a security agent
  3. Bank access to cash flows
    • First priority charges on property
    • Assignment of lease
    • Availability of cash flow surplus in favour of debtor only after approval by security agent
  4. Distribution of risk between bank and debtor
  5. Horizontal structuring (first priority or subordinated security)
  6. Additional securities
  7. Risks relating to maturity (“Whatever you do, don’t forget the exit”)
  8. Purpose of financing
  9. Quality of debtor as a partner
  10. Creditworthiness of debtor
  11. Conditioning (by property, debtor and credit rating)
    • Redenomination of property, debtor and credit rating
    • Right to margin adjustment due to changes in rating
    • (Rating-adjusted) interest amendment clauses
    • Termination rights
    • Obligations/duties on transparency / reporting duties
    • Financing a real estate portfolio

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