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Loan Security L3 EP APC Residential 2022 > *Loan Security (do first) > Flashcards

*Loan Security (do first) Flashcards

1
Q

What types of finance?

A

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

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2
Q

What are the types of debt finance?

A

Senior Debt – first level of borrowing, takes precedence over secondary/mezzanine funding.

Mezzanine – additional funding for additional monies required over the normal LTV lending.

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3
Q

Any differences between valuing for a mezzanine lender than a senior debt lender?

A

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.

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4
Q

How is the financial market supported by valuation advice?

A

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.

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5
Q

What is a SWOT analysis?

A

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
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6
Q

How would you comment on the terms of the loan?

A

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).
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7
Q

What would be a key risk of loan secured on a development site?

A

A key risk would be needing to sell the site in a part-built state.

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8
Q

What market trends are you currently aware of?

A

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.

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9
Q

How did you agree your special assumption?

A

In writing in the Terms of Engagement

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10
Q

Where can you find information on assumptions in the Red Book?

A

VPS 4 - Bases of value, assumptions and special assumptions

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11
Q

Do you still use the material uncertainty clause?

A

The RICS and my company generally lifted the clause in September 2020.

However, I still review on a case by case basis

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12
Q

How did you make sure your client was happy with the material uncertainty clause?

A

I mentioned it both within my fee quote and also in my Terms of Engagement with they signed.

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13
Q

What might have been in a title which may impact suitability of loan?

A

If the long leasehold was less than 80 years.

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14
Q

What do banks lend on?

A

GDV
Cost
MV

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15
Q

What do you consider when commenting on the suitability of a loan?

A

SWOT
MV
Level of competition
Liquidity

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16
Q

How do you minimise risk when carrying out a LSV?

A

Detailed notes
Clear audit trail
Liability in place
Up to date with CPD
Use of ‘professional skepticism’

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17
Q

If you were an SME with a limited track record – what would your finance options be?

A

More limited options - more likely high street.
Expect to pay higher finance rates – higher risk

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18
Q

What is Bridging Debt?

A

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

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19
Q

Why is bridging riskier?

A

Less due diligence checks – quick turn around

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20
Q

How would a lender manage risk?

A

Ensure they have first charge.
Careful consideration of LTV

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21
Q

What is Slotting?

A

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

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22
Q

What is relevant case law on loan security valuation and negligence?

A

Case Law: Nykredit Mortgage Bank vs Edward Erdmann 1997

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23
Q

What is the Case Law: Nykredit Mortgage Bank vs Edward Erdmann 1997?

A

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)

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24
Q

Who does a Surveyor have a duty of care to?

A

Duty of care to the client/lender.

However, in some case law also a duty of care to potential purchaser.

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25
Q

What is a reinstatement cost estimate?

A

The cost of reinstating the building without making a profit. For building insurance purposes.

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26
Q

How is a reinstatement cost calculated?

A

Total build cost
+
Demolition (5% of build cost)
+
Fees @ 15%
+
VAT @ 20%

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27
Q

What would be the different finance rates for different forms of debt?

A

Mezzanine would be higher than senior.

Bridge would be higher than mezzanine.

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28
Q

Why should a valuer disclose any potential circumstances that could be considered a conflict to a lender?

A

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.

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29
Q

Explain the difference between a liability cap and a firm’s professional indemnity insurance limit?

A

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.

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30
Q

What is a bilateral loan, and why is it the least risk area of LSV?

A

A bilateral loan = lender lends 100% of a loan amount.

From a structural perspective, these are the least high risk secured lending valuation engagements for valuers.

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31
Q

Why do lenders need a valuation report?

A

Lenders often do not have a detailed understanding of a particular property market or investment.

The valuation report will normally be used to support work of internal underwriting teams, who conduct a very subjective process of risk analysis using detailed mathematical models.

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32
Q

Why do lenders often require particular special assumptions as part of an instruction?

A

Special assumptions i.e.

  • Restricted marketing period
  • Vacant possession

Allow the lender to assess the probability of repayment of the outstanding balance from a range of different scenarios.

