Commercial Property Finance for Investment and Development Projects Snapshot

Red Chilli Structured Finance present their Commercial Property Finance for Investment and Development Projects Snapshot for June 2009.

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Introduction

Red Chilli Structured Finance (RCSF) is a property advisory boutique specialising in arranging finance for real estate projects in the UK and across Europe. The principals of Red Chilli have extensive experience in the real estate markets straddling 3 property cycles and have a solid track record in evaluating risk and structuring tailor-made innovative funding solutions for property projects across Europe. Over the years, Red Chilli’s principals have established long standing relationships in the property industry with many prominent investors, developers and financial institutions.

RCSF covers every sector of the property industry and is involved at all levels of the capital structure on investment and development projects. The team has historically focused on delivering funding for complex real estate transactions, where deals have been structured not only via the introduction of financial products such as mezzanine or equity but also by underpinning their economic strengths, via the introduction of exit strategies or synergistic partnerships.

The RCSF team draws on its extensive expertise in the property industry to evaluate each project through a thorough risk/opportunity assessment:

• Sponsor’s background and track record
• Sponsor’s financial position and financial trading history
• RICS valuation of project, investment or development cash flows, QS costings, covenant strengths, market dynamics
• Exit strategy, stress tests, cross collateralisation, risk mitigation via the introduction of non financial partners or options (operator, balance sheet, put-options, pre-sales or pre-lets…)
• Planning or change of use angles
• Development agreement and synergistic partnerships

RCSF has built a strong reputation within the financial and property communities for the integrity and thoroughness of its analyses. RCSF has historically been a predominantly fee based business operating on the principle of fees being due on delivery, although it can take some stake in appropriate projects. For that reason, RCSF only embarks on projects which it feels are economically solid, and which it believes it can enhance through some innovative structures or partnerships.

In evaluating each project, RCSF also focuses on any potential mispricing of property risk by lending institutions which may create opportunities for a partner or investor to take positions in projects that can be refinanced, de-risked, repackaged or simply spun off in part or in whole at a later stage. It is the belief of the Red Chilli team (borne out of experience but also evidenced by the recent turmoil in the credit markets) that lenders are constrained by systemic limitations in their ability to accurately evaluate risk. One of RCSF’s core strengths is the ability to arbitrage the difference between lenders’ evaluation of risk and the economic reality.

In the current climate, RCSF is increasingly approached by principals and lenders looking for funding or exit solutions to existing and new projects. Given the state of the debt market, solutions often involve equity injections where in the past stretched senior or mezzanine debt would have sufficed. The dearth of solutions, particularly at the distressed end of the market, means that the ability to deliver those solutions through a mixture of equity, restructuring of existing debt, value-adding partnerships and innovative exit strategies has become a critical part of the service RCSF offers its clients.

Past Projects

Blackfriars Tower, London - UK
Structuring of original site acquisition followed later by the structuring of a joint venture (coupled with a new funding package) between UK property developer the Beetham Organization and giant Russian developer Mirax, through which Mirax has taken a 50% stake in Beetham’s Blackfriars Tower. The £900 million scheme consists of a luxury hotel (Park Hyatt) on the lower part and of upmarket residential apartments on the upper part.

Disused Nuclear Shelter, Wiltshire - UK
Structured £8m preference equity for a site comprising ground surface and 2¼ million square feet of mines which previously was the British Government atomic shelter in the 1960s. Equity required to get planning on surface and convert underground space into data storage facility. The site having been a military site was perfectly suited for this purpose due to its power and comms. infrastructure and the services already in place. JV with end value of circa £150m.

Hybrid mezz/equity facility into Turkish property company - Turkey
Structured a hybrid $25m facility. Our client was in need of a facility secured on surplus income from a well-let shopping mall in Istanbul. However, the terms of the leasehold prevented any lender from taking a charge on the property. We were able to arrange an unsecured loan facility on the strength of the client’s balance sheet.

€1.1 billion committed acquisition finance for residential investment – Germany
Clients were looking to expand their residential investments in Germany in order to capitalise on strong yields and lower costs of funds than in the UK. Their strategy was to build up their portfolio as rapidly as possible.

We arranged a war chest facility ready to be released as and when they came across attractive investment opportunities. An initial fund allocation of €200 million allowed them to identify suitable investments and swiftly secure them with the knowledge that funds were available. After the initial €200 million were drawn, the facility was extended to allow the client to draw a total of 1.1 billion Euros in 18 months.

£563 million of residential property development finance - UK
The funds were raised through a combination of senior and mezzanine facilities for this client over the years to finance a number of city centre projects including residential, office, and hotel developments. Our client has developed a successful business model by combining luxury residential units above quality hotels pre-let to four and five star operators. By working closely together over the years and through intimate understanding of our client’s objectives and needs, we have been able to aggressively fund his real estate projects through the use of highly geared senior facilities topped by inexpensive mezzanine slices.

