LVR Problem

S

Sootygirl

Hi all, could anyone shed some light on my problem please?
I am in the process of trying to borrow for a freehold business. The bank said 'yes' providing valuation came in ok.....it didnt for the business. Included in the valuation was "$90,000 a year for rent". The business is freehold so whats with the rent??
I have lost faith totally in my broker, he keeps me in the dark and whenever he talks to me he talks in circles. I never hear from him unless I ring him {out of shear frustration from hearing nothing}.
I was staggered also to learn that the bank will only lend on %65 LVR of the WHOLE loan. The property that the business is on, {excluding the business}, has been valued at one million. I have always assumed {my broker told me no different} that the land would have a LVR of around %85 and the BUSINESS ONLY a LVR of %65.

The broker was stunned by the inclusion of rent in the valuation but didnt have a clue as to why. He said "thats the way they do it". Needless to say, Im changing brokers.
Thanks for any light that can be shed on my two queries.
 
Hiya Sooty

I dont think you are being given a hard time here, but perhaps your expectations were made to high by your finance people.

Generally, 70 % lvr for the land/building component is normal and not bad, an lvr of > 50 % for the business is not bad at all. Some really high profile businesses (mainly franchises) can get to 65/70.

ta

rolf
 
Sootygirl said:
Hi all, could anyone shed some light on my problem please?
I am in the process of trying to borrow for a freehold business. The bank said 'yes' providing valuation came in ok.....it didnt for the business. Included in the valuation was "$90,000 a year for rent". The business is freehold so whats with the rent??
Click to expand...

G'Day Sootygirl,

Valuations for Commercial & Industrial Properties are primarily based on the rate of return, (there are other determining factors also ), so in order for a valuer to value the property, they have had to establish a current market rental that the property would yield, if the property were to be leased.
Nothing sinister or untoward in this, just standard practice.

So once having established a market rental, then that is applied to the business operation, (the business being a seperate entity for the valuation process). Then the business is valued as an operation that requires the use of the said freehold premises and assumes that a rental of $90,000 per annum is paid.
Now the business is valued on its profitability after deduction of all expenses including the $90K per annum rent.
Therefore if the now adjusted profitability of the business is low, so will the valuation of the business be.

Can some real valuers on the forum, step in and explain this in a more streamlined manner.........please.

regards
 
Last edited:
Rolf Latham said:
an lvr of > 50 % for the business is not bad at all. Some really high profile businesses (mainly franchises) can get to 65/70.
Click to expand...
The mainstream banks were offering me 50% for Subway- it took Bankwest to offer 70%, as they were actively trying to get into Subway at the time.
 
Thank you Rolf Latham and Jakk.
It is clear that my broker had little idea, {by his gobsmacked response to the $90,000 component}, as to how a business is valued. My suspicion that the guy is in the wrong business is confirmed.

I now understand the way the business has been valued but what puzzles me is why the land component attracts a LVR of only %65. If the business goes under, the house and land is still worth $1 million. Its zoned 'ongoing business' and on half and acre, smack in the middle of a residential area.

Since we are only $85,000 short, its extremely frustrating, since $85,000 seems like a drop in the bucket in the overall picture. The income from the business easily covers the interest so no problems there. I have $80,000 in cash but want/need to keep that for working capital and anything unexpected in the first year.
It was suggested to me that the vendor may agree to a lease arrangement on the plant and equipement which coincidently, is worth $80,000.
Anyways, my solicitor is now involved [I hadnt approached him prior to now,
as the finance wasnt arranged}. He knows my broker, and referred to him as a 'fringe dweller'. He is looking at other avenues.
Im not giving up yet!!
 
Sootygirl,

Perhaps you need to separate the two deals more to ensure they are considered separately.

1) A deal over the land at 85%

2) A deal over the business at 65% (with the business just happening to be a tenant on the land)

They could have been combined by your last broker.

Splitting deals like this may make the entire package harder to get across the line however.

Cheers,

Aceyducey
 
Sootygirl,

As I understand it the bank will view a property in its worst possible light as its will be used for mortgage security, if the business goes belly up and everything turns bad then their best chance of getting their money back is through the property. The valuation on the property should be on the basis of its highest and best.

