NPN Finance News

Building Your Credit Score

oneclicksydney@outlook.com (Simon gee) — Sun, 29 Dec 2019 14:02:07 GMT

How to build your personal credit

Improve your credit score

1. Stay on top of your repayments and commitments. Consider setting up direct debits for utility bills and schedule loan repayments for a set day (may be your pay day)

2. Keep track of your credit commitments.

3. If you move house or update your contact details, notify lenders.

4. If you are having trouble meeting repayments, seek assistance early on.

5. Use the many online options to view your credit file and take sometime to go through it and understand its contents

What is a Non Recourse Commercial Loan

Mon, 16 Sep 2019 14:56:57 GMT

What is a Non Recourse Commercial Loan?

A non recourse commercial loan is one whereby the only form of security taken in support of the loan is the underlying asset or project which the loan is funding with the lender having ‘no recourse’ or no resort to any of the borrowers’ other assets.

For example, if a borrower takes out a loan to fund purchase of a commercial property, the security under a non recourse loan arrangement would be a mortgage over the said commercial property and a GSA or charge over the company (if property is held in company name )with no guarantee taken from individuals or any other companies forming part of the same group.

This is usually sought out by company directors who wish to borrow in their company name without necessarily providing directors’ guarantees in support of the lending.

Criteria for consideration

- Commercial Loans with low loan to valuation ratios well below the standard 65-70% levels. For example if a borrower seeks a loan of $3,000,000 against a property valued at $6,000,000, the likelihood of approval on a non recourse basis are higher. This is because the lender will have a higher buffer in event of a default.

LVRs usually need to be around the 50% mark.

- Non recourse loans are usually available for larger loan amounts and require more input from credit assessors.

- Strong primary exit needed. In other words, debt servicing from income available to the borrowing entity on a stand alone basis needs to be strong with no reliance on other group companies for servicing. Where income available for servicing is scattered among different businesses/companies, guarantees from those companies will need to be taken which may take the loan outside the non recourse parameters.

- Strong applicants more likely to be granted approval on a non recourse basis.

The benefits of this type of lending is the simple security structure with the lender taking security over the commercial property on a stand along basis without holding the individuals personally responsible for the debt. It is particularly appealing to large groups of companies with multiple ownerhip structures as it keeps their security structure clear-cut.

One of the main benefits of a non recourse loan is the elimination of personal liability.

Drawbacks include the fact that non recourse lenders will impose more restrictions on their loan arrangements by way of added covenants or ongoing conditions. This is usually done to ensure the underlying property maintains its value and the LVR is not eroded.

When making your borrowing decisions, it is important to keep in mind that your lender and loan have a significant impact on the ongoing management of the loans associated with your commercial property portfolio. This can have an impact not only on your loan management but also on your overall property portfolio. This is why it is important to discuss your strategies early on with your trusted finance broker who can negotiate on your behalf with the lender a loan structure that best fits your needs.

Commercial Investment Loans

Mon, 16 Sep 2019 14:54:56 GMT

Commercial Investment Loans

Definition

Commercial Real Estate (often abbreviated to CRE) is property that is income producing used for business purposes as opposed to residential.

Some examples include shops, restaurants, office buildings and shopping centres.

Commercial property can be either owner operated ie the owners of the property operate their businesses from the said commercial property, or they can be owned by landlords who then lease them out to business owners to house their operations.

In this blog, we will be looking specifically at Commercial Investment Property being a property owned by a landlord for investment purposes, ie leased to a business operator.

Ownership

A commercial property is often owned by a business entity as opposed to a residential property which is traditionally owned by individuals.

Commercial properties can be owned by companies, partnerships, property trusts and other corporate entities.

Often these entities are formed for the special purpose of owning commercial real estate and are referred to as a special purpose vehicle (SPV) which means their structure and ownership is in isolation to other assets and business operations that the corporate group may own or engage in.

Type of lending

A commercial or business loan is provided for the funding of commercial property acquisitions for investment purposes.

Typically, these loans have maximum terms of 15 years however most lenders offer a level of flexibility whereby smaller terms may be offered initially that can be renewed on expiry. Often a business loan through renewal, interest-only terms or refinancing may have a tenure that extends beyond the 15 year term.

The term of these facilities is usually dictated by term of the lease. For example, if a company purchases a restaurant that is operated by the tenant under a lease that has a 5 year remaining term, the lender will provide a facility that cannot exceed the lease term. This is to ensure the debt servicing capacity of the property is maintained. This is especially evident when the loan is non-recourse, it the lender has recourse only to the mortgaged property as security.

Whilst a shorter term is provided, repayments continue to be calculated on a longer term usually 15 years or facility may be offered on an interest only basis for its term.

The loan to valuation ratio (LVR) is usually offered at a maximum of 70% of property value or purchase price. Some banks and lenders will provide lending at higher LVRs however this usually comes at a premium ie a slightly higher interest rate.

Serviceability Assessment

These loans are usually assessed by reference to the leasing income associated with the commercial property.

An interest ratio cover is calculated by dividing the net leasing income less outgoings (property expenses paid by landlord ie council rates, water rates and sometimes some utility bills depending on lease terms) by the interest expense.

For example a property with a net leasing income of $100,000 and an interest payment of $80,000 per annum will have an interest cover ratio of 1.25 times. In other words, rental income covers interest 1.25 times.

A preferred ratio is 2 times on current rates though that’s not always achievable. Some lenders have a ICR requirement of 1.5 times.

A negative ICR indicates negative cashflows from the property ie rental income cannot cover the interest expense.

Rates and Charges

The perceived higher risk associated with commercial property translates to higher interest rates than on residential loans. The spread is usually 1% however this depends on variables such as lease term, background and tenure of the tenant, strength of borrower group, existence of other cashflows that may be used for servicing, property location and LVR.

Other costs that apply;

- Valuation fee

- Legal fees

- Bank Application fees and monthly service fee

A commercial property investment provides means for a property investor to diversify and tap into the commercial real estate market.

Whilst more risky than the residential property market, commercial property ownership can be rewarding and this market is often counter cyclical to the residential market, ie during a residential property downturn, commercial property market may continue to strive and even experience an upward turn.

The risks and benefits of a commercial property investment needs to be carefully evaluated with advice from experts such as lawyers, accountants and mortgage broker.

If you are considering investment in commercial property, we are ready to talk to you and share our insights with you. We have a large database to tap into and are ready to sit down with you and discuss options that may suit your goals and property portfolio.