Current Equity Requirements

Low Risk Planning – City of London
Equity requirement: £2.75m - £12m (stepping up at certain milestones where additional value becomes embedded). The site is owned free and unencumbered by the client but is subject to a long leasehold interest to a social housing provider. The RSL has agreed in principal to move to a new site(s) if it is paid for by client (including the cost of build).

• Initial advance £2.75m on an estimated value of £10m
• Total spend £8-£12m to get to secured planning on subject site which would then be worth £50m-£100m.

Head of City Planning is happy in principle to support application for quite a dense scheme of up to 600 units. Planning is not contentious as it is already residential (albeit affordable) . May create access into a distressed £1m sq.ft. office scheme which has further significant value.

Hotel Operating Fund
Equity requirement: £10m minimum but could be much larger with a possible £70m opportunity to merge two hotel operators for c.£75m and take c.£1.5m pa out of overheads. The plan is to roll out with new acquisitions of hotels that have collapsed with debt.

Hotel development - Manchester
Equity requirement: £1m (25% of site value). Looking to structure a pre-let (on a management agreement) with Hilton’s Hampton brand on a site adjacent to an existing Hilton and package up for a developer. Site vendor will facilitate a soft deal for a developer with a balance sheet making this an attractive option for a developer. We could work in an option for us on the adjacent full-service hotel (c.£57m).

Student accommodation
An experienced acquirer of student accommodation locations having assembled sites and delivered in excess of 3000 units in the past 5 years requires an equity injection of £10m to work alongside his own funds in order to do two things:

Serviced offices
Our client owns 10 serviced office assets and has a majority share in one of the largest serviced office operators in the UK. He requires £15m equity to work alongside his own funds in order to expand and take advantage of the value in the market:

Distressed high end residential development
A developer owns a prominent property in Belgrave Square valued at £37m (current) with £20m of debt secured on it. Opportunity to bring £18m debt & equity and construction management company to JV with the redevelopment of the property for a GDV of £65m.

Residential development, West Sussex
Equity requirement: £2.5m. This would buy a 50% stake in an SPV which owns a 22 acre site. It is currently going through the planning process and has c12 months to run. Upon the granting of planning a national house builder has agreed to purchase the site at 70% of the value of the 22 acres. Current land value is c.650k per acre. The land would therefore be bought at £10m doubling the initial £2.5m equity in 12 months.

Deal Flow

RCSF has an enviable deal flow stemming from strong, long standing relationships within the industry and an active contact strategy through its database of over 25,000 property professionals.

Our contact strategy is based on targeted communications relating to structured products or investment opportunities which generate a constant flow of new deals. Each inquiry is evaluated thoroughly by one of the RCSF team before being taken on. As a result and at any point in time, the team is working on circa 150 real estate funding deals.

The Red Chilli Team

Mark Jeffers
Mark has over 25 years experience structuring and funding major real estate deals across all sectors of the property industry. He has a very strong record in delivering innovative structures in both the investment and development arenas, and has been a key contributor to the businesses of some of the property industry’s most prominent figures.

Bernard Frazer
Bernard has extensive experience in all aspects of business management and property finance with a career spanning over 20 years in the UK and the USA. He has been involved in creating many successful innovative financial structures and helped the Red Chilli team position itself at the forefront of the property market, both in the UK and internationally.

Alex Anderson
Alex has extensive experience in the banking industry and is a member of the Chartered Institute of Bankers. Over a career of 30+ years, he worked in the Bank of Scotland’s legal department before becoming an underwriter in the bank’s Head Office Credit Control Division then moving on to a senior management role in the Intensive Lending Control department dealing with workout solutions/strategies, both for trading and property related businesses, and finally taking the position of Regional Corporate Director. Alex brings to the Red Chilli team a wealth of experience in dealing with the due diligence process and some of the more complex funding structures.

James Thomlinson
Working within the UK Senior Team James specialises in the re-financing of residential and commercial investment portfolios with values ranging from £6 - £50 million. The most recent examples are the financing of a £20 million block of student accommodation in the North of England, an £18 million prime London residential portfolio and a £26 million residential portfolio in the North West. James is also working on a number of large scale foreign projects (up to US$500 million) with a requirement for land acquisition and development funding.

Dorothée Queyroux
Dorothée is primarily focused on property located in the UK and France, specialising in developments and site acquisitions. With deal sizes ranging from a few million to GDVs of c. £800 million, Dorothée has worked on larger scale mixed-use developments as well as high-end residential projects. She has also recently arranged funding for the acquisition of quite substantial sites valued without planning at circa £90 million in London. As well as developments Dorothée has arranged numerous investment packages including industrial, retail, leisure and bespoke residential portfolios. Her objective is to establish a larger network in France (her native country) strengthening Red Chilli’s presence there.

Tim Mycock
Tim is predominantly focused on arranging finance for residential and commercial developments and investments in the UK, recently structuring finance for a £25 million residential development in the South West. He has dealt with a number of small developments ranging in size from £2 - £10 million whilst also working on a number of larger and more complex structures totalling £250 million+ in the North West of England. Tim’s expertise and knowledge of a range of development structures, including senior debt mezzanine and equity, ensures his ability to guide a development from conception through to loan draw down.

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