The basic rule for every structuring project is that a project identified as meaningful must never lack financing. We therefore consider it our primary responsibility to structure the financing of real estate in such a way that it achieves the very best for the implementation through the use of suitable instruments and financing layers.

In particular, the team at ÖVAG has made many projects possible for its customers – predominantly in development – through direct investment in equity or subordinate financing shares. These projects would never have come to fruition under classical banking requirements. The successful structuring of such financing assumes both a deep knowledge of the respective real estate market as well as an assessment of the usefulness and potentials of the respective property. The advantage for the customer is clear: the project is achieved. The advantage for the bank lies in the additional earnings potential, in particular following a successful sale.

The requirement arising from Basel II to give each property to be financed a rating calls for differentiated financing structures. Risk classes and individually suitable financing instruments are defined on the basis of the risk content of the project and own funds injected by the proponent.

The classic investment grade area is dominated by the senior loan. The risk is estimated as low by the full coverage of the property or creditworthiness of the proponent. The bank charges risk-adequate interest rates and does not participate in any upside.

In the sub-investment grade area, additional graded instruments are used:

• junior loans are suitable for slightly higher risk structures, where parts of the loan capital can no longer be fully secured. This financing layer is given a higher interest margin, but does not participate in upsides.
• mezzanine capital adopts an intermediate position by combining elements of outside capital and equity. In addition to on going interest charges, the bank can also achieve earnings by participating in the specific success of the project, although usually to a limited extent.
• equity investment means that the financing bank also has to take on the direct risk of the project. Equity is essentially offered interest-free against aliquot investment in the substance and therefore the upside potential of the project.

The timing is also particularly important.

While equity is essentially available on an unlimited basis – e.g. until the project is sold to an investor – junior loans and mezzanine are subject to a repayment structure as they are essentially outside funds.

Junior loan:
short to medium term
(5 to 7 years), normally with regular repayment

Mezzanine:
short term (3 to 5 years), generally due at the end

The combination of the timing with the costs of these outside funds (which also achieve double-digit percentage rates p.a. in the mezzanine area) are shown by those areas

• in which junior loans and mezzanine can be meaningfully used
• or the extent to which additional equity is required

in order to achieve a good balance between risk and possible success from the project. Structuring competence is noted for developing with our customers an appropriate solution that takes proper consideration of all foreseeable risks and thereby ensures the best possible success for all parties involved.