X-coll is not good
- Thread starter Dazz
- Start date
Seems like prudent advice JIT.....and something that I tried to negotiate with the Bank more than 4 years ago now.
Unfortunately, Bank policy isn't so logical and does not allow you that sense of matching. Indeed, they have established specific criteria to protect themselves in this situation and let the investor swing in the wind.
The two specific criteria they told me was, they would lend me money based on the terms of the Lease that met the following ;
(a) 75% of the term of the Lease
(b) 1 year less than the term of the Lease
Whichever is less.
So if you rock up with a firm 10 year Lease, they'll use (a) and calculate 7.5 years, and use (b) to calculate 9 years. They therefore take option (a).
What does leave you with. You either so OK, in which everything is smooth sailing for 7 and a bit years before they dump you like a hot potato and the other lenders look at you with less than 3 years to go, apply the same fuzzy logic and might extend 2 years finance. Or, you say no thanks, and don't buy the place, knowing full well that the next deal you present (after another 100 of hours of DD) to them they'll say the same thing.
As was mentioned previously, they hold the gold - they make the rules.
I distinctly bringing this very point up with the Banker at the time. I tried to bend the rules a tad such that the finance decision on a 4 year Lease deal ran out 1 month prior to the Lease. They refused. The Tenant was obligated to tell me their decision whether they wished to re-new the Lease between 3 & 6 months prior to the end of the Lease. They would only extend finance until 9 months prior to the Lease ending. I asked them "what about the 6 month gap between when they are forced to tell me their decision and when you want your money back". The answer was....."Don't worry about that, it's a long way down the track and anything can happen between now and then."
Well, guess what, we are a long way down the track, nothing extraordinary has happened, and I find myself still stuck with this 6 month finance limbo window where the Bank is asking "we need to know whether the Tenant is going to extend or not, before we can approve a finance extension" and the Tenant sitting there saying..."Not sure as yet, we aren't obligated to tell you until 3 months to go, so we'll let you know then."
If it was a simply as that to which you allude JIT, life would be simple indeed. Unfortunately, risk experts in the name of their shareholders, have been down this path well before you take your first step.
Unfortunately, Bank policy isn't so logical and does not allow you that sense of matching. Indeed, they have established specific criteria to protect themselves in this situation and let the investor swing in the wind.
The two specific criteria they told me was, they would lend me money based on the terms of the Lease that met the following ;
(a) 75% of the term of the Lease
(b) 1 year less than the term of the Lease
Whichever is less.
So if you rock up with a firm 10 year Lease, they'll use (a) and calculate 7.5 years, and use (b) to calculate 9 years. They therefore take option (a).
What does leave you with. You either so OK, in which everything is smooth sailing for 7 and a bit years before they dump you like a hot potato and the other lenders look at you with less than 3 years to go, apply the same fuzzy logic and might extend 2 years finance. Or, you say no thanks, and don't buy the place, knowing full well that the next deal you present (after another 100 of hours of DD) to them they'll say the same thing.
As was mentioned previously, they hold the gold - they make the rules.
I distinctly bringing this very point up with the Banker at the time. I tried to bend the rules a tad such that the finance decision on a 4 year Lease deal ran out 1 month prior to the Lease. They refused. The Tenant was obligated to tell me their decision whether they wished to re-new the Lease between 3 & 6 months prior to the end of the Lease. They would only extend finance until 9 months prior to the Lease ending. I asked them "what about the 6 month gap between when they are forced to tell me their decision and when you want your money back". The answer was....."Don't worry about that, it's a long way down the track and anything can happen between now and then."
Well, guess what, we are a long way down the track, nothing extraordinary has happened, and I find myself still stuck with this 6 month finance limbo window where the Bank is asking "we need to know whether the Tenant is going to extend or not, before we can approve a finance extension" and the Tenant sitting there saying..."Not sure as yet, we aren't obligated to tell you until 3 months to go, so we'll let you know then."
