Commercial Real Estate Finance

Duration:
2 days
Location:
Prague, NH Hotel Prague
    By the end of this course, participants will be able to:
  • Assess the key risk issues in Commercial Real Estate Finance;
  • Evaluate a Commercial Real Estate valuation and be aware of the main approaches to the valuation of Commercial Real Estate;
  • Illustrate the impact of key drivers on the viability of a Commercial Real Estate Finance transaction;
  • Discuss and evaluate the principal methods for mitigating risks in Commercial Real Estate Finance and make proposals for the debt structuring of Commercial Real Estate transactions
  • Review key features of the principal debt financing products and their relative advantages and disadvantages and structure Commercial Real Estate debt financings taking into account the requirement of both debt providers and equity investors;
  • Identify potential warning signs in a Commercial Real Estate Finance
Course Description
Commercial Real Estate is a major investment Asset Class, represents a very substantial portion of corporate assets and provides collateral and credit support for a huge volume of bank and Capital Markets financings, ranging from lending to the SME sector to Commercial Mortgage Backed Securitisations. Commercial Real Estate values are very sensitive to the underlying economic fundamentals as well as the financial markets. Additionally Commercial Real Estate values and performance are also influenced by specific factors such as the quality of the Real Estate, lease terms, tenant risk, market sector and geographic focus making it essential to understand the specifics of each Commercial Real Estate Asset.

Methodology
The teaching approach emphasises "learning by doing" using case studies and examples of specific transactions, where feasible, as the principal method of learning. To maximise the benefit to the participants, case studies will:
  • mostly focus on the main types of Commercial Real Estate – office, retail and industrial;
  • concentrate on large scale transactions involving both single pieces of Commercial Real Estate or portfolios / corporate financings;
  • Primarily relate to the financing of single asset companies, both developments and existing investments. There will be some coverage of Commercial Real Estate companies and Investment vehicles
Knowledge Pre-Requisites
Participants should already be familiar with the core principles of corporate credit risk analysis, the fundamental principles of investment appraisal techniques, and the core functions in Excel. Some previous familiarity with the financing of Commercial Real Estate has been assumed.

09.00 - 09.15 Welcome and Introduction

Session 1: Overview of developments in the Commercial Real Estate markets

  • Macroeconomic cycles…what can be learned from past economic cycles?
  • Recent developments and issues arising from the “credit crisis”
  • Key risks and mitigants in Commercial Real Estate Financings
  • Risks inherent in specific types of Commercial Real Estate transactions

Case study: Review of a commercial real estate financing to identify key credit risks and potential mitigants, based on which participants prepare a rating

Session 2: Principles of Commercial Real Estate Valuation

  • Summary of Commercial Real Estate valuation methods and how the different methods can influence value
    • Comparable buildings
    • Capitalisation of yields
    • Open Market Values
    • Discounted cashflow valuation methods
  • Occupational lease terms – examples from selected markets, and how this affects value
  • Yields in Commercial Real Estate Valuations
    • Initial yields
    • Reversionary yields
    • Equivalent yields
  • Development vs. investment financings, and factors to consider in valuation assumptions

Case study: Calculating and sensitising Commercial Real Estate Finance valuations using discounted cashflow techniques

12.00 - 13.00 Lunch

Session 3: Financial analysis of Commercial Real Estate Companies and Investment vehicles

  • Typical types of Commercial Real Estate investment companies and their approach
    • Developers
    • Trading companies
    • Investment companies
  • Real Estate Investment Trusts (REIT) vs. non REIT
  • What are the key elements of a creditworthy Commercial Real Estate company – principal elements in credit rating
  • Operating vs. financing risks
  • Key accounting issues
Case study: Review of the financial statements of a Commercial Real Estate Investment Company and rating the company

Session 4: Sensitising the key drivers in a financial model for a Commercial Real Estate Finance transaction

  • Reviewing the underlying assumptions – are they realistic?
  • Key drivers of Commercial Real Estate values
  • Sensitivity analysis and reviewing the financial model – useful Excel Functions
    • Goal seeker
    • Solver
    • Data tables

Case study: Participants review a financing proposal and sensitise the pre finance returns to assess the impact on rates of return

Day Two

Session 5: Use of Commercial Real Estate by companies

  • Why should companies invest in Real Estate?
  • Do companies have Real Estate strategies?
Case study: Review of a company with a view to making a recommendation on its Real Estate strategy

Session 6: Debt financing choices for Commercial Real Estate transactions and debt structuring issues. Financing choices

  • Private debt financing choices
    • Development vs. investment financings
    • Asset specific financing
    • Secured vs. unsecured debt
    • Senior vs. subordinated / mezzanine debt
    • Sale and leaseback transactions
    • Capital markets financings
    • Use of hybrid financings – convertible bonds
  • Commercial Mortgage Backed securitisations – review of a Commercial Mortgage Backed Securitisation

Debt structuring issues

  • Repayment profile
  • Exposure to residual values and lease expiries
  • Debt service coverage measures
  • Interest rate management
  • Impact of Basel 3

Case study: Participants review and sensitise a financial model with a view to developing an acceptable debt structure

12.00 - 13.00 Lunch

Session 7: Risk and return in Commercial Real Estate Finance – the equity investors’ perspective

  • To what extent is the equity investor at risk? The bank vs. equity risk / return trade off
  • Principles of evaluating investments – discounted cashflow methods, NPV and IRR
  • Value creation – the development process; active Real Estate management; financial market influences
  • Risk and return – Commercial Real Estate Finance vs. other asset classes
  • Use of Equity vs. Subordinated Debt

Case study: Sensitising a financial model to illustrate the sensitivity of equity related returns to key assumptions

Session 8: Debt structuring issues and risk mitigation techniques

  • Use of covenants and developing a covenant package
    • Debt Service Coverage measures ( interest and debt service coverage)
    • Asset Coverage measures ( Loan to Value ratio and “top up” requirements)
    • Development vs. investment financings – completion and cost overrun undertakings
    • Ratcheting of covenants over the lifetime of a transaction
    • Trade offs in negotiating covenants – risk vs. pricing
  • Third party credit support
    • Completion and cost overrun agreements
    • Nature of underlying construction contracts

Case study: Participants prepare the key elements of a Term Sheet and make their recommendations for the financing of a core case study financing proposal

Evaluation and Termination of the Course

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