Bpe 34603 - LN 5 25 March 2019

PROPERTY DEVELOPMENT
(BPE 34603)
PREPARED BY:
ASSC. PROF. SR. DR. AZLINA MD. YASSIN
Project Financing
Project Financing
Basically choices are:-
 Own financing (corporate financing -

reflected on our own balance sheet).
 Project financing (incorporate the new project

in a newly created economic entity, Special
Purpose Vehicle (SPV) and finance off
balance sheet.
 Private Finance Initiative (PFI)

Financing of Projects
Corporate Project
Financing Financing
PFI
Project Financing
Who are the Sponsors:
 Industrial sponsors (see initiatives as upstream

or downstream integrated or in some way as
linked to their core business.
 Public Sponsors (local government,
municipalities who focus on social welfare)
 Contractors/ Developers
 Purely financial investors
Project Financing
Alternative 1 (Corporate Financing):
 Sponsors use all assets and cashflows from

existing firm to guarantee the additional credit
provided by the lenders.
 If project fails, all remaining assets and

cashflows can serve as a source of repayment
for all the creditors (old & new) of the combined
entity (existing firm + new project).
Project Financing
Alternative 2 (Project Financing):
 The new project and the existing firm live two

separate lives.
 If project fails, project creditors have no (or

very limited) claim on the sponsoring firm’s
assets and cashflows.
 The existing firm’s shareholders can then

benefit from the separate incorporation of the
new project into SPV.
Lending criteria
 The most important criteria from the lender’s
perspective is the ability of the borrower to be
able to repay the loan, i.e., the financial status of
the borrower
Lending structures
 Can be negotiated to reduce the risk of
adverse interest rate changes or to assist
cash flow by deferring or rolling up
interest.
 Number of years which loan can be repaid
is also a matter for negotiation
Project Financing
 Understanding:
 (Priority) doesn’t depend on the soundness

and creditworthiness of the sponsors (e.g.,
developer or party proposing the business
idea).
 Approval doesn’t depend on the value of

assets which sponsors are willing to make
available as collateral to financiers.
Project Financing
 Understanding:
 It is basically a function of the project’s ability to

repay the debt contracted and remunerate
capital invested at a rate consistent with the
degree of risk inherent in the venture concerned.
Project Financing
 Project Finance is the structured financing of

a specific economic entity aka Special Purpose
Vehile (SPV) created by sponsors (developers)
using equity for which the financier considers
cash flows (eg. in the case of property
development) as being the primary source of
loan reimbursement whereas assets only
represent collateral (CAGARAN).
Project Financing using SPV
 Two or more entities form another entity
(SPV) to develop a commercial complex that will
benefit both parties.
 The SPV borrows fund to construct the
project and repays the debt from the proceeds
received from the project
 Payment of the debt is guaranteed by the
companies that formed the SPV
Arrangement
Collateral Bank
Loan
Financing
Co. A Co. B
Project Financing - Features
1. Debtor is a project company set up on ad-hoc
basis that is financially and legally
independent from the sponsors
2. The lender has limited recourse (sometimes

not at all) to the developer (sponsor) after the
project is completed. The developer is in fact
limited in terms of time, amount and quality.
Risks associated with the deal must be
assessed in a different way that risks
concerning companies already in operation.
3. Project risks are allocated equitably between
all parties involved in the transaction, with the
objective of assessing risks to the contractual
counterparties best able to control and
manage them.
4. Cashflows generated must be sufficient to

cover operating cost and to service
repayment (capital + interest); dividents are
from balance.
5. Collateral is given by the developers

