FUND RAISING FOR REAL ESTATE - COMMERCIAL ISSUES

Transcription

1 FUND RAISING FOR REAL ESTATE - COMMERCIAL ISSUES 05 May 2012 WIRC - ICAI Keyur S Shah

2 Contents 2 Preparing for funding Valuation and structuring issues Business operations post investments Exits

3 Developer's Sources of funds 3 Potential Future Sources Non- Banking Finance Company REIT Financial Institution Customer Advances External Commercial Borrowing Real Estate Mutual Funds Individual Investors Developer Public Market Private Equity

4 Life Cycle of PE Investment 4 Deal Sourcing Investment Appraisal Due Diligence Commercial Negotiations Deal Execution Asset Monitoring Exit from Investment

5 Preparing for PE funding 5 Company should hive off non core assets (eg bungalow premises) Compensation of promoter owned assets utilized for business (eg office premises, equipment etc) Put in place an arms compensation system for promoters/relatives working in company Square off outstanding inter group transactions Don t venture into markets/segments outside domain expertise

6 Preparing for PE funding (cont) 6 Documentation for common transactions e.g. advances Title certificate for expediting due diligence Position paper for litigation outstanding Tax positions in prior periods and tax refunds Contracts for various services (eg maintenance services) Management fee structure to be determined Formula/base of payment Timing of payment Escalations mechanism

7 Putting systems in place 7 Generally PE funds need to provide accounts within 90 days Reporting mechanism in place to provide information to PE Funds on a regular basis Half yearly independent valuations Monthly/Quarterly financial statements Interest statement and security holding confirmations MIS system to provide on site information like Average sales price Movement of construction costs Sales velocity

8 Valuation issues 8 Enterprise value vs Equity value Pre money vs post money Land held at historic cost revalued for deal Waterfall to be specified Tax on unearned gains Specify deal value including currency Valuation for regulatory purposes - issues

9 Valuation issues 9 No revaluation of assets used for business May require restructuring prior to funding Cash out then preferred return Cash in company utilization conditions Entire valuation cannot be provided upfront when contingencies are involved paying consideration in multiple tranches Funding also linked to utilization

10 Deal structuring issues 10 Waterfall mechanism in case of differential returns Funding instrument equity, CCPS, CCDs etc Coupon tax deductible Transfer pricing Issues in joint development agreements Rachet down clause with convertible instruments: FSI available EBITDA achieved Number of units

11 Deal structuring issues (cont) 11 Utilization of surplus cash-flows subject to creating: Reserves for debt servicing Construction costs Default clauses Construction milestones Sales milestones Affirmative rights Key contracts Related party transactions Cost escalation and price reduction

12 Business Operations Do s & Don ts 12 Have detailed business plan in place: used as benchmark for monitoring purposes Deviation in plan requires investor consent Take investors into confidence (don t take them for granted) Do not have inter company transactions Business advances on due dates (not out of turn) Approvals and timelines

13 Business Operations Do s & Don ts 13 After PE funding don t use funds for personal exps Make non business advances after agreeing compensation for moneys advanced Security for SPV/investor Rushed actions to avoid rachet down Adhere to covenants (loan utilization etc) Investors will review schedules/groupings Business operations will have to be conducted in professional manner

14 Business Operations Do s & Don ts 14 Don t give surprises impairs credibility Buying vs leasing (conflict with investors) Investing surplus funds Investing in downstream joint ventures Focus on cash-flow not profits Select your customers correctly Pricing contract bids Retention money Overheads/timelines

15 Business Operations Do s & Don ts 15 Focus on cashflows/present value concept Rs 5000/- profit today vs 5 yrs in future Cost escalations will erode margins Handle customer issues in timely manner Blogs Regular customer interaction

16 Exit Modalities 16 Project cash flows Exit based on project generating sufficient cash flows Promoter Buyback Most prevalent exit route for Funds Promoters keen to provide exit to PE Funds IPO s Negative sentiment towards real estate stocks in the past few years has discouraged developers from listing Third party exits Under specific circumstances

17 Exit Modality (cont) 17 Important to determine/envisage exit strategy at time of investment Important to fix conversion price up front In case of residential investment, exit is likely to be through self liquidation While in the case of commercial/hospitality, promoter buyback or sale of assets to third party is more relevant

18 Issues in exiting investments 18 IPO Pricing/valuation Creating a book (FI/FII etc) Third party/fund exit Covenants Withholding taxes

19 Challenges/risks with exiting 19 investments Uncertainty over put/call options Lock in period for 3 years Fewer exit options Lack of clarity for REIT s or Real Estate Mutual Funds Currency risk Taxation GAAR Reps/warranties/indemnities

20 Disclaimer 20 The information contained in this presentation is of a generic nature and is not intended to address the circumstances of any particular situation/person The content provided here treats the subject and issues covered herein in generic form and is purely for academic purposes only The views expressed, if any are the speaker s personal views and do not represent views of any organization/institution

21 21 Thank You Any Questions?