If their left holding the property then it may represent an investment opportunity and its value will be tied to any potential market rental income, a valuer will try and second guess the market as to its expected rental income and yeild then apply a capitalisation rate to determine market value. Most smaller commercial properties in this environment tend to be owner occupied and the valuer should probably assess them on a rate per sqm basis, but they should use a check method and so probably still use a capitalisation approach anyway which notes a market rent. Sometimes these properties might reflect more of a development site and a cap approach is useless but the bank still ask for a market rental. I don't know why as its got no relevance to the overall capital value but I assume it has something to do with holding costs, they may also ask for an estimate on letting up period to get a tenant.

I don't know what they do with the business val, this is probably just repeating the above but there's my two cents worth. Good luck!
 
Sooty

That is the way it is. Lenders won't lend very highly on commercial properties for various reasons. Generally a 70% lend is high.

And very few lenders will lend solely on a business. There is generally no security with a business as nothing is left if it were to close down.
 
Sottygirl,

Might be wise to talk to a specialist commercial finance broker.
As 65% LVR on unserviceable debt is pretty standard for 1 security.
Is your income from the business proven. Otherwise you may be in the
non servicable debt area.
It might be wise to renegotiate with your vendor to pay the remainder on different terms or find another financier who will do it.(Up the leverage)
You may need to re-structure your equity or obtain an equity partner
or 2nd mortgage. There are many ways to go about this. It seems like
you need someone with actual experience in putting commercial finance
deals together.

Hope this helps

Justin
 
LVR troubles

You should be able to acheive 75-80% LVR on your property. 50-65% on your business is quite reasonable. Banks are generally quite nervous about loans that do not have real property as security hence your problem with the business.
Your solution would be to go to a private lender who is not constrained by the banks standard response set and will be able to find a solution that suits you.

By the way, can your broker. He's got no clue.
If you need more info on private lenders [email protected]
 
Thanks again for your comments. I forgot to add, that I also own 2 houses, total value of $550k {no mortgage} which I offered as security. My mum in law has offered her house also {250k}. Still not enough.
We are now looking at buying the business only, with an option to buy the freehold later on. This arrangement now rests with the owners and whether they can sort out their settlement issues {divorce}. One may buy out the others share of the freehold. Thanks again.
 
Pfsfinance. Sorry, Ive had pc probs for the last few days.
We are looking to borrow 1.4m. 900 for the land, 400 for the business and 100 for plant/equipment, stamp duty etc.

The updated version is that the owner is now looking at doing some vendor finance. I estimate we will need about 100k. We can service that loan no problems {according to my calcs}. Im off to the accountants again tomorrow.
 
If you want to email me all the details. e: [email protected]

I reckon I can point you in the right direction with who will do what. I have just spent the last 5 years in commercial, business & development finance and I'm now a state manager for a Mortgage manager and have access to credit departments of a lot of funders.

I will then let you know what lenders will do the deal and you can take it from there.

Kerri
 
Thanks again everyone. Ok, I went to the accountant {at his request} this morning, determined not to leave until I had the answers as to why the hold up with the loan. I had done my homework on the financials, erring on the side of caution even, and the result is that there will be enough of a buffer in profits to allow me to sleep easy at night.
The problem for the lenders, according to the accountant, is that there is only a 5% return on the business. My accountant and solicitor think thats a}a reasonable return and b}that it wasnt valued properly, according to the type of business it is. We do have the required security to cover the loan but now have to convince the powers that be, that the return from the business is good enough.
It took my accountant to tell me all this. Im a novice at this but even so, its clear to me that my broker should have spelt this out to me 2 months ago!
My solicitor {who's been on holidays for a week agghh} has got a broker involved, who deals with commercial finance, so hopefully I will know something next week, but Im not holding my breath as Ive been on this rollercoaster of yes no yes no for months now.
The business is a corner store/servo/ sandwich bar.
 
Rolf Latham, the issue of a 5% 'return' has me confused. The net profit before interest and tax is 5% of total sales, however, I thought a 'return' would mean net profit as a percentage of money invested {$400k for the business in my case}, which is much higher than 5%.
I know my ignorance is showing, but as my dad always said "if you dont ask, you dont get told".
The low 5% return on sales is obviously due to the fact that for every $50 spent at the bowser, the owner gets approx $1.
 
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