Loan Security Flashcards by Cally Nugent

what role does debt finance play. can you give me some examples of debt finance?

existence allows people to borrow money. insures fluidity in market, driving the market and leverage returns which also reduces risk exposure.

loan/mortgages, credit cards

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What are some of the risks with secured lending for the bank (lender)?

the tenant defaults and cant pay their loan. higher risk for the bank.

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how do you deal with sold off long leasehold interests?

990 year lease and the rent is peppercorn therefore i didnt capitalise the rents.

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why are title searches/ report on title important for loan security?

rights of way, site boundary, summary of previous lease details in order to check if its suitable for loan security. restrictive covenants- stating not for specific use.

always receive from client.

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What additional elements did you include in the Terms of Engagement to comply with the Red Book?

Any previous involvement must be enclosed within terms of engagement. Any involvement past 2 years needs to mentioned.

make sure can act independently/objectively

loan amount

due diligence- environmental/ flood/ contamination reference

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how do you establish if strong covenant strength?

CreditSafe

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Why do we use SWOT analysis in loan sec reports?

for client to check if it is suitable for lending Gives them more info for them to base their loan terms off and assess and to weigh up the risks/rewards

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How did you establish what is within a reasonable tolerance when measuring?

typically 10% but my firm use 5%

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what are three VPS standards.

VPS mandatory

VPS 1 Terms of Engagement

VPS2 inspection- must always be carried out. Any restrictions must be identified and recorded in the terms of engagement and in the report.

VPS3 Valuation reports- states whats included

VPS4 Basis of value- make sure appropriate method for purpose of valuation,

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Why do we value on the special assumption of vacant possession?

giving client/bank worst case scenario - how much is the asset worth if the tenant defaulted

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Balham- How did you reflect restricted access in your opinion of market rent?

looked at comps found some with restricted access

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Balham- what would you do if the unit was sold without an updated EPC rating however there was planning for the building to be refurbished?

i would say the property met the requirement if it was EPC complaint once done the works.

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What made it suitable for loan security? How did your advice impact your client?

if property was to fall vacant client/bank would be able to sell the asset without any issues for same value bought it for

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what is VPGA2 and what does it focus on?

guidance on secured lending NOT MANDATORY

deals with:
independence, objectivity and conflicts of interests
basis of value and special assumptions
reporting and disclosures

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conflict of interest. what must you do?

check internal software Salesforce

Must act objectively and impartial
must declare conflicts of interests- must state no previous, current or anticipated involvement with the borrower, or prospective borrower.
‘Previous involvement’ would normally be anything within the period of 24 months preceding the date of instruction.

must act independently.

Send email round the office to check if conflicts exist.

Must check if it meets rules of conduct

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should special assumptions be included in terms of engagement

yes

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what is included in terms of engagement for secured lending?

previous involvement within the last 24 months with the borrower or the property must be stated.

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retail parade- notting hill

what were the banks reporting requirements?

they required the value the property with reference to the special assumption of vacant possession, environmental issues such as floor risk, valuation method adopted

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example of special assumptions

planning consent granted for development at the property

Restrictive marketing period- 3 months

Vacant possession- 10-15% off value

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what to include in the report

purpose of valuation, valuation date, conflicts, basis of value adopted, disclosure of recent transactions, suitability for secured lending, environmental issues (flood risk, contamination) disrepair, covenant strength, market rent, assumptions and special assumptions

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what does VPGA 2 stand for? and where to find in the red book?

Valuation Practice Guidance Applications. Part 5 of Red Book.

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how do loan security valuations differ from accounts vals in terms of reporting?

report must contain more info regarding the instruction.

valuation methodology adopted
environmental considerations- flood, contamination
suitability for loan security
special assumptions
lenders action points

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what is a red book complaint valuation?

valuation undertaken by a qualified surveyor following RICS set of global standards.

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what does limiting reliance mean? are you still liable for advice orally?

lender can only rely on the valuation for specific purposes, usually for assessing the security of a loan, and cannot use it beyond the agreed scope.

If requested to do so colliers must be notified and appropriate measures put in place.

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how did you structure your fee?

scope of instruction- staff availability, if measurements involved

what liability cap did you set?

30% highest liability cap.

definition of ARY. why this approach? could you have used another method?

all encompassing yield that reflects all risk and rewards of property at that time. used for rack rented properties. CR=MR

where is Aylesbury?

north london, between oxford and luton

did you have sight of the loan terms? what was the loan to value?

LTV= 60- 70%

key professional standard

RICS Professional Standard: Valuation of leasehold properties for secured lending purposes 2021 comparable evidence in property valuation

what were the risks associated with Retail Parade- Notting Hill. Can you detail the SWOT?

short unexpired term, weaker covenant strength of 2 units

what was the specification of the two industrial units in Balham?