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33
Q

What are the two main risks to a lender?

A
  1. Cash flow can’t cover interest payments
  2. Value of the property at the end of the loan period is not enough to pay the outstanding balance of the loan.
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34
Q

What benefit can lending provide to an investor, and therefore what risk are they considering in their cash flow analysis?

A

Borrowing also provides the exposure to leverage, which is the strategy of using borrowed capital to increase the potential return of an investment.

When using the IRR as a performance measure (i.e. to compare ‘like for like’ against other investments), positive value addition along with leverage creates a higher return % than that of all equity. This is due to the investor being able to access positive returns with less of their own capital i.e. making more money with putting less in.

The counter to this is when negative values are experienced the downside is also amplified and further capital may be required to avoid foreclosure from the lender.

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35
Q

What is portfolio finance, and what criteria will the lender consider with re. loan serviceability?

A

A long-term business loan that’s offered to property investors who have a number of rental properties. The lender offers the ability to consolidate borrowing into one loan. Serviceability of this loan is based on rental income.

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36
Q

What factors will affect a lender’s ability to advance a loan using the Borrower’s property as security?

A
  • supply and demand
  • property’s location
  • property’s condition
  • lease terms
  • covenant strength
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37
Q

What RICS guidance have you had view of for LSV?

A

RICS Guidance Note: Valuation of Properties in Multi-storey, Multi-Occupancy residential buildings with cladding 2021

RICS Guidance Note: Valuation of Individual New Build Homes 2019

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38
Q

What types of properties will lenders not lend on?

A
  1. Former local authority owned properties
  2. Short leases
  3. Unusual access arrangements
  4. Restrictive Covenants
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39
Q

What are the reasonable tolerances when considering potential valuer negligence?

A

Various case law:

5 - 15% depending on value & complexity

40
Q

What research do you need to do assess matters which may affect valuation uncertainty?

A

Asset type
Economic conditions
Location

41
Q

What is a sale by restricted marketing period?

A

Lenders sometime seek this as a way of seeing what would happen to the value if the borrower were to default and the asset needs to be sold quickly.

42
Q

What discount would you apply to the value of a restricted marketing period?

A

Depending on property and market conditions:

20 - 50%

43
Q

What would you do if you suspected fraud in LSV?

A

If suspected money laundering:

  • alert senior member
  • inform MLRO
  • MLRO would submit a suspicious activity report to the National Crime Agency
44
Q

Examples of sources of fraud in LSV?

A

Identity Fraud = stolen identity used

Purchaser Fraud = nominated person disappears, they aren’t actually the purchaser

Income Fraud = lying to get a higher amount

Planning permission Fraud = supplied fictitious planning consent to procure higher valuation

45
Q

What are potential indicators of fraud in LSV?

A
  1. Unusual instructions
  2. Unusual information
  3. Requests for divergence from RB
  4. Discrepancies in borrower/property details
  5. Indication that not arms-length transaction
  6. Inflated estimates of value provided by Borrower
  7. Suspicious tenancy agreements provided
  8. Short term ownership
  9. Unrealistic deadlines.
46
Q

What makes a property suitable for secured lending?

A

If the borrower were to default, then the Bank would be able to sell the property and recuperate its costs.

47
Q

What makes a property unsuitable for secured lending?

A

Short lease – lease less than 80 years is categorised as a wasting

Location – e.g. flood area, cliff edge, next to petrol station

Invasive plants – Japanese Knotweed

48
Q

What is loan refinancing?

A

Replacement of an existing debt obligation with another under different terms.

Can be done at the end of a loan or during the life of a loan.

49
Q

Why might a borrower wish to refinance?

A
  1. Desire for increased flexibility
  2. A cheaper loan may be available
  3. May wish to release capital
50
Q

What does zero-value refer to?

A

Zero value: this refers to the practice of recommending that a property is not suitable for lending because of a risk factor in line with the lender’s policy.

e.g. EWS with combustible material.

This does not mean that there is no value, just that the lender is not prepared to lend. A cash buyer can still get a bargain, as unmortgageable does not mean no value.

