How does Urbanitae protect its investors’ money?
The real estate sector is considered a safe haven for investment. However, that doesn’t mean there are no risks involved. In this article, we’ll explain how we at Urbanitae work to mitigate these risks and, most importantly, safeguard our investors’ capital as much as possible.
The first strategy is basic: we try to choose good projects. This selection process begins with the developer, who must have a proven track record showing they are capable of executing a project like the one they propose. It continues with a meticulous evaluation of the business plan hypotheses, the validation of these hypotheses, and the establishment of conditions to protect our investors’ money.
Land as the primary guarantee
In a real estate project like those we finance at Urbanitae, the land is the main guarantee. The funds contributed by our investors in capital gain projects are primarily used to purchase the land. The reality is that final land in good areas tends not only to maintain but to increase its value. Therefore, if this land is bought at market value, it could be sold, thus recovering the investment – possibly with profits – if the project does not go as expected. This guarantee, tied to the value of the asset in which the investment is made, allows Urbanitae investors to sleep soundly.
A SPV for each project
Another important point is that each project is 100% independent of the others, so there can be no contagion effect if one does not go well. The investors’ funds, which before investing are in an account opened in their name – and never in an Urbanitae account – go to the project account and then to the operating company’s current account, either as loans or as capital increases.
Moreover, we finance the SPV, the entity that owns the asset/project. By not directly financing the developer, we avoid any balance sheet risk associated with the developer’s existing commitments or liabilities. In debt projects, the developer does not receive all the funds upfront; instead, they access the capital as construction progresses – although they must pay interest on all the raised capital even if they are not yet using it.
Developer’s ‘skin in the game’
In Urbanitae projects, except for very justified exceptions, we require the developer to contribute at least 20% of the share capital. This capital is remunerated under the same conditions as that of the other investors – although sometimes an additional reward or commission may be agreed upon if the project achieves a return above a certain threshold. This means that if the project fails, the developer is also directly affected.
Conservative business plan
To approve any project, our Investment Committee conducts a stringent due diligence on the developer’s business plan. This involves verifying everything from the developer’s relationships with banks and access to financing to the sale prices – ensuring with third parties that they are reasonable for the product and the area – as well as construction costs. In the business plan presented to investors, we usually include a safety margin in the form of higher construction costs and a lower average sale price to absorb possible deviations.
Guarantees
The level of guarantees on our loans is very high: in capital gain projects, Urbanitae investors are shareholders and, consequently, owners of the company. In debt projects, investors, through the figure of the guarantee agent, hold a mortgage on the asset and a pledge of the company’s shares. Therefore, in case of default, Urbanitae investors would also become the owners of the shares, in addition to having a first-ranking mortgage on the asset.
In other words, in the event of loan default, we can initiate foreclosure proceedings, acquire the asset, and sell it to recover the debt – principal plus interest. All costs (fees and provision of funds for the guarantee agent, registration tax of the mortgage, legal expenses, etc.) would be borne by the developer – borrower – and are separate from the interest that will be paid to the investors/lenders.
What about rental projects?
In rental projects, besides owning the asset, there is a long-term lease contract with a solvent tenant – usually two to three years – which guarantees rent payment even if the business doesn’t succeed and the premises are abandoned. But that contract is not the only guarantee. We thoroughly analyze the real estate value of the asset, i.e., its market value when vacant, to determine if, in the unlikely event the current tenant leaves, it would be feasible to find another tenant with a similar rent.