If it was a simply as that to which you allude JIT, life would be simple indeed. Unfortunately, risk experts in the name of their shareholders, have been down this path well before you take your first step.
Very interesting stuff Dazz.
This advisor I spoke to described to me a situation he faced with his own business commercial property premises over 30 yrs ago, that is quite similar to your current predicament in some ways, and that created a lot of financial stress for him at the time.
What fortunately happened for him though, was that the ''loyalty factor" came into play, and the bank let him sit tight without forcing a sale/cash injection at a time when commercial property valuations were falling and lenders were generally being more conservative.
Not sure if that same loyalty factor applies today though...
Private Post for Daz
Dazz You have mail
Dazz You have mail
hi dazz
yes spoke on the phone and yes I have a couple of things that are
a not for a board
b lenders don't like
c are very effective but yes they are not for everyone.
but as I told a investment bank last week
these times require people to do things differently and they require people to organise there finance in there favour and that does not include assisting banks stay with in there criteria but dont stay with one.
banks or lenders require to lend if not the will close there doors and may well not open them.
now there is two groups in any deal
the lender and the lendee
now the lenders have a whole group of legal ways to enforce a sale
and the lendee generally sits back until a liquidator or admin is appointed
and then they run off to there legals to get them out of the poo.
where I sit is half way from the poo but on the lendee's side of the table.
and usually get reffered to clients to reorganise there finances and get finance for them to not go into the poo any further.
now as discussed with dazz banks don't like me.
because if I am going into a bank its for a client or person on my side of the fence and I know there lending criteria and usually have another lender or equity person to shore up the position if need be.
now the bank already knows that if someone comes in in this position that under there lending apra rules they must negotiate and thats my chair.
and usually I take a position within the group as now I am also a co owner in the project which again the banks like even less.
and as I told dazz
this is a street fight and you get anything you can to hit your opponent
and the banks do the same and the last one standing please turn the lights out.
and they play very nasty if they want so you have to be a good and sharp pencil to win.
yes spoke on the phone and yes I have a couple of things that are
a not for a board
b lenders don't like
c are very effective but yes they are not for everyone.
but as I told a investment bank last week
these times require people to do things differently and they require people to organise there finance in there favour and that does not include assisting banks stay with in there criteria but dont stay with one.
banks or lenders require to lend if not the will close there doors and may well not open them.
now there is two groups in any deal
the lender and the lendee
now the lenders have a whole group of legal ways to enforce a sale
and the lendee generally sits back until a liquidator or admin is appointed
and then they run off to there legals to get them out of the poo.
where I sit is half way from the poo but on the lendee's side of the table.
and usually get reffered to clients to reorganise there finances and get finance for them to not go into the poo any further.
now as discussed with dazz banks don't like me.
because if I am going into a bank its for a client or person on my side of the fence and I know there lending criteria and usually have another lender or equity person to shore up the position if need be.
now the bank already knows that if someone comes in in this position that under there lending apra rules they must negotiate and thats my chair.
and usually I take a position within the group as now I am also a co owner in the project which again the banks like even less.
and as I told dazz
this is a street fight and you get anything you can to hit your opponent
and the banks do the same and the last one standing please turn the lights out.
and they play very nasty if they want so you have to be a good and sharp pencil to win.
I think this is still in the "good paying customer" basket, albeit with a post-it note stating "to be watched".
With equity & leases, not yet imo at the "call the henchmen" stage.
Dazz maybe givem a discount for an early renewal? A couple weeks or 1 mth free? (you probly thought about it anyway)
Just like hedging I suppose. 1 mth rent for hassle free years.
And you may gain a happier tenant.
You may end u spending more for "creative services", new loan apps etc etc anyway.
With equity & leases, not yet imo at the "call the henchmen" stage.
Dazz maybe givem a discount for an early renewal? A couple weeks or 1 mth free? (you probly thought about it anyway)
Just like hedging I suppose. 1 mth rent for hassle free years.
