Hi Nonrecourse
The lender does not/can not have recourse to other SMSF assets/income outside of the sole asset to be funded. Herein lies the lenders problem.
Because the legislation is very clear on this point (limited recourse to SMSF's other assets/income is a must) then the lender can only look at the income solely derived from the purchased property to service the loan.
If the rental income from the property (and most lenders will only take into account a net income after discounting for agents fees & a vacancy factor, normally 20-30% in total) is insufficient to cover repaying the loan over an acceptable period, then they will want you (the member) to support/guarantee it.
If you look in isolation to the sole rental being obtained from the property, I'm guessing your LVR will need be down to around at least 40% or less to get serviceability on a stand alone basis to meet their guidelines.
So whilst the SMSF position obtains a "limited recourse" position with the lender you as the member will unfortunately be required to be added as a guarantor. In return for this a better interest rate may be offered.
I know that there are lenders doing non-recourse to members but they are charging what I consider to be very high rates (think Macquarie Property Lever at approx. 10%pa) for very little risk at LVR's 55% and below.
I've done the numbers and I'd rather be borrowing at a much lower rate inside an SMSF than being charged considerably more just to say I'm not a guarantor.
Hi mike you have got to be pulling our collective legs on this one really!
Point 1; The investor is providing 50% of the funds so in the event the property is repossessed by the bank even in a firesale the bank is going to make a profit.
Point 2; We are talking about a commercial lease minimum 5 years in Victoria with either a suitable bond and or tenant personal guarantee's. All outgoings are met by the tenant including the single unit holding land tax if the tenant is an ASX publically listed company. The 30% discount on the rental income belongs in a past era when banks charged mums and dads an extra 2% for investment properties!!!
Point 3;In order for a super fund to put up 50% of the deposit it would have to be generating some decent cash flow from either other business property and or dividend income. Are you suggesting the bank would discount this income too?
Point 4;I'm quoting you here Mike
"The lender can only look at the income solely derived from the purchased property to service the loan." Why? If this sentance was true then you wouldn't need a guarantee for the salary sacrifice. My legal and accounting advice on paying out the warrant installments is that I can use the income from the super fund as well as my 9% manditory contributions.
Point 5;This product is not for mums and dads with limited super assets. For a small business that has a reasonable cash flow and wishes to secure the business property it operates from it would make sense. Provided their super fund had sufficient assets to provide the first warrant installment and a sufficient rental or dividend income from existing investments there would be no funding issue. The rent the business would pay for use of the building which could be set at the top commercial rate (determined by a valuer or real estate agent) which the business would claim as a deduction. The rent recieved by the super fund would pay a concessional 15% contribution tax. If the building is large enough part of it could be sublet bringing in further income to pay down the outstanding amount quicker.
Prior to August 11th 1999 when SMSF's were no longer allowed to use unit trusts to borrow to purchase business property many small businesses had successfully applied the principles I have outlined in point 5. The recent amendments provides better protection than the previous outlawed method.
Mike under these circumstances as explained above there is no justification for a bank to require a personal guarantee. Under normal commercial arrangements I have purchased a commercial property with as little as a 20% with a personal guarantee. Why would I give you 50% and a guarantee?
I have written to senator Sherry Minister for superannuation to alert the government to this subversion of the intent of the super reforms regarding SMSF's investing in real business property through limited recourse loans.
Clearly the banks are having a punt on this and it is deceptive marketing to suggest it is a limited recourse loan.
The simple solution is to make it illegal for either a trustee or a beneficiary of the SMSF to give a guarantee for a "limited recourse loan to an SMSF".
If the commercial property the SMSF wishes to purchase does not stack up as I have described then the banks should refuse to finance it full stop.
