Debt Management

As you probably already know, real estate companies can use several different types of funding methods. The most common method of funding is through the use of mortgage deeds as a form of guarantee. For most smaller businesses, this funding method is the only way to get financing, as they aren't large enough to have access to the capital market – something that larger companies can do.

Mortgage Loans and Blanket Mortgages

The most common form of secured financing is what we call mortgage loans. A mortgage loan means that you secure a loan with mortgage deeds for one specific property. However, mortgage loans can quickly become quite complex since the more properties you have in your real estate portfolio, the more external loans you'll need. In other words, that means that the administration and negotiation processes are going to become increasingly complex as your real estate portfolio grows. Therefore, many people use so-called blanket mortgages for a more manageable process.

A blanket mortgage means that you instead use several properties to secure a loan. This way, you can choose to reserve an entire real estate portfolio for a bank of your choice. The advantage of this method is that it allows you to proactively negotiate both the security and the credit evaluation with the bank instead of waiting for each individual loan to expire. In other words, it puts you in a position where you're more aware of your terms, giving you the possibility to shape the terms and conditions before you sign with the bank.

To make your financing work even easier, you can use a Treasury Management System like, for example, Nordkap. You can then simply choose whether you want to connect each loan to one or several properties directly in the system. 

Negotiating Your Credit Terms

What is financial risk?

As the term suggests, financial risk is the risk associated with financing. The two main risks are

• The risk of not being able to refinance the already existing loans and
• The risk of not getting a new loan – or only being able to get new loans with unfavorable terms.

It also doesn't take much for the credit margin of a loan to rise; mild stress in the credit market or increased cost requirements for the banks lending you the money can quickly affect the credit margins on your loans. 

We've also experienced several difficult and unpredictable credit situations these past few years, which affect financing, too. For example, the covid-19 pandemic led to many investors and banks holding on to their money more, and with the ongoing war in Europe, the restraint that we saw in 2020 has partially come back. The result is that there's a lot less financing available than there usually is under more normal circumstances. In other words, it's often impossible to predict how the financial market will change over time, which makes it even more critical to plan and prepare for financial risks. 

When It’s Time to Negotiate

Different banks will have different terms, and they can often vary quite a lot on the loan market. But, of course, that also makes it difficult to compare the various banks' offers when it's time to sign your new loans. Therefore, it can be good to keep in mind the three components that determine how transparent your financing process will be:

• Reference interest rate
• Does the loan follow a public market interest rate, such as, for example, Stibor?
• Interest rate floor
• What happens if the reference interest rate is negative? 
• Credit margins
• What credit margin applies during the duration of the loan?

During these past few years, it has become increasingly common for banks to offer a variable credit margin or add a variable debt valuation charge (?) on top of the credit margin. In reality, this means that there's a risk that the credit margin becomes fully variable and, therefore, might differ a lot between each payment. As a result, it's nearly impossible to predict and budget for future costs, something that's incredibly important to real estate companies. 

There's also a risk that a variable credit margin might create some confusion when it comes to debt maturity. As you probably know, debt maturity shows how much time you have left to pay off a loan. As a borrower, you always know how long you are guaranteed to loan the money since you have a clear and defined debt maturity date. So, now that we're in a difficult credit situation again, many people ask themselves how much that date actually matters when the credit margins can increase pretty much uncontrollably and one-sidedly by the lender anytime during the loan's duration. 

If you're instead able to connect the loan to a reference interest rate and fix your credit margins for the duration of the loan, you'll get a lot more transparency and control. The most important thing is to make sure that you have as much insight and control of your terms and conditions as possible before signing with the bank – that's how you'll get the best possible conditions to predict your costs and minimize your risks.