40% site cover eaves height- 7 meters steel portal framed profile steel cladding

how did this instruction come about?

existing relationship

what is covenant strength and what do you look at?

financial health of business look at net worth, pre tax profit

L.3 Retail Parade: what was the vacant possession value? and why did they require it.

worst case scenario in case tenant defaults no income therefore more likely bank wont receive interest.

what is the fee quote based on?

scope of instruction

Aylesbury- describe the property?

Masonry construction, 1,700 sq ft.

Aylesbury- how did you value this property?

using the investment method- property was rack rented used ARY

when is the comparable method used?

everything APART from retail as they aren't of the same pitch, size shape, harder to compare. Value is specific to each individual unit

L3. Notting Hill- how did you assess the asset was reversionary?

market rent higher than current rent under rented- rent was agreed a couple of years prior and expiring in .. 3 years T&R used to isolate passing income capitalising reversionary income

L3. Notting Hill- Talk me through your process for choosing what rates to adopt?

I capitalised each unit at different capitalisation rate to reflect the covenant strength, lease term. Then looked at the resultant yield profile for the whole asset and compared it with other comparable multi let retail units. stronger unit- lower yield of 5% weaker units- higher yield of 7%

L3. Notting Hill- How did unexpired terms impact the yields you adopted?

two units that had shorter unexpired- higher yield long unexpired term- lower yield

MV of Notting Hill Example

£800sqft

What was the resultant yield profile?

Net Initial Yield Equivalent Yield Reversionary Yield

why was vacant possession value lower than MV?

Market value- includes the benefits of existing lease and secure income, increasing its appeal to investors. Vacant possession value- reflects risks associated with a lack of income, letting costs, and market uncertainty, often making it lower than market value.

Industrial terrace- Balham- What was the profile of tenant demand? What type of occupier?

local occupier small business

Industrial terrace- Balham- Walk me through the restriction and how you accounted for this?

located in the middle of a residential area, with a narrow access to the site in between the houses. In my opinion, the type of occupiers we would expect to occupy the unit would not deter demand.

Industrial terrace- Balham-Why would it impact marketability? How did you account for this in your valuation?

What makes a property Suitable for Loan Security? What does this actually mean?

no ominous clauses on the title document. income stability- strong covenant strength marketability

Industrial terrace- Balham-What was your MV and MR for this property?

£450/sqft MV £25.00/sqft MR

what is quantum

the more you buy the less you pay individually on per unit basis

Westbourne Grove- zoned rent sqft

£150 sqft- return frontage £125 sqft- terraced

what approach for Wesbourne Grove?

term and reversion

yield Westbourne Grove?

6.5%- poorer covenant, shorter WAULT 5.5%- better covenant, longer WAULT 6% REVERSIONARY

VOID Westbourne Grove

12 months 6 rent free 6 marketing

Loan to Value ratio

70%

Westbourne Grove MV

£800 SQFT £5m

Whats the office market like in Aylesbury? What are prime rents and yields there?

not established office location however as this unit was small and recently let i was of the opinion the demand would be strong. prime rents- £16-20 sqft prime yields- 6-7%

Aylesbury- what is a reasonable tolerance with cross checking areas?

10% is but we aim for 5%

What are the risks associated with reporting for secured lending?

if give wrong value to property then possibility of being sued.

In what ways do you mitigate risk as a valuer?

clearly state scope of their instruction in T of E covered under PI insurance and have liability cap, usually less than 30%

What does the RICS state about limiting reliance?

terms should state that only the named client can rely on the report

Aylesbury- Why was ARY most appropriate? What was an appropriate rate? How did you choose this?

My comparable evidence was also rack-rented, like the subject property Then cross checked the NIY against comparables

Balham- what do you do it occupier didnt update EPC rating?

capital expenditure- to carry out EPC rating- usually costs around £100 to undertake would deduct this from cashflow

what is a lenders action point?

things the lender (client) must consider to safeguard their interest in the property. Valuers provide detailed recommendations and justifications in the valuation report to ensure lenders can make informed decisions about property-related risks.

different loans?

senior loan- first loan mezzanine- bridging loan- expensive

why do banks want restrictive marketing periods?

- clear expectations on how quickly the asset should be brought to market - Enhanced Predictability, if tenant defaulted how quickly would it re-let

how do you discount for restrictive marketing period?

discount from mv look for comps with similar restrictive periods gives a more realistic value of property

what is in a title register?

Property Description Tenure Information- freehold, leasehold, previous owner(s) Restrictive Covenants Boundaries and Boundary Responsibilities