The asset manager's role in (re)financing

The right choice and timely appointment of an experienced and specialised asset management company can make financing negotiations for real estate transactions and loan renewals a lot easier. Especially for properties from the "value-add" risk class upwards, the asset manager's track record plays an important part in making a financing decision and arranging the terms and conditions.

Asset managers must be able to present a convincing case to the finance provider to demonstrate that they will be able to extend the remaining lease terms or increase rental income levels during the financing term through skilful negotiations with tenants. To achieve that, they need to have profound knowledge of the real estate markets and of the current and future space requirements of tenants – for retail properties and thus also our "basic retail" asset class, this is of even greater importance than for many other asset classes. If faced with professionals during lease negotiations, a lot of experience is required to optimise the contract terms and conditions for the lessor. Many finance providers agree. This is why some loan agreements for the portfolios we manage contain wordings such as: "During the financing term, the portfolio will be managed by the full-service retail manager GRR Real Estate Management GmbH."

But the asset managers' role in relation to financing is not limited to their contribution during property transactions. In negotiations about the provision of funds for value enhancements, the asset manager's involvement is pivotal. Finance providers will only be prepared to provide support for measures if a convincing property strategy has been presented to them.

A topical example: We recently managed the purchase of a portfolio whose anchor tenants had a weighted average remaining lease term of only six years. There is evidence that the bank offered a financing term of five years only because the investor and the asset manager credibly demonstrated that it would be possible to successfully negotiate lease extensions with the anchor tenants.

This can only be achieved, if everything necessary is done to keep the property and the leasable space attractive for existing tenants. It is a fact that the property is of far greater importance to retail tenants than to, say, office tenants.

Asset managers can also play an important part in securing financing by ensuring that the loan covenants are met. For example, the loan-to-value (LTV) ratio, which is the ratio of the current loan amount to the latest property valuation, continues to be an important covenant. Breach of the agreed LTV covenant could have serious implications for the financing, because in terms of the agreement this gives the bank the right to demand higher interest or grants it special termination rights. Especially real estate at locations with limited transparency, because they are too small to be included in the valuation firms' regular research, are often measured against properties that, according to specialised asset managers, are not really comparable. By critically interrogating and discussing the resulting valuations for the financed portfolio, asset managers may succeed in convincing the valuers to review their valuations of individual properties. This could lead to situations where the revaluation averts a covenant breach.

For financing issues related to the portfolios they manage, asset managers therefore not only perform an important interface function between investor and bank, but also make a significant contribution to the success of the investment. Their experience, their market know-how and the quality of the property strategies they have developed have a direct impact on the ability to finance a real estate transaction, as well as on the loan terms and the finance provider's willingness to support value-add measures.

by Manfred Kronas, Managing Director of GRR Real Estate Management GmbH