Real Estate Leasing Beyond conventional financing

1. Real Estate Leasing Beyond conventional financing ALB National Conference Bucharest, 18.10.2007 Bogdan Cernescu Managing Director Member of Erste Bank Group

2. Agenda Introducing real estate leasing Real estate – a particular asset class Building up expertise and benefits Sample lease financing models

3. What makes real estate different? • Real estate is a particular asset class/investment vehicle: • It enjoys a very long economic life and conserves value. • Each property also unique in its way. • Terms and conditions of sale/purchase may widely vary in time and space. • Market information is imperfect; market intelligence and thorough market research really make the difference! • Certain types of real estate transactions offer sometimes attractive tax benefits that may enhance their returns. • Properties may need substantial time for market exposure in order to capture the best price, time that may not be available to any given seller. • Buyers needs to act quickly sometimes given internal or external constraints.

4. Real estate – understanding its key features Physical property A clear-cut image of the quantity and quality parameters that define the property are of utmost importance when deciding upon the property potential. Are they available? Time horizon Real estate prices go up and down in time. For prospective investor or financier trying to asses if the real estate property will appreciate or depreciate in value, it is of utmost importance to decide what time period is relevant. Short, medium or long-term? Geographic area Real estate is a spatial commodity, so its value is directly linked to what is going on around it. The question is therefore what is the relevant market area to be considered? Property rights Real estate is more than brick & mortar properties; it is also a bundle of legal rights consisting of deeds, titles, liens, encumbrances, etc. Have they been studied?

5. Real estate – understanding its value drivers When analysing real estate, value is the central concept. What are the key determinants of value? • Supply • Current supply of new space • Prices and characteristics • Similar properties/substitutes • Demand • Economic outlook – upward trends? • Demands for new space • Availability of funding • The Property • Location, location, location! • Restriction on Use • Improvements • Property management • Transfer Procces • Market research • Promotion • Negotiation power

6. What makes real estate financing different? Therefore financing real estate requires a holistic approach: • Thorough understanding of the key features of real estate and the risks associated to its financing. • Understanding of value creation and value drivers in real estate universe. • Building up particular expertise and competence that goes beyond „plain vanilla“ financing to legal, taxation, construction, plannning, arhitecture, etc. • Understanding Total Investment Cost and Total Ownership Cost principles. • Establishing functions and competences able to offer a comprehensive service range in addition to financing.

7. Moving to a holistic approach Ultimately leading to: • Value creation for customers in order to build up long-lasting partnerships. • Proving value to shareholders and financiers to attract more capital. • Enhanced risk management capabilities on both lessor and lessee‘s side. • Make it easier and cheaper!

8. Beyond financing Legal, tax & accounting expertise Transaction modelling Advisory Real estate valuations Internal Real estate valuations Market knowledge and intelligence Construction services Monitoring/Supervision (early warning capabilities) Project Management („technical lawyer“ of the investor) Construction services & more General planner (from vision to reality) General contractor (turn-key delivery) Technical equipment planning (HVAC, elevators, etc)

9. Particular strenghts & benefits • Asset risk know-how • Wider range of property types eligible for financing – increased funding availability; • Longer financing term (i.e.15-20 years) – immediate release of liquidity and less cash flow constraints; • Flexible lease payments adapted to lessee‘s cashflow by undertaking higher residual values. • Monetization of hidden reserves via sale&leaseback. • Tax & accounting know-how • Off-balance sheet structures; P&L optimization. • Construction know-how • Management of the control of construction procedures and quality standards – cost optimizations & savings. • Lessees focus on their core business, less administrative hassle. • The entire costs of leasing (e.g. costs for project documentation, planning permission, transfer tax, other fees) can also be comprised into the Total Investment Costs.

10. Possible structures and deal models • Conclusions: • The lessors‘s product understanding – both in terms of asset and counterparty risk are critical to offer a highly competitive and value-adding product. • The product goes beyond the border of traditional financing, ultimately aiming at optimizing the risk and benefits for both lessee/lessor. • Lessor can undertake the asset manager and construction specialist role.

11. Sample real estate leasing models

12. What could be financed? • Any commercial property* can be leased in principle: • Industrial and production halls. • Logistics premises/warehouses. • Shopping centers (retail centers, power centers, hypermarkets). • Office buildings. • Hotels and leisure ammenities. • * Income earning, not speculative properties.

13. Possible structures and deal models • From simple to more complex models: • Finance lease. • Operating lease. • Long-term rentals. • Sale and leaseback. • Equity participation deals. • Asset vs. share deals.

14. Real estate leasing – generic priciples Possible activities (or any combination): Assistance with selection of location and land Purchase of existing real estate (=plot of land) Financing of the construction Project management and project supervision Facility and property management Leasing Company = Financier, plus Lease instalment Use of the property • Client • logistics of manufacturing company • public sector • development company • retail chain • hotel chain provider • etc. Possible activities (or its combinations): Property use Further sub-lease of the real estate Possible acquisition of the property at the contract end. = Lessee

15. Real estate leasing – even more complex Possible activities (or any combination): Assistance with selection of location and land Purchase of existing real estate (=plot of land) Financing of the construction = Head-lessor Leasing Company Lease payments Use of the property = Lessee Possible activities (or any combination): Project management and project supervision Project development Property letting Facility and property management Possible purchase of the property after the contract expiry Developer/Client Use of the property Rent = Sub-lessee Tenants/End-users Property use

16. Real estate leasing – sophisticated Leasing Company Developer/Client = Equity partner = Financier & equity partner majority share in the SPV minority share in the SPV i.e. property investment SPV Real Estate Leasing Contract Property use Developer / Client = Lessee Share purchase option in SPV Tenant/Sub-lesees

17. Possible structures and deal models • Conclusions: • Real estate leasing is an attractive form of capital asset financing, that combines advantages of rent and ownership of the asset. • It is a versatile product – models and structures can range from „plain vanilla“ finance leases up to complicated structured finance products featuring off-balance treatment and tax optimization. • Lessor undertakes a financial advisor role.

18. Thank you for your attention! For more details please contact Immorent Romania 8, Tudor Arghezi St, Unimed Building, 7th Floor, sector 2, Bucharest +40 310 12 04; office@immorent.ro www.immorent.ro