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Real Estate Leasing
Beyond conventional financing
Bogdan Cernescu
Managing Director
A Member
of Erste
Member
of Erste
Bank Bank
GroupGroup
ALB National Conference
Bucharest, 18.10.2007
Agenda
Introducing real estate leasing
Real estate – a particular asset class
Building up expertise and benefits
Sample lease financing models
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What makes real estate different?
Real estate is a particular asset class/investment vehicle:

It enjoys a very long economic life and conserves value.

Each property also unique in its way.

Terms and conditions of sale/purchase may widely vary in time and space.

Market information is imperfect; market intelligence and thorough market
research really make the difference!

Certain types of real estate transactions offer sometimes attractive tax
benefits that may enhance their returns.

Properties may need substantial time for market exposure in order to
capture the best price, time that may not be available to any given seller.

Buyers needs to act quickly sometimes given internal or external
constraints.
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Real estate – understanding its key features
Physical property
Time horizon
A clear-cut image of the quantity and
quality parameters that define the property
are of utmost importance when deciding
upon the property potential. Are they
available?
Real estate prices go up and down in time.
For prospective investor or financier trying
to asses if the real estate property will
appreciate or depreciate in value, it is of
utmost importance to decide what time
period is relevant. Short, medium or longterm?
Property rights
Geographic area
Real estate is more than brick & mortar
properties; it is also a bundle of legal
rights consisting of deeds, titles, liens,
encumbrances, etc. Have they been
studied?
Real estate is a spatial commodity, so its
value is directly linked to what is going on
around it. The question is therefore what is
the relevant market area to be
considered?
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Real estate – understanding its value drivers
When analysing real estate, value is the central concept.
What are the key determinants of value?
Demand
1.
2.
3.
Economic outlook – upward
trends?
Demands for new space
Availability of funding
Supply
1.
2.
3.
Current supply of new space
Prices and characteristics
Similar properties/substitutes
The Property
Transfer Procces
1.
2.
3.
4.
1.
2.
3.
Location, location, location!
Restriction on Use
Improvements
Property management
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Market research
Promotion
Negotiation power
What makes real estate financing different?
Therefore financing real estate requires a holistic approach:

Thorough understanding of the key features of real estate and the risks
associated to its financing.

Understanding of value creation and value drivers in real estate universe.

Building up particular expertise and competence that goes beyond „plain
vanilla“ financing to legal, taxation, construction, plannning, arhitecture, etc.

Understanding Total Investment Cost and Total Ownership Cost principles.

Establishing functions and competences able to offer a comprehensive
service range in addition to financing.
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Moving to a holistic approach
Ultimately leading to:

Value creation for customers in order to build up long-lasting partnerships.

Proving value to shareholders and financiers to attract more capital.

Enhanced risk management capabilities on both lessor and lessee‘s side.

Make it easier and cheaper!
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Beyond financing
Legal, tax & accounting expertise
Transaction modelling
Advisory
Real estate valuations
Internal Real estate valuations
Market knowledge and intelligence
Construction services
Monitoring/Supervision (early warning capabilities)
Project Management („technical lawyer“ of the investor)
Construction services & more
General planner (from vision to reality)
General contractor (turn-key delivery)
Technical equipment planning (HVAC, elevators, etc)
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Particular strenghts & benefits
Asset risk know-how




Wider range of property types eligible for financing – increased funding
availability;
Longer financing term (i.e.15-20 years) – immediate release of liquidity and
less cash flow constraints;
Flexible lease payments adapted to lessee‘s cashflow by undertaking higher
residual values.
Monetization of hidden reserves via sale&leaseback.
Tax & accounting know-how

Off-balance sheet structures; P&L optimization.
Construction know-how



Management of the control of construction procedures and quality standards –
cost optimizations & savings.
Lessees focus on their core business, less administrative hassle.
The entire costs of leasing (e.g. costs for project documentation, planning
permission, transfer tax, other fees) can also be comprised into the Total
Investment Costs.
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Possible structures and deal models
Conclusions:

The lessors‘s product understanding – both in terms of asset and
counterparty risk are critical to offer a highly competitive and valueadding product.

The product goes beyond the border of traditional financing, ultimately
aiming at optimizing the risk and benefits for both lessee/lessor.

Lessor can undertake the asset manager and construction specialist
role.
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Sample real estate leasing models
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What could be financed?
Any commercial property* can be leased in principle:

Industrial and production halls.

Logistics premises/warehouses.

Shopping centers (retail centers, power centers, hypermarkets).

Office buildings.

Hotels and leisure ammenities.
* Income earning, not speculative properties.
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Possible structures and deal models
From simple to more complex models:

Finance lease.

Operating lease.

Long-term rentals.

Sale and leaseback.

Equity participation deals.

Asset vs. share deals.
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Real estate leasing – generic priciples
= Financier, plus
Leasing Company
Lease instalment
Use of the property
Client
-
logistics of manufacturing company
public sector
development company
retail chain
hotel chain provider
etc.
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= Lessee
Possible activities (or any combination):
Assistance with selection of location and land
Purchase of existing real estate (=plot of land)
Financing of the construction
Project management and project supervision
Facility and property management
Possible activities (or its combinations):
Property use
Further sub-lease of the real estate
Possible acquisition of the property at the
contract end.
Real estate leasing – even more complex
= Head-lessor
Leasing Company
Lease payments
Use of the property
= Lessee
Developer/Client
Use of the property
Possible activities (or any combination):
Assistance with selection of location and land
Purchase of existing real estate (=plot of land)
Financing of the construction
Rent
Tenants/End-users
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= Sub-lessee
Possible activities (or any combination):
Project management and project supervision
Project development
Property letting
Facility and property management
Possible purchase of the property
after the contract expiry
Property use
Real estate leasing – sophisticated
Leasing Company
Developer/Client
= Financier & equity partner
majority share in the SPV
minority share in the SPV
i.e. property investment
SPV
Real Estate Leasing
Contract
Property use
Developer / Client
Share purchase option in SPV
Tenant/Sub-lesees
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= Lessee
= Equity partner
Possible structures and deal models
Conclusions:

Real estate leasing is an attractive form of capital asset financing, that
combines advantages of rent and ownership of the asset.

It is a versatile product – models and structures can range from „plain
vanilla“ finance leases up to complicated structured finance products
featuring off-balance treatment and tax optimization.

Lessor undertakes a financial advisor role.
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Thank you for your attention!
For more details please contact
Immorent Romania
8, Tudor Arghezi St, Unimed Building, 7th Floor,
sector 2, Bucharest
+40 310 12 04; [email protected]
www.immorent.ro
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