(AG Real estate) Hypo Project Finance Model in Serbia

HYPO Alpe-Adria-Bank Belgrade is one of the first banks that offered possibility to the investors to realize different types of projects through project finance model. Hypo bank has long experience with financing and tracking different projects. Also, necessary conditions were created in the previous year for project finance model to be used in Serbia as a brand new finance model, which exists for years on the developed capital markets.

With significant real estates market development and growth of the number of investors in Serbia, the need emerged for a new form of finance that is not based on the analysis of company’s history and conservative collaterals, and justification of financing is based on the analysis of the very project. Also, legal framework is created for the realization of this type of finance. The new Mortgage Law has introduced the term of mortgage on facility under construction, while, on the other hand, the National Bank of Serbia enabled classification of claims on the basis of the projection of cash flows tied to the project, and not exclusively on the basis of historical financial indexes.

The very term of project finance relates to financing of the company that is founded for the sake of realization of one, clearly defined project. In this case, loan is not approved on the basis of the company’s operations, but on the basis of projected cash flows of the project itself.

This finance model enables financing of the construction of apartments and business facilities, industrial and tourist capacities (hotels, industrial halls, warehouses, logistics centers) and commercial facilities (hypermarkets, shopping malls, etc.). The purpose of these facilities can be their further sale, lease or long-term exploitation by the investor itself.

Characteristics of Hypo Project Finance

The aforementioned finance model has series of advantages over the standard model of corporate finance. Basic differences between the standard and project finance are:

- In case of the standard finance model, the company that is financed must exist for at least 1-2 years. As far as project finance model is concerned, finance goes to a newly founded company (Special Purpose Vehicle – SPV) that is not burdened with some other activities;

- Standard finance model has more flexible relation between its own and borrowed sources, while the project finance demands the investment by the investor in amount of at least 20% of total value of the investment;

- Appraisal of credit worthiness of the loan applicant is the base for the approval of loan with the standard finance model, whereas the project finance model requires analysis based on projected economic and financial flows of the project and risk evaluation;

- Project finance model does not require the analysis of current business activities and financial situation of the loan applicant, but the analysis of the project itself, which is also the base for repayment of the loan;

- With the project finance model, the newly founded company - SPV does not transfer risk of the project to mother company and vice versa;

Phases in Realization

In order for the investor to be able to provide funds through the project finance model for its realization, it is necessary for certain conditions to be created:

Founding of New Company

Ø It is required that the investor, as the user of the loan, founds a project company (SPV – Special Purpose Vehicle) that is not burdened with other activities. This company is founded by mother company for the sake of the realization of the project itself, which is also company’s only and basic activity.

Preparation of Documentation

Ø Before the loan application is submitted, SPV must provide Building permit, as well as all other documentation issued by authorized institutions and required for the commencement of the construction of real estate.

Project Holder

Ø Building permit and the rest of required documentation should be addressed to the newly founded project company.

Business Plan

Ø Investor forwards complete project documentation to the Bank, as well as thorough Business plan, which will be the base for the control and supervision of works and use of funds approved by the Bank.

Required Investments

Ø Investor provides certain amount of funds for the project - 20- 30% of the total value of the investment. In that way, mother company is able to mobilize its capital funds for further development of other business activities.

Project as Guarantee

Ø Basically, guarantees other than the guarantees related to the project itself are not needed, neither are additional means, such as mortgage on personal property, etc. Appraisal of cash flows of the project and loan repayment ability, and not credit worthiness and value of investor’s property, represent the base for loan approval.

Experience

Ø It is necessary for the investor to have evidence of experience in this field.

Use of Funds

Ø Money from the loan is taken in instalments, on the basis of presented invoices, that is, verified situations with the consent from the Bank.

Loan Repayment and Maturity Dates

Ø Loan repayment and maturity dates are completely adapted to the project itself, that is, projected deadline for construction and income realized from the project.

HYPO Support

Hypo Alpe-Adria-Bank Belgrade provides support to the investor from the beginning to the end of the realization of the project by offering more favourable terms of finance to investor’s potential buyers of real estate. Thus, natural and legal persons can also buy real estate that is under construction, that is, before it is registered, and endorsers are not needed. Money from the sale is intended for the repayment of the investor’s loan. In addition to financing project company, the bank also enables mother company and its employees to use standard products of the bank under more favourable conditions.

Conclusion

In the field of project finance, Hypo Alpe-Adria-Bank Belgrade is both an investor and reliable financial adviser with rich experience in modern forms of finance. It also knows market and laws very well, it knows how to recognize good projects and needs of clients, and it has ramified network of suppliers and buyers.

HYPO Alpe-Adria-Bank Belgrade has, so far, financed a large number of projects related to apartment and business facilities, industrial capacities and commercial facilities.

One of the most significant projects financed by HYPO Alpe-Adria-Bank Belgrade, which is also the largest project ever on the real estate market in Serbia, is the project for the construction of the University village in New Belgrade’s block 67 for the needs of the University Games 2009. Following the end of the University Games, these facilities will appear on the market. On the area of 75,318 square meters, between Agustina Neta Street, Milutina Milankovića Street, Jurija Gagarina Street and Ho Ši Mina Street, the following facilities will be built: apartment buildings on 171,882 square meters (136,629 square meters of useful surface – 1,778 housing units), business facilities on 22,196 square meters (19,581 square meters of useful surface), a primary school complex (1,600 square meters) with a court for sports activities, a combined institution for children (1,600 square meters), a care centre for the old, while the construction of other social care institutions is also possible.

author :

Ana Marković, Head of Project & Structured Finance Department

Hypo Alpe-Adria Bank a.d. Beograd

[email protected]

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