And you may gain a happier tenant.
You may end u spending more for "creative services", new loan apps etc etc anyway.
Love your attitude. What we need is brokers who know how to access the sources of finance that you seem to be able to tap into... now that would be awesome.
And what sources of finances are they?
And with what conditions and strings attached do they come with?
And how would he suggest that a lendee "organise" finance in his/her favour?
And with what conditions and strings attached do they come with?
And how would he suggest that a lendee "organise" finance in his/her favour?
Not much more, in fact well beyond, in what I can add.
Just wanted to say Dazz that I am following with interest and your frankness is to be commended.
We all make mistakes. Whether we admit and seek advice from others, or hid and "buggle" ahead doing the same thing is the usually a measure of our ego.
Yours is clearly healthy and sensible.
Peter 14.7
PS Like JIT advice of match the loan to the lease to avoid refinance issues.
Just wanted to say Dazz that I am following with interest and your frankness is to be commended.
We all make mistakes. Whether we admit and seek advice from others, or hid and "buggle" ahead doing the same thing is the usually a measure of our ego.
Yours is clearly healthy and sensible.
Peter 14.7
PS Like JIT advice of match the loan to the lease to avoid refinance issues.
You are just trying to retire at an unfortunate time. The commecial loan market is in turmoil at the present and is going to take a little while to correct.
Things will get a little rosier in this deparment within a matter of months.
Things will get a little rosier in this deparment within a matter of months.
I think moving everything elsewhere would do the trick, if its all to one lender just make sure that there is a separate loan for each property, and make sure that each loan is only mortgaged by one property. If it shows other properties dont sign, (take it back to the broker and get the bank to correct it). I think that the problem is that interest rates are higher now than they were when he got the loans, and I assume the loans are fixed interest for different periods.
Would using LOC's to get at the equity for the next deal have worked the same way as you X-COLing?
For the IP we are buying now we are using a LOC on our PPOR for the purchase costs on the IP, we shouldn't have to use any savings to do this. Going forward can we still just put further LOCs against properties to get the purchase costs, and not XCOL?
Unfortunately, that won't usually achieve the aim of protecting your position. Nearly every lender has an "all monies" clauses in their loan documentation, which says that regardless of which properties are tied to which loans, a default on any one of the loans gives the lender access to all securities held by that lender. So you're effectively cross-collateralised anyway, even if each loan has only one property "securing" it.
To avoid cross-collateralisation, you usually have to have different lenders.
Yes, Steve, absolutely true. It's only about increasing the degree of difficulty (and thus cost) for the lenders to get their mitts on your assets...And I'm yet to be convinced even that works when worst comes to worst Tracey.
Hi Steve and Tracey
Minimising the client contribution ( bank speak for non xcoll) Its about buying time
If you have 40 loans with the one lender and they decide that you smell, you will be done and dusted with judgements in 90 to 120 days.
If you have 10 loans with 4 lenders and one decides that you smell, you have more time AND capacity to re-arrange your affairs............. not a lot more, but more, lets say 3 to 4 weeks.
In reality, we arent talking about a default caused by the borrower.........we are talking of a default event brought on by the lender due to some voodoo concern,hence why the lender spread is often more worthwhile than it might first appear.
ta
rolf
Minimising the client contribution ( bank speak for non xcoll) Its about buying time
If you have 40 loans with the one lender and they decide that you smell, you will be done and dusted with judgements in 90 to 120 days.
If you have 10 loans with 4 lenders and one decides that you smell, you have more time AND capacity to re-arrange your affairs............. not a lot more, but more, lets say 3 to 4 weeks.
In reality, we arent talking about a default caused by the borrower.........we are talking of a default event brought on by the lender due to some voodoo concern,hence why the lender spread is often more worthwhile than it might first appear.
ta
rolf
Hi Rolf,
My head hurts after reading this.
