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:
- 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.);
- Reporting and the use of a security agent
- 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
- Distribution of risk between bank and debtor
- Horizontal structuring (first priority or subordinated security)
- Additional securities
- Risks relating to maturity (“Whatever you do, don’t forget the exit”)
- Purpose of financing
- Quality of debtor as a partner
- Creditworthiness of debtor
- 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