Loan Security Flashcards
What types of finance?
Debt Finance – lending money from a bank or other funding institution.
Equity Finance – selling shares in company or joint venture partnership or own money used
What are the types of debt finance?
Senior Debt – first level of borrowing, takes precedence over secondary/mezzanine funding.
Mezzanine – additional funding for additional monies required over the normal LTV lending.
Any differences between valuing for a mezzanine lender than a senior debt lender?
This would increase risk for the mezzanine lender. I would as such note this within my report.
I would also advise of the title restriction in favour of the senior lender within my report.
How is the financial market supported by valuation advice?
The RICS recently published a statement that read “an estimated 70% of global wealth is held in land and property assets”
Without valuation advice multiple assets would be unable to trade.
Repurpose and restructure their equity.
What is a SWOT analysis?
Strengths, weakness, opportunity, and threat analysis of the asset being valued.
Allows my client to understand the potential considerations that might impact on the asset value across the lifetime of the loan.
S = location, condition W = location, condition O = redevelopment, extension T = Covid, Brexit, competing stock
How would you comment on the terms of the loan?
I only comment on the terms of the loan in the context of my valuation advice.
For example, I would typically look at:
- the length of the loan.
- amount of the loan (LTV).
What would be a key risk of loan secured on a development site?
A key risk would be needing to sell the site in a part-built state.
What market trends are you currently aware of?
I am aware that buyers are currently keen to secure outside space of some form.
There has been a push out from buyers from London into Essex, seeking rural yet accessible locations where they can get more for their money.
How did you agree your special assumption?
In writing in the Terms of Engagement
Where can you find information on assumptions in the Red Book?
VPS 4 - Bases of value, assumptions and special assumptions
Do you still use the material uncertainty clause?
The RICS and my company generally lifted the clause in September 2020.
However, I still review on a case by case basis
How did you make sure your client was happy with the material uncertainty clause?
I mentioned it both within my fee quote and also in my Terms of Engagement with they signed.
What might have been in a title which may impact suitability of loan?
If the long leasehold was less than 80 years.
What do banks lend on?
GDV
Cost
MV
What do you consider when commenting on the suitability of a loan?
SWOT
MV
Level of competition
Liquidity
How do you minimise risk when carrying out a LSV?
Detailed notes
Clear audit trail
Liability in place
Up to date with CPD
Use of ‘professional skepticism’
If you were an SME with a limited track record – what would your finance options be?
More limited options - more likely high street.
Expect to pay higher finance rates – higher risk
What is Bridging Debt?
Short term debt serving a specific purpose e.g. auction purchase
Supplied on a quick turnaround
Riskier than senior and mezzanine - so higher level of interest
Can be 1.5% per month
Why is bridging riskier?
Less due diligence checks – quick turn around
How would a lender manage risk?
Ensure they have first charge.
Careful consideration of LTV
What is Slotting?
The Financial Conduct Authority requires financial institutions to assign each of their performing specialised lending exposures one of four categories (a slot)
Either strong, good, satisfactory or weak
What is relevant case law on loan security valuation and negligence?
Case Law: Nykredit Mortgage Bank vs Edward Erdmann 1997
What is the Case Law: Nykredit Mortgage Bank vs Edward Erdmann 1997?
The House of Lords held that, where a mortgage lender sues a valuer for negligence, the lender’s loss is suffered at the first moment that the loan is not fully secured
This will occur when the amount outstanding on the mortgage (that is, the capital debt plus whatever interest has accrued) first exceeds the value of the lender’s rights (that is, the value of the security plus the value of the borrower’s undertaking to repay the loan)
Who does a Surveyor have a duty of care to?
Duty of care to the client/lender.
However, in some case law also a duty of care to potential purchaser.
What is a reinstatement cost estimate?
The cost of reinstating the building without making a profit. For building insurance purposes.
How is a reinstatement cost calculated?
Total build cost
+
Demolition (5% of build cost)
+
Fees @ 15%
+
VAT @ 20%
What would be the different finance rates for different forms of debt?
Mezzanine would be higher than senior.
Bridge would be higher than mezzanine.
Why should a valuer disclose any potential circumstances that could be considered a conflict to a lender?
Lenders usually have distinct internal risk and compliance policies.
A valuer’s opinion of what circumstances could give rise to a conflict may differ from the perspective held by a lender.
Explain the difference between a liability cap and a firm’s professional indemnity insurance limit?
Insurance limit = the maximum amount insurers will pay in any particular claim, as set out in the firm’s insurance policy.
Liability cap = an agreement between a member and their client, fixed when they enter into a valuation engagement.