In a similar manner to project finance operations, structured real estate finance involves the funding of a transaction in which the bank accepts the cash flows generated, or which may be generated, from the property financed as collateral for the repayment of the debt.1
The due diligence carried out by the bank when granting these loans involves an assessment of the economic and financial equilibrium of a specific real estate asset or project, which will preferably be legally and economically independent of the other initiatives carried out by the sponsors which conclude the transactions. The real estate project to be financed will generally be implemented by its sponsors by creating a special purpose vehicle (SPV) which permits the investment to be separated in economic and legal terms.
A real estate project is assessed by the banks and its sponsors principally with reference to its capacity to generate revenues from the lease and/or sale (also partial) of the properties financed. The cash flows associated with the real estate transaction provide the source for servicing the debt as well as paying a return on the equity capital invested by the sponsors.
The guarantees may be real (e.g. pledge on SPV shares, mortgage on the property) or contractual (e.g. assignment of receivables as collateral, contractual covenants), although it is the contractual guarantees which actually assure the banks that the cash flows generated by the real ...