(sponsors) to lenders as security for receipts
and assets tied-up in managing the project.
Project Financing
The Drawback (disadvantage);
 Structuring and organising such deal is costly

than Corporate Financing. In some cases the
cost stands at around 5~10% of the total
investment cost.
Project Financing
High costs due to;
a. Legal, technical, insurances of developer and

loan arranger need time to negotiate contract
terms & documentations.
b. The cost of monitoring the project in progress

is very high.
c. Lenders are expected to pay significant costs

in exchange for taking on greater risks.
Project Financing
Benefits:
1. Project Finance allows for high level of risk

allocation among participants in the deal.
2. From accounting standpoint, contracts

between developers and SPVs are essentially
comparable to commercial guarantees.
Project Financing
Benefits:
3. Corporate-based financing can always count

on guarantees constituted by personal asset of
the developers, which are different from those
utilized for the investment project.
4. Creating a project company (SPV) makes in

possible to isolate the developers (sponsors)
almost completely from events involving the
project if financing is done on a no-recourse (or
more often a limited-recourse) basis.
Corporate Financing -vs- Project Financing
Factor Corporate Financing Project Financing
 Guarantees for  Assets of the borrower  Project assets

financing
 Effect on financial  Reduction of financial No or heavily reduced
elasticity elasticity for the borrower effect for sponsors
 Accounting treatment  On balance sheet  Off-balance sheet
Main variables  Customer relations  Future cash flows

underlying the granting  Solidarity of balance sheet
of financing  Profitability
Degree of leverage Depends on effects on  Depends on cash flows

utilisable borrower’s balance sheet generated by the project
(leverage normally higher)
Gatti (2008)
Project Financing
The Purpose:
To provide financial assistance to finance

property development projects (residential
and/or commercial and/or industrial)
What is meant by off-balance sheet
financing?
Off balance sheet financing is borrowing monies
in such as way that the liabilities are NOT
recorded in a company’s balance sheet and it’s
believed that it makes the balance sheet higher
quality for reasons;
1. It permits credit to be obtained more readily
and at less cost
What is meant by off-balance sheet
financing?
2. Loan covenants set limits on the amount of
debt a company may have if they are included
on the balance sheet
3. Assets are under valued as well as any related
liabilities
* A loan covenant is a condition in a commercial loan or bond issue that

requires the borrower to fullfill certain conditions or which forbids the
borrower from undertaking certain actions, or which possibly restricts
certain activities to circumstances when other conditions are met.
Facilities
Type of Facilities:
• Term Loan
- To part finance the acquisition or purchase of the Project Land
-To redeem project land that is currently encumbered with other
financial institutions
- Working capital intrinsic to the project
• Bridging Loan
-To part finance the development cost of the development project -
To part finance the development costs of the project including
premiums, preliminaries, infrastructure and building construction
costs.
Facilities
Type of Facilities:
Financial Guarantee
- The normal guarantee letters required by local authorities for a
development project
Facilities
Eligibility
(among others)
- Property developer with a proven track records.

- Projects in a strategic locations.
- Projects with a good viability and feasibility
- Preference is given to projects with planning approval obtained.
- Priority is given for the development of residential and
commercial project.

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PROPERTY DEVELOPMENT

 Own financing (corporate financing -

 Project financing (incorporate the new project

 Private Finance Initiative (PFI)

 Industrial sponsors (see initiatives as upstream

 Sponsors use all assets and cashflows from

 If project fails, all remaining assets and

 The new project and the existing firm live two

 If project fails, project creditors have no (or

 The existing firm’s shareholders can then

 (Priority) doesn’t depend on the soundness

 Approval doesn’t depend on the value of

 It is basically a function of the project’s ability to

 Project Finance is the structured financing of

2. The lender has limited recourse (sometimes

4. Cashflows generated must be sufficient to

5. Collateral is given by the developers

The Drawback (disadvantage);

 Structuring and organising such deal is costly

a. Legal, technical, insurances of developer and

b. The cost of monitoring the project in progress

c. Lenders are expected to pay significant costs

1. Project Finance allows for high level of risk

2. From accounting standpoint, contracts

3. Corporate-based financing can always count

4. Creating a project company (SPV) makes in

Factor Corporate Financing Project Financing

 Guarantees for  Assets of the borrower  Project assets

 Accounting treatment  On balance sheet  Off-balance sheet

Main variables  Customer relations  Future cash flows

Degree of leverage Depends on effects on  Depends on cash flows

To provide financial assistance to finance

* A loan covenant is a condition in a commercial loan or bond issue that

- Property developer with a proven track records.

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