51
Q

What types of loans are regulated, by whom, and when could a potentially unregulated loan become regulated?

A

Entities making commercial loans, being loans to businesses, do not require regulatory authorisations to do so.

A loan becomes ‘regulated’ when the loan is secured against a property that is currently occupied, or will be occupied in the future, by the borrower or any member of their immediate family. Such a loan would then be regulated by the Financial Conduct Authority under the residential mortgage rules.

Commercial finance can become subject to regulation when the business is provided with a secured loan against property, and the property is owned by an individual or occupied by persons related to the borrower as their home.

52
Q

How do you check the covenant strength?

A

Dunn and Bradstreet report

53
Q

How else could you check the covenant strength?

A

Companies House information
Credit report
Audited accounts
Business plan

54
Q

What does a Dunn and Bradstreet report show?

A

Dun & Bradstreet’s business credit reports allow you to quickly assess risk across an organization, uncovering hidden dangers and potential hazards, meaning you can make smarter, faster credit decisions.

55
Q

What is the Dunn and Bradstreet rating made up of?

A

Financial strength = based on tangible net worth

  • 5A - 1A - A - H
  • 5A being highest

Risk indicator = derived from D&B failure score

  • scored 1 - 4
  • 1 minimal
  • 4 high

Best tenants = 5A1

56
Q

What is a sub-prime market? Why is this topical?

A

Subprime market is where credit is provided to parties with poor credit history or standing.

Often it has high interest rate.

The risk of default is strong. Topical as this was a contributing factor to the market crash

57
Q

What does LTV represent?

A

Represents leverage level, and the greater this value the higher the risk to the lender.

58
Q

What is leverage?

A

Leverage is the use of debt (borrowed capital) in order to undertake an investment or project.

The result is to multiply the potential returns from a project

59
Q

What happened in Hart v Large 2020, and what is the resultant advice for surveyors?

A

Claimant was considering buying a property in Devon, Defendant recommended Home Buyer report. Claimant asked if the extensive refurbishment meant they should get building survey, but Defendant said it wasn’t necessary. Later transpired that lots of damp issues meant property had be demolished and rebuilt and that the Defendant should have recommended a full Building Survey.

The key take-aways from this case are relevant to the requirements set out in the new RICS Home Survey Standard, coming into effect on 1st March 2021, namely:

  • Being clear on the report about the scope of inspection including limitations, caveats and actions available to the client;
  • Recommending justifiable further investigation;
  • Taking all reasonable steps to ensure clients understand the differences between the levels of service, including the extent and limitations of each option
60
Q

What is private equity?

A

Direct investment in real estate projects (bricks and mortars)

61
Q

What is private debt?

A

A loan for the purchase of already built real estate or the development thereof.

62
Q

What is public equity?

A

Can access real estate investments through the purchase of REITs

63
Q

What is public debt?

A

Investments in debt instruments which are traded on stock exchanges – as such it has high liquidity and higher volatility than private debt. Income generated from interest payments that the borrower makes, which have priority over any payment to the stockholders.

64
Q

What is VRS?

A

Valuer registration scheme.

Must register in order to be able to sign off Red Book valuations.

Gold standard of valuation.

Provides further confidence for clients in terms of quality, high standard and regulations.

65
Q

When is VRS mandatory?

A

Must be a member to sign off Red Book valuations

66
Q

What is the aim of VRS?

A
  1. Improve quality
  2. Meet RICS requirement to self-regulate
  3. Raise and protect status of valuation profession.
67
Q

Who is applicable to apply for VRS?

A
  1. Members who have completed APC Vals to Level 3
  2. Subsequently apply for registration
68
Q

How do you apply?

A

Provide the following information:

  • type of valuations
  • purpose of valuations
  • number of valuations
  • Firm’s total fee income from RB valuations
  • history of negligent claims
69
Q

How does the RICS monitor the valuer?

A

Through the submission of their firm’s annual return

70
Q

Who has the power to remove a valuer?

A

The Head of Regulation

71
Q

Is there any further advice you include in your reports in relation to Covid-19?

