The structure of property finance
| Project Finance| Corporate Finance|
| Equity| Debt| Equity| Debt|
Development finance| Forward funding
Lease and leaseback| Bank project finance
Mezzanine finance| Developer’s funds
Share issue| Multi-option funding
Deep discount bond (DDB)|
Investment finance| Forward sale
Sale and leaseback
Finance lease| Mortgage Eurobond issue Securitisation| Share issue Retained profit| Corporate bond issue|
Project-based development finance: equity
Most lenders require developers to inject a cash stake from their own resources into the projects they are financing.
→ hard for many developers to achieve
difficult to raise new equity since their shares have not been popular with the investing public.
1. Joint venture
→ Joint venture which is an agreement btw 2 or more parties to participate in the profits gained from the development of property.
→ Common approach has been to set up a special purpose vehicle (SPV) which takes various forms. → may be limited liability companies or a partnerships.
A notable example of a joint venture:
established by AMEC, Balfour Beatty, Kumagai Gumi of Hong Kong, China State Construction Engineering Corporation & Maeda of Japan f or the construction of the new Hong Kong airport on the island of Lantau in the 1990s.
Advantages of Joint venture:
a. Asset sharing is one of the best advantages about joint venture. use additional finance to facilitate the production & growth, operation of projects & products.
increase profit margin & increase your revenue potential;
b. provide a chance to companies to gain new capacity and expertise. access to greater resources, including specialized staff, technology and finance;
c. Sharing of risks and costs with a venture partner & reducing in gearing through off-balance-sheet financing & liabilities;
d. help address the needs of foreign investors.
Neither party may really be interested in the primary project, but they participate simply to gain access to the new market.
The risks of joint ventures:
a. Unclear objectives for the partnership,
which may result in unmet expectations & hard feelings on both sides because the objectives of the venture are not totally
clear & communicated to everyone involved;
b. Different objectives may result in the joint ventures with the partners actually working against one another,
using valuable resources & energy without bringing about the desired outcome;
c. There is an imbalance in levels of expertise, investment or assets brought into the venture by the different partners;
d. Different cultures & management styles result in poor integration & co-operation. For example, the partners don't provide sufficient leadership & support in the early stages;
e. Partners are not sufficiently committed to the joint venture, which leaves one partner shouldering the bulk of the responsibility with decreased benefits.
2. Forward funding
→ the institution agrees to buy a site & provides funds for the construction of the building.
→ gives the institution a greater control over the development, often leading to the developer being charged a lower rate of interest than the market norm. → On completion, however, the developer might receive a lower capital sum when the building is sold at a higher yield.
→ So the lower interest charged by the institution on the development finance is counterbalanced by the developer’s lower profit on sale. This lower profit can be seen as the cost of the lower risk the developer bears as a result of a guaranteed sale.
→ The institution bears not only the development risk but also the leasing risk. The developer’s...