Jack Coombs, director at Aspen Bridging, takes a look at five very different situations which will ultimately affect a lending decision, and what they ultimately mean for an application:
Bridging is fundamentally a specialist form of finance designed to address complex lending situations where traditional banking products are unable to offer a solution.
In short – bridging finance is a problem solver.
Although in recent years the scope of the sector has widened and become more vanilla, bridging has always had its grey areas and it is in these that the specialist lender needs to excel.
At Aspen we focus on enabling the deals that are doable, and if they aren’t we will tell you why in the first five minutes.
Most of the time this comes down to affordability, loan-to-value, troublesome financial backgrounds or any manner of the usual reasons. But some very interesting applications cross our paths, and here’s where true expertise really needs to rise to the top.
Let’s be clear, I am not a lawyer and this does not constitute legal or financial advice, but here are five leftfield scenarios with examples of when you can and when you cannot lend:
If a client is undergoing a divorce the underwriter should take care to understand that the divorce is settled either in-or-out of court, or that both parties in the marriage have received independent legal advice and consent to the loan. (This is regardless of in whose name the property may be in.)
If one party is trying to pull funds out of the property quickly before a claim is made of an interest in the property, the underwriter must avoid facilitating this or the lender may become exposed.
Sale at undervalue
Sales at undervalue are commonly banded about in the market, but there are some that are satisfactory and others that are insupportable.
When a client gets an option to purchase a site and then adds value through works or planning this (in our view) is fine – the real value of the site ought to be higher than the purchase price and this should be accounted for as long as the developer has adequate ‘skin in the game’.
When family member gifts equity this is also acceptable to us – people have given property away to their children since time immemorial – and clearing the mortgage through a purchase is acceptable. A deed of gift and correct tax treatment is needed but this is, in Aspen’s view acceptable.
“I brought it at auction”, “I am buying in bulk” and “the client is a good negotiator” are obviously terrible reasons.
The market is not as strong as it was in 2016 in some areas and people think things are worth more than they are – buying in bulk almost invariably leads to selling in bulk in a difficult situation and underwriters should anticipate this.
“The seller is desperate for a quick sale” is an interesting one. The lender must establish that the seller is of sound mind and is not a vulnerable person. They should also look at whether the numbers make sense – does moving country or fear of repossession merit the level of discount?
At Aspen we steer clear of these because 9/10 something awful such as intimidation or fraud is happening in the background.
The worst one is “the receivers are flogging it cheap”. If correct this is a criminal action and a major breach of the duty of care to the current owner’s equity position. An absolute no and probably a note to self to avoid the receiver is needed here.
Lending on properties owned by foreign governments is fascinating stuff.
In the last 10 years there have been a couple of notable cases where bridging lenders lent to foreign governments. In two such cases – one where the loan was to Kosovo and another where it was to the Democratic Republic of Congo – the lenders have been severely burnt.
The reality is that nations typically have significant sources of credit so the real question is who actually needs this money? Often the reality is that person purporting to act for the government is often not authorised to do so and actually is committing a fraud.
Putting this aside however, the legal position of the lender on the face of it can often appear sound. If the property is not an embassy then it is not subject to immunity and if the charge is registered what could go wrong? The answer is everything.
The bottom line is when attempting to repossess the property of a sovereign nation you essentially are undertaking a declaration of war to get control of it. This is a route that has (in the cases noted above) already proven to be beyond the means of even the largest of specialist lenders……
If no petition for bankruptcy has been lodged but one is still only potential then it is safe from a legal – if not necessarily an underwriting perspective – to refinance them out of trouble.
However once the petition is lodged there is only one way to do it and this itself is not a process without risk.
The lender’s solicitors must attend the hearing thus ensuring that all pre-existing creditors who have a prior claim have come out of the woodwork, and use a series of undertakings to essentially complete the refinance there-and-then to enable the claimants to be satisfied and the petition dismissed.
Any other route risks the charge not being registered ahead of prior claimants. After the client has been declared bankrupt any attempt to provide funding becomes much harder still and it would wise to avoid.
An automatic discharge occurs after six months but this is really meaningless and any funding would need to be arranged with the full consent and knowledge of the administrators of the bankruptcy and supported by any necessary court orders.
As with the other scenarios there is no quick yes or no answer. The main challenge is determining that your borrower is the person that owns the company and its legal status and asset position is suitable.
It also primarily depends on the quality of information in the country in question. In short with the right solicitors and authorised agents it is doable in such places as the British Virgin Islands and Panama.
But countries like Sierra Leone – where their version of Companies House was burnt down in the civil war – are naturally best avoided.
This has been a light-hearted look at what is and isn’t doable in bridging, but the applications covering these areas are relatively commonplace.