A

Market conditions explanatory note: Novel Coronavirus (COVID-19)

Which comments saying that although COVID continues to affect economies, at the valuation date markets were mostly functioning.

States that it is not prepared subject to ‘material valuation uncertainty’.

Explanatory note included to ensure transparency and to provide further insight into the market context under which the valuation opinion was prepared.

72
Q

Is the DCR method suitable for LSV?

A

No.

73
Q

What is a facility loan?

A

A long term loan taken out to a company to assist its growth.

Used often in development schemes which
require projected finance.

74
Q

Things covered in VPGA 2

A

Dealing with conflicts of interest

Additional reporting requirements

Potential Special Assumptions

75
Q

Dealing with conflict of interest

A

Any previous current or anticipated involvement with the borrower or property must be disclosed to the lender

Previous involvement – usually within last two years

Instruction must be declined if conflict cannot be managed

Valuer must be independent

76
Q

Additional minimum reporting requirements

A

Disclosure of previous involvement

Valuation methodology adopted

Information concerning recent transaction of the property if been disclosed and relied upon as MV

Comment on environmental considerations

Comment on suitability for lending

77
Q

Examples of special assumptions

A

Vacant possession

Restricted marketing period

Planning consent granted

New letting on given terms

Special purchaser

78
Q

UK VPGA 10

A

UK specific guidance

  • panel agreements must be relevant to each instruction and regularly reviewed
  • reports must be solely addressed to the lender (no third party reliance unless stated)
79
Q

What is the difference between a normal conflict check and a loan security conflict checked?

A

Must disclose any previous involvement in the terms of engagement and report

Must check over last two years

Conflict check on borrower and property

80
Q

Why do you do special assumption valuations in LSV reports?

A

Provides a lender with values for different scenarios – well informed and prepared

81
Q

SWOT analysis

A

Strengths Weakness Opportunities Threats

82
Q

Important thing to remember when undertaking a SWOT

A

Remain objective!

Get colleague to review to make sure objective

83
Q

Advantages of SWOT

A

Simple framework to use/ understand
Facilitates understanding of S&W
Encourages strategic thinking
Flexible

84
Q

Disadvantages of SWOT

A

Sometimes oversimplify- focus on key items
Pace of change makes it difficult to assess
Some data based on assumptions

85
Q

Lander action points

A

Provides lender with succinct summary of items that need to be addressed/ confirmed

86
Q

Example of LAPs

A

Site Area
Tenure
Tenancy info
Fire risk assessment
EPC
Flood risk
Refurb costs
Floor areas

87
Q

Sources of risk to lenders

A

Environmental
Tenure
Lease terms
Covenant strength
Market conditions

88
Q

Debt finance

A

Borrowing money from bank

Must be paid back by an agreed date/ time

Interest accrued on loan

89
Q

Equity finance

A

Selling of shares to raise capital

Always paid back last

90
Q

Types of finance (ladder)

A

Senior debt

Mezzanine debt

Equity

91
Q

Valuers role on loan security valuations

A

Provide lender with risk level of investment and certainty that lending will be secure

Outline strengths weaknesses and areas of concern

92
Q

Loan to value ratio

A

50% to 60%

Dependent on current market situation

93
Q

What do lenders usually look at?

A

Lend on MV subject to occupational lease
(Providing good covenant/ unexpired term/ good spec)

Use VP if lender is uncertain on covenant strength/ worried may default

94
Q

Factors that affect ability to obtain finance

A

Borrower has poor credit rating
Character of the market (Covid/ poor retail)
Proof that borrower can repay loan and interest and pay remaining purchase price capital

95
Q

Negligence case law

A

Donoghue v Stevenson
Duty of care

96
Q

Advantages of debt finance

A

Preserves companies ownership as not having to sell shares

Principal payment and interest expenses are fixed and known amount assuming that the loan is paid at a constant rate

97
Q

Disadvantages of debt finance

A

Need regular income to pay regular instalments

Adverse impact on credit ratings

Potential bankruptcy of can’t pay

Loan Security L3 EP APC Residential 2022 (2 decks)

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