Learning how to collaborate on challenging commercial deals will help get them over the line
LA TROBE FINANCIAL
A self-employed applicant had purchased a retail shop in the regional town of Ballarat, Victoria, for long-term investment purposes.
He was purchasing the shop from the existing owner, who was also the tenant. The existing owner/tenant would be vacating the shop at settlement. The applicant had paid a deposit, and settlement was 90 days from signing the contract of sale.
As the retail shop would be vacant at settlement and without a formal lease in place, servicing was not initially evident. Subsequent to signing the contract of sale, the borrower had entered into a lease agreement for five years, but the first six months were rent-free.
We were also advised that the borrower had a utility default from three years previously for $560.
The borrower approached his current financier to assist him, who advised that “all would be OK” and “we are working through the process”.
After 60 days, the borrower was becoming frantic as he only had 30 days to the settlement date and was concerned that he was not going to settle on time and would lose his 10% deposit. The current financier still did not have an answer for him.
"The broker’s relationship with La Trobe Financial and immediate action with one simple phone call made a significant difference to meeting tight deadlines" - Steve Lawrence
The borrower became nervous and decided to contact a finance broker who had been recommended to him. The broker reviewed the borrower’s financial circumstances and immediately called their La Trobe Financial BDM to see if we could assist with the financing.
Following the discussion with the broker, the La Trobe Financial BDM immediately contacted our credit team to see whether we could find a possible solution for the borrower. The team was made fully aware of the time constraints and the credit issues around the servicing of the loan, including the default issue.
The La Trobe Financial BDM and the commercial credit team worked together and assessed the borrower’s circumstances against La Trobe Financial’s lending criteria. Together they workshopped possible scenarios. Put simply, they applied a relationship approach, rather than just ticking boxes.
The team identified the possible financial solutions:
- With respect to servicing, we agreed to capitalise the interest within the loan amount for the first six months to overcome the issue of the first six months’ rent-free. We also undertook our standard servicing of the loan via our ‘Lite Doc’ method, incorporating the rental from the security property that would commence in six months, verified through a market rental amount as noted by the valuer. We established that the loan could be serviced.
- A satisfactory explanation was given with respect to the previous default, and we obtained confirmation that it had been paid in full.
- We agreed to an LVR of 70% with interest-only for the first 12 months, and thereafter the remaining term of 24 years would be on a principal and interest basis.
- The loan was subsequently approved and settled within the four-week time frame.
The broker’s relationship with La Trobe Financial and immediate action with one simple phone call made a significant difference to meeting tight deadlines. The broker’s understanding of La Trobe Financial’s credit policies, BDM support and immediate action also played a significant role in achieving results.
We pride ourselves on assessing each application on its merits, and in this case La Trobe Financial’s service, direct access to those ‘decisionmakers’ and its solution-focused methodology to ‘try to make the deal work’ has helped another customer achieve their financial goals.
One of our Victoria relationship managers, Joel Harrison, was recently presented with a commercial loan scenario that required considerable workshopping prior to submission and approval.
The high-level loan details involved four individual, self-employed sponsors with interconnected businesses. The finance objective was to acquire a commercial warehouse under special purpose vehicle (SPV) to operate an existing business owned by two of the loan parties. The loan size was $600,000 for a term of 30 years.
On the surface, a commercial property purchase such as this would seem quite standard. The twist in the transaction on this occasion involved how to demonstrate satisfactory full-doc verification of income.
Sufficient aggregate income was required to show that serviceability was needed from multiple sources. Some of the borrowers had less than two years of individual trading history. Some were only profitable in the last financial year, while others relied on commissions that only had a history of less than 12 months. Forecast rental payments to the SPV were to come from an associated entity that belonged to only a minority proportion of the sponsors.
"We recommend brokers workshop transactions with their relationship manager as a collaborative exercise and aim to involve the most suitable lender as early as possible" - Peter Vala
Up to this point the applicants had been unable to obtain finance from mainstream lenders, either due to policy constraints or because the lenders could not fully come to understand the various business income flows and the possible ways servicing could in fact be demonstrated. The applicants were subsequently referred to Thinktank by an industry colleague.
Thinktank was able to demonstrate income on the applicants’ current ‘real’ income position, which satisfactorily met our 1.5x minimum interest coverage ratio requirement.
By opting for a loan term of 30 years at the current rate, the loan repayments were not dissimilar to the starting rent to be paid by the proposed tenants (an associated business). Thus the actual cash flow of the tenants’ business essentially would not materially alter.
A detailed understanding of the various applicants’ employment histories and experience in their chosen fields of business was obtained by our team. Provisional financial statements were also provided, which served to display a positive net income trend. This gave further confidence to the assessment of the transaction, which relied on the most recent year’s financial statements without having to average income over multiple years.
All lenders have different credit risk assessment criteria and appetites for lending. Just because it does not fit a certain lender’s parameters or preferences does not mean that the transaction is not without merit and may not prove more than acceptable to another lender.
At Thinktank, we recommend brokers workshop transactions with their relationship manager as a collaborative exercise and always aim to involve the most suitable lender as early as possible in the process so all parties are working towards an identified and common goal.
In this case, Harrison conducted a series of face-to-face meetings with the broker, and had numerous joint phone calls with the broker, accountant and financial planner for the associated individuals so as to structure this proposal into a workable solution for all parties.
In the end there was a delighted and surprised broker who had been introduced to a lender that was willing to invest the time and work on an alternative approach, which then delivered a great outcome for their client.