Loan Security Valuations Flashcards
3 things covered in VPGA 2?
- Dealing with conflicts of interest
- Additional reporting requirements
- Potential Special Assumptions
Guidance on dealing with conflict of interest?
- Any previous, current or anticipated involvement with the borrower or property must be disclosed to the lender.
- Previous involvement - usually within last 2 years.
- Instruction must be declined if conflict cannot be managed.
- Valuer must be independent.
Additional minimum reporting requirements?
- 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
Examples of special assumptions?
- Vacant possession
- Restricted marketing period
- Planning consent granted
- New letting on given terms
- Special purchaser
What is UK VPGA 10?
Provides 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)
What is the difference between a normal conflict check and a loan security conflict check?
- Must disclose any previous involvement in the terms of engagement and report.
- Must check over last 2 years.
- Conflict check on borrower and property.
Why do you do special assumption valuations in loan security valuation reports?
Provides a lender with values for different scenarios - well informed and prepared.
What is a SWOT analysis?
Strengths, weaknesses, opportunities and threats
Important thing to remember when undertaking a SWOT?
- Remain objective.
- Get colleague to review to make sure objective.
Advantages of SWOT?
- Simple framework to use/ understand.
- Facilitates understanding of strengths and weaknesses.
- Encourages strategic thinking.
- Flexible.
Disadvantages of SWOT?
- Sometimes oversimplify - focus on key items.
- Pace of change makes it difficult to assess.
- Some data based on assumptions.
What are lender action points (LAPs)?
Provides lender with succinct summary of items that need to be addressed confirmed.
Example of LAPs?
- Site Area
- Tenure
- Tenancy info
- Fire risk assessment
- EPC
- Flood risk
- Refurb costs
- Floor areas
Sources of risk to lenders?
- Environmental
- Tenure
- Lease terms
- Covenant strength
- Market conditions
What is debt finance?
- Borrowing money from bank
- Must be paid back by an agreed date/ time
- Interest accrued on loan
What is equity finance?
- Selling shares to raise capital.
- Always paid back last.
Types of finance (ladder)?
- Senior debt
- Mezzanine debt
- Equity
What is valuers role on loan security valuations?
- Provide lender with risk level of investment and certainty that lending will be secure.
- Outline strengths, weaknesses and areas of concern.
Loan to value ratio
50-60%
Dependent on current market situation
What do lenders usually look for?
- 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
Factors that affect ability to obtain finance?
- 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.
Advantages of debt finance?
- 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.
Disadvantages of debt finance?
- Need regular income to pay regular instalments.
- Adverse impact on credit ratings.
- Potential bankruptcy if can’t pay.
What advice would you provide to the Bank following Mini Budget?
- Market explanation clause
- Volume of transactions stagnated - lack of data from September onwards (after Mini Budget) so unsure on what impact it had on prices.
- Perception that values started to fall and transactions that are being completed are subject to price chips
- Market adjusting to increased interest rates, although primary markets are not affected as much as secondary/ tertiary markets
- Borrowing cost increased - likely to impact prices buyers are willing to pay
