Chaim Citronenbaum has more than 10 years of experience in real estate. He is the owner of a real estate firm. He describes here all the financing option in real estate.

1. WELCOME

2. Financing Options
in Real Estate

3. Users of Capital and Needs
Sources and Providers of Capital
Financing Instruments – A Snapshot
Definitions
Sources
Features
Financing Instruments
Title Insurance
Regulatory Trends

4. Financing for acquisition, refurbishmentsEnd User
Asset Acquisition, Asset Management, RefurbishmentsAsset Owner
Direct Financing, RefinancingFinancer
Land acquisition, Development/ Construction
Bridge financing
Developer
NeedsParticipants
Generic Needs
 Seed funding to initiate project/ acquisition
 Working Capital Requirements
 Realization of future cash flows at current date
 Lowering the cost of capital
 Tax Efficiency

5. Public Offerings , REIT/ REMF, AIM, Pension Funds, Insurance
Fund
Public equity
Real Estate Funds, VCF, FII, HNI, End Users (through advances)Private equity
Banks, FI, NBFCs, REIT/REMF, Government bodiesPublic debt
Private trusts, Private syndicates, HNIsPrivate debt
ProvidersSources
Sources and Providers of Capital

6. Financing Instruments – A Snapshot
Bonds, Term loans, CC limits, Bridge Loans, ECB, Lease Rental
Discounting, Asset Backed and Income Backed.
Debt
Private Equity - HNI/ Institutional, Venture Funding, Public listing,
REMF/REIT, Preference instruments, End User Advances
Equity
Mezzanine funding, CTL, convertible instruments, Mortgage Backed
Security (RMBS, CMBS, CMO), option linked instruments, Asset
Backed Securities, Collateralized Debt Obligation, Covered Bonds,
Convertible Bonds, FCCB.
Structured
Instruments

7.  Debt Instruments can be Income Backed or Asset Backed.
 They can be fixed rate instruments of adjustable rate instruments.
 Bonds : Issued by companies to raise debt for funding their capital requirements. Eg –
Infrastructure bonds raised by NHAI which also have a tax exemption status. Some of this might
be available to township development projects in the future.
 Term Loans : Loans provided by Banks, FIs as project financing with pre determined payback
schedules, rates and tenure and against collateral. The loans are usually structured on a case
to case specific basis guided by sectoral exposure norms of the Reserve Bank of India.
 Cash Credit Limits : This is a facility for funding interim cash requirements subject to a draw
down limit. Interest is charged on the amount outstanding and the period outstanding.
 Bridge Loans : Also known as "interim financing", "gap financing or a "swing loan“, this loan
helps to meet short term cash flow requirements till permanent financing is secured. These are
short term loans ( < 1 yr) with higher interest rate and some collateral.
 External Commercial Borrowings (ECB) : The current guidelines allow for overseas
borrowings for the infrastructure and construction development sector subject certain guiding
conditions. This provides access to cheaper source of funds and is subject to currency risks.
 Lease Rental Discounting (LRD) : Securitization of future rent receivables.

9.  Private Equity HNI/ Institutional : The equity raised is not from the public markets and
hence not freely tradable on public exchanges
 Venture Capital Fund : Type of private equity capital provided by professional, institutionally
backed investors to new or growing businesses
 Public listing : These could be initial public offerings or further public offerings. A company
can use this route to access the public financial markets for raising capital by divesting equity
subject to certain entry norms as guided by SEBI.
 REIT : These raise funds from the public markets and invest either in the real estate either
directly (through acquisition of properties) or indirectly (through mortgages)
 REMF : Also raise funds from the public market and invest in real estate directly in RE
properties, MBS, Equity shares/bonds/debentures of listed/unlisted RE companies
 End User Advances : Funds received in advance from the ultimate owners of the property

10. Issues
RightsPublic Private Placement
Qualified
Institutions
Placement
(For listed
companies)
Preferential
Issue (For
listed
companies)
Private
Placement
(for unlisted
companies)
Initial Public Offering
(For unlisted companies)
Further Public Offering
(For Listed companies)
Fresh Issue Offer for sale Fresh Issue Offer for sale

11.  Mezzanine funding: Typically unsecured, high yield, subordinated debt or preferred stock which is
senior only to company’s shareholders.
 Asset Backed Securities: These securities are backed by a pool of financial assets ranging from
mortgages to accounts receivables.
 Mortgage Backed Securities: Its an ABS where the asset is a pool of Mortgages eg: RMBS, CMBS,
CMO
 Credit Tenant Lease: Landlord sells property to an SPV and the SPV borrows money against a pledge
of the rentals. The right to rentals is further divided into classes of securities each being subordinate
with higher promised returns. The landlord typically buys back the first loss piece.
 Second Mortgage: A mortgage on real estate which has already been pledged as collateral for an
earlier mortgage. The second mortgage carries rights which are subordinate to those of the first.
 Collateralized Debt Obligation: typically securitizes a diversified pool of debt assets. These assets,
corporate loans for instance, are split into different classes of bonds (known as tranches) that pay
investors from the cash flows they generate.
 Covered Bonds: similar to ABS but the assets remain on the issuers balance sheet
 Convertible Bonds: A convertible bond is type of bond that can be converted into shares of stock in
the issuing company, usually at some pre-announced ratio eg: FCCB.
 Option linked instruments: Instruments with embedded options like call, put, floor, ceiling, floor,
collars, convertibility etc.