So if Dazz had his loans distributed approximately evenly with 4 banks, and come May next year there has since been a comm prop crash, and one of the banks has a concern (not sure what this means - bank asks Dazz for their money back? ie. sell now or we will?), are the loans and properties at the other 3 banks still up for grabs to that one bank? Would that only be if forced sales didn't cover first banks lend amount?
I don't think so...the banks are quite clever...they will encourage you to get all their loans through them only....this way they have the upper hand via the all monies clause.
If you were smart enought to put it through different banks you will find that banks are reluctant to take on other banks as this brings negative publicity to the industry and both have deep pockets to pursue things legally. As a matter of fact some of the people in the professions which are open to litigation will keep a small mortgage on their PPOR as a form of protection from creditors. This way the creditors can see you own the asset but do not know how much in equity you have to see if it is worthwhile pursuing you!
Dazz unfortunately is in a bind if he has commercial property and has this through only one lender. Best to sell down and take profit now that way you are in a stronger position. The commercial property market in the next year or so is going to take a pelting...and process monkeys in some of these banks may do some stupid things.
I for one now only give 600k worth of business to any one bank (I only deal in residential properties at the low end). I find this also mitigates my risk as loans under 1 million are considered very low risk in banking terms so long as you pay the mortgage. Further if you have mortgage insurance you are also a lower risk...funny isn't it?
I now regularly shift my overpayments from offsets to pay off loans and take the security. The banks hate this as they are ususally left holding loans with 90-95% LVRs as I only put in 5% in my deals. This way I shift risk to them and because I am so small the risk vs return equation is not there for them and they will more likely let me ride out the storm so long as I pay my rates or refinance.
From a risk perspective, I feel that Commercial properties are a risking proposition at the moment. The banks also see this...however I feel that residential property is still low risk so long as you do not invest in high end properties. The rents are rising quickly that things you buy now will become postively geared if interest rates decrease and rent increases continue.
In previous posts I did warn people about the potential affect on Commercial Property...I also said that rates would head down in Oct. /Nov. 2008....will be interesting to see if this also happens.
If you were smart enought to put it through different banks you will find that banks are reluctant to take on other banks as this brings negative publicity to the industry and both have deep pockets to pursue things legally. As a matter of fact some of the people in the professions which are open to litigation will keep a small mortgage on their PPOR as a form of protection from creditors. This way the creditors can see you own the asset but do not know how much in equity you have to see if it is worthwhile pursuing you!
Dazz unfortunately is in a bind if he has commercial property and has this through only one lender. Best to sell down and take profit now that way you are in a stronger position. The commercial property market in the next year or so is going to take a pelting...and process monkeys in some of these banks may do some stupid things.
I for one now only give 600k worth of business to any one bank (I only deal in residential properties at the low end). I find this also mitigates my risk as loans under 1 million are considered very low risk in banking terms so long as you pay the mortgage. Further if you have mortgage insurance you are also a lower risk...funny isn't it?
I now regularly shift my overpayments from offsets to pay off loans and take the security. The banks hate this as they are ususally left holding loans with 90-95% LVRs as I only put in 5% in my deals. This way I shift risk to them and because I am so small the risk vs return equation is not there for them and they will more likely let me ride out the storm so long as I pay my rates or refinance.
From a risk perspective, I feel that Commercial properties are a risking proposition at the moment. The banks also see this...however I feel that residential property is still low risk so long as you do not invest in high end properties. The rents are rising quickly that things you buy now will become postively geared if interest rates decrease and rent increases continue.
In previous posts I did warn people about the potential affect on Commercial Property...I also said that rates would head down in Oct. /Nov. 2008....will be interesting to see if this also happens.
brings back bad memories of last xmas... about the 18th December, Allco Commercial Finance decided to call in my loan. I later found out why (because they were going broke etc) and they gave me soemhting like 10 days to repay?? they were not sympathetic in the slightest and seemed to take a bit of delight in it really. The helpful guys at NAB refi'd me out of my position thankfully, but it was a wake up call for me on the reality of being a borrower.
