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More and more commercial estate market participants resort to borrowing to finance their projects. A substantial element of the debt financing process is the professional appraisal of commercial properties. Not only appraisers should have relevant market information, but they must be able to identify professionally the specific features and value of the evaluated property.

Why Go to the Bank?

The strong growth of business related to commercial property is an outcome of advantageous market situation, decrease in risks and growth of the whole economy. Many developers are rapidly employing their sites in Moscow and Moscow region and with increasing confidence go to other regions in hope to get more attractive land plots, preferences in projects realization and high return rate of their investments.

Many developers encounter issues related to more professional project financing. There are numerous methods of financing arrangement, from selling some of existing assets to project participation by investing certain property. The latter usually suppose that there will be a certain stake in the project.

As investment risks subside and a civilized commercial real estate market builds up, the project financing via bank loans is getting more popular. The most important reasons for this strategy are rising property investment costs, diversification of financing risks and need to establish borrower public credit history. It is important as well that the property owner doesn’t have to sell collateralized property when arranging debt financing, but keeps on owing it.

Though return rates for commercial property investments are falling rapidly, using debt financing gives opportunity for market participants to get additional gains by using leverage. Leveraging project allows gaining additional profit being difference between property rate of return and borrowing costs.

Different Standards

It is well known that valuation practice is regulated by certain professional standards. The creditor bank has the last word in choosing them. The bank defines standards which regulate how valuation report is prepared and property market value is assessed.

According to usual business practice the bank issues valuation plan, which includes its recommendations regarding chosen standards and report contents depending on type of commercial property, its location and features of the project itself.

The valuation standards are defined depending on property attributes, specific project aspects and project participants’ features. Usually Russian banks prefer that appraiser adheres to Russian valuation standards, whereas Western creditor banks prefer to base upon international standards.

Role of Appraiser

The loan value or the total financing volumes depend on the value of mortgaged property, as well as income it generates. The parties employ independent appraiser to evaluate these parameters.

The role of appraiser is important in the debt financing process. Appraiser has to professionally estimate property parameters and value according to existing business practice, valuation standards and specific bank requirements to each specific property. It is very important for all the deal counterparties that property is examined in detail in respect to all the factors which may influence its value.

The most significant aspects are not just the location, technical features and overall construction quality. The most important factors in existing asset valuation are availability of open lease contracts as well as commercial terms of these contracts. In addition it is necessary to make professional analysis of both general tenant mix (which is most important for retail centers) and guarantees from holding companies of tenants, who represent foreign companies in Russia.

Not a long time ago consultants of Cushman & Wakefield / Stiles & Riabokobylko (С&W/S&R) carried out valuation of business centre Capital Plaza for the project developer Capital Group, which closed construction loan refinancing deal together with EuroHypo AG bank. The construction of Capita Plaza was accomplished in 2005. The architecture conception was designed by Bureau “Ostozhenka” and the general contractor was Ant Yapi Sanayi Ve Ticaret LTD Sirketi (Turkey). The creditor bank gave the detailed valuation plan to the appraiser, who requested the application of international appraisal standards as well as the detailed examination of the existing lease contracts and deals pipeline.

Another case is the collaboration between Alfa bank and DhamilKo company regarding raising debt financing. С&W/S&R was retained as consultant for valuation of trading company Louis Vuitton – St. James, located in Stoleshnikov pereulok, Moscow. The creditor also gave consultants the detailed plan for property valuation. In this case the creditor required that appraiser precisely adhered to Russian valuation standards, and analysed cash flow and lease and property sale closed deals.

As to the development stage projects, it is substantial to carry out the detailed analysis and estimation of project costs schedule, so as to determine their adequacy relating to the existing market conditions. Such a valuation is needed so as to provide deal counterparties, and especially creditor bank, with the fullest information about property and its attributes. This information is used during financing terms negotiations.

Another case is the valuation by C&W/S&R of developer trade centre project in St Petersburg for HSH Nordbank. In this instance, apart from valuation per international standards, the bank requested analyzing existing conception and design, analysis of future retail centre coverage area as well as recommendations regarding future tenants and lease contract terms.

It is important for creditor as well to understand how the mortgaged assets will function during the entire financing term. For instance, С&W/S&R carried out the development project valuation in Moscow region for EBRD according to the standards of UK Royal Institution of Chartered Surveyors. In this case the creditor needed to estimate the change in property value at various stages of development.

It is essential often to provide banks with detailed competition analysis, based not just upon existing competition level, but taking into account as well future competition from properties under construction and planning. The close interaction between client and consultant during the entire valuation process is paramount in such assignments.

The role of appraiser specializing specifically in commercial property is very important for debt financing parties. This is emphasized above all when foreign participants are taking part in deal. The foreign participants require not just the full information about the property itself, but they need also the detailed analysis of the relevant commercial estate market. Thus they achieve the full understanding of demand, supply, rates of return, leasing rates and occupancy data.