12. Past Current Future
 Domestic Public Equity
(REMF / REIT)
 Refinancing Options
 Secondary Debt Markets
 Access to Overseas Public and
Private Debt Markets
 Hybrid capital from Banks, FIs
 Pension Funds & Insurance
Funds
Debt Debt
 Asset and Income
backed debt
 Lease rental
discounting
 Consumer mortgage
 Asset and Income backed debt
 Lease rental discounting
 Consumer mortgage
 ECB
Equity Equity
 Individual Private
Equity
 Public Markets –
(limited access)
 Venture Funds
 Institutional Private Equity –
Domestic and Overseas.
 Individual Private Equity

13. Past Current Future
 Other benchmark linked rates
 Non Recourse options
 Higher Amortization periods –
20 – 30 years
 Widespread sources of Debt
 Flexible exposure norms
 Bond Placements, Tax Credits
and other Municipal Finance
Alternatives
 Collateralized Mortgage Pools,
Collateralized Debt Obligations
and other Credit Derivatives
Debt Debt
 PLR linked interest rates
 High Recourse – often to
promoters
 Amortization period –
Generally 5-7 years
 Low availability
 PLR linked interest rates
 High Recourse – often to
promoters
 Amortization period – upto
10 years max
 Limited availability
 Banks more willing now but
stringent norms from RBI
Debt

14. Instrument Features
in the past
Current Features Future Possible Features
 Guidelines to allow direct
access to overseas Public
Markets
 Equity exposure by Domestic
Public Equity sources- life
insurance , Pension Funds.
Equity Equity
 Limited mainly to High
Net worth Individuals and
End User Advances
 Public Equity not widely
available
 High risk perception due
to absence of institutional
participation
 Venture Funds both
Domestic & Overseas now
allowed
 FDI allowed
 Successful Public Equity
raisings in 2006
 Successful AIM, LSE
listings in 2006
Equity

15. Instrument Features
in the past
Current Features Future Possible Features
 Senior and Junior Mezzanine
Debt
 Straight, Convertible and
Participating Second Mortgages
 Swaps, Options, Caps, Collars,
Swaptions, Captions, etc
 Hedging Options
Hybrid Hybrid
 Mezzanine Funding being
explored
 Funding with Convertible
options being explored
 Preferred Equity Structures
 RMBS
Hybrid

18. RBI has hiked the risk weightage of the commercial real estate exposure to 200% from 150%
Risk weightage on home loans increased to 100% from 75%
General provisioning requirement for banks on standard advances to residential housing loans
beyond 20 lakhs and commercial real estate loans increased to 1% from 0.4%
Exposure to SEZ will be treated as exposure to Commercial real estate
Norms for Banks

19. Two sets of Norms for NBFCs investing in Real Estate
proposed for those who avail public deposits and those
who dont.
 Under the new norms, finance companies which
accept public deposits can not invest more than
10% of their net worth in land or property, except for
its own use. At the same time, investment in
unquoted shares of a company that is not a
subsidiary has to be limited to 10% of net worth.
 Loan and investment companies are, however,
allowed to invest up to 20% of their net worth in
unquoted shares.
Current guidelines require asset finance companies to
ensure that 60% of their loans go to lease and hire-
purchase of machinery, the remaining 40% is used by
finance companies to fund the real estate sector. If a
finance company acquires land or property or unquoted
shares in exchange of its bad loans, these assets have
to be disposed off by the NBFC within three years.
Norms for NBFCs

20. REMF
SEBI approved the guidelines for REMFs in June 2006
Initially REMFs will be Closed ended
Directly in RE properties within India
Will disclose NAV on a daily basis
Mortgage backed securities
Equity shares/bonds/debentures of listed/unlisted companies
dealing in properties and development
Other securities
They can invest

21. Internationally recognised means of covering the title risk in property transactions.
Protects owners and lenders against any claims against the title guarantees that the
mortgage is valid, enforceable and of first priority.
A general insurance policy will usually cover the insured against a future event which may
or may not occur.
A title insurance policy covers the insured for past events; that there are, for example, no
mortgages registered over the land as at the date of the insurance policy.
Title Insurance
Lenders title insurance, also called a Loan Policy
Owner's title insurance.
The availability of title insurance in India will reduce the risk perception of public debt and
equity institutions thereby triggering a greater availability of capital
Type of Title Insurance