Fundamentals of Commercial Real Estate Debt Finance

Developments in the Commercial Real Estate Markets: An Overview

• What can be learned from past economic cycles? Overview of commercial Real Estate investment performance
• Influences on the financing of commercial Real Estate following the Global Financial Crisis
• Is this economic cycle different?
  • The impact of weak economic growth in many mature economies
  • Interest rates and inflation – the end of the ultra low interest rate environment
  • Ongoing effects of political tensions
  • COVID-19’s ongoing impact on how and where people work, travel, live and shop
  • Technology
  • Shorter lease terms and how this might impact commercial Real Estate finance
• ESG (environmental, social, and governance) and its potential impact on the commercial Real Estate markets

Key Risks in Commercial Real Estate

• Discussion on risk factors identified by a Commercial Real Estate Investment Trust

Principles of Commercial Real Estate Valuation

• Different valuation methods:
  • Comparable buildings
  • Capitalisation of yields
  • Open market values
  • Discounted cash flow valuation methods
  • Investor expectations
• Occupational lease terms – assessing the impact of shortening commercial lease transactions and enhanced tenant risk
• Yields in commercial Real Estate
  • Initial yields
  • Reversionary yields
  • Equivalent yields
• Commercial Real Estate Debt Finance Training Exercise & Discussion: a review of the impact of changing assumptions on rents, yields and occupancy on valuation
• Exercise: valuation of the core Real Estate case study

Financing Choices

• Who are the principal investors in Commercial Real Estate, and their approach? The growing role of Commercial Real Estate Funds post the start of the Global Financial Crisis:
  • What are the key elements of a creditworthy Commercial Real Estate company/REIT? Principal elements of a credit rating
  • Equity market indicators of Commercial Real Estate values
• Debt vs equity and influencing factors:
  • How much debt can be supported?
  • Trends in debt finance , leverage and credit margins; what will be the impact of current market conditions on capital structuring for Commercial Real Estate transactions?
  • Repayment profiles
• Private debt financing choices:
  • Development vs investment financings
  • Asset-specific financing
  • Secured vs unsecured debt
  • Senior / stretched senior/whole loans vs subordinated / mezzanine debt
  • Sale and leaseback transactions
  • Capital markets financings, including an overview of Commercial Mortgage Backed securitisations

Debt Structuring Issues & Risk Mitigation Techniques

• Use of covenants:
  • Debt Service Coverage measures (interest and debt service coverage)
  • Asset Coverage measures (loan-to-value ratio and “top-up” requirements)
  • Third-party credit support
  • Exercise: Developing a capital structure and financial covenants for the core Real Estate case study

Redcliffe’s Commercial Real Estate debt finance specialist has over 45 years of experience in the financial services industry and financial training. He started his career with National Westminster Bank (now part of RBS) before moving to Mellon Bank NA, a major regional US bank (now part of Bank of New York Mellon). At Mellon Bank, he held several credit analysis and account management positions in London, focusing on large UK corporations and UK subsidiaries of US corporations. He also had two extended work assignments in the USA, on the second occasion as an account officer responsible for a group of US subsidiaries of non-US multinationals.

After 11 years at Mellon Bank, he joined Swiss Bank Corporation (now UBS) in London. He was actively involved in the development and ongoing management of the bank's UK Commercial Real Estate lending activities. His Real Estate skills were further developed at Debenham Tewson Financial, a subsidiary of one of the world’s leading Real Estate advisory firms.

Since 1992, he has been primarily focused on training in Corporate Credit Analysis, Financial Restructuring, Project, Infrastructure, and Structured Debt Finance, including Real Estate finance and Asset Securitisation. He has designed and delivered tailored and public courses in over 60 countries. He has worked with a wide range of corporate and investment banking firms, Development Finance Institutions, public sector organisations, Export Credit Agencies, property investment and many major corporations.

Participants in his courses range from recent graduates to experienced line managers, and in areas as diverse as bond sales and trading to credit research and Relationship Management positions in financial institutions. As well as project engineers, professional advisers and public sector employees in the area of project finance.

In the area of Real Estate Finance, the trainer has run both public and tailored training programmes on a global basis with participants working in banks, Real Estate companies, Real Estate investors, Public Sector organisations and professional services firms.

This Commercial Real Estate finance course will provide participants with an intensive overview of:

• Risk analysis, from a lender’s standpoint, in financing large-scale Commercial Real Estate transactions
• Key drivers impacting the value of Commercial Real Estate
• Key elements influencing capital structuring decisions, with an emphasis on debt structuring issues
• The principal debt financing options
• Key risk mitigants in Commercial Real Estate transactions and financings

This commercial Real Estate debt finance course will be relevant to a range of people working in organisations involved in the arrangement, analysis and structuring of large-scale Commercial Real Estate debt financing transactions.

This includes:

• Banks
• Real Estate companies
• Real Estate investors
• Public sector organisations
• Professional services firms

To obtain maximum benefit from this training, participants should have some familiarity with the principles of financial analysis and Commercial Real Estate valuations, and the main features of the key financing products used in Commercial Real Estate finance. Limited previous practical experience in the financing of Commercial Real Estate investing and transactions has been assumed.

Familiarity with the main functions in Excel will also assist you in obtaining maximum benefit from this commercial Real Estate valuation course.

Commercial Real Estate has always been affected by economic cycles. But exceptional factors such as COVID and AI have had and will have an impact on how and where people work, travel, live and shop and affect demand for Commercial Real Estate and valuations. Given these cyclical and structural changes, as well as political tensions, lenders and investors will need to evaluate the structuring of commercial Real Estate transactions, monitor financing exposures more intensively, and sector and specific property selection will be increasingly important.

Redcliffe’s Commercial Real Estate Debt Finance training course focuses on key features of Commercial Real Estate, the historical performance of Commercial Real Estate, the key risk issues and the principles of valuation techniques.
It also looks at the financial structure of Commercial Real Estate transactions and structuring issues in terms of risk protection from a lender’s standpoint.

A primary focus will be on the financing of single property transactions, and on ‘traditional’ sectors of Commercial Real Estate – offices, retail and industrial/logistics. There will, however, be some brief coverage of alternative types of Real Estate, such as hotels, in terms of the risk analysis and how this impacts financing. There will be brief coverage of the analysis of Real Estate Investment Trusts (REITs).

This is an interactive course, with one case study involving a large-value Commercial Real Estate transaction, such as a distribution centre, that is explored throughout the training. The case study will consider risks both during the development period and also when it is income-producing.

Background on the case study and a supporting spreadsheet will be provided before the training so that participants have an opportunity to familiarise themselves with the material and maximise the benefits of the training programme. Participants will need to access the spreadsheet during the training.