Banking on Property

Until the onset of the credit crunch many businesses wanting to raise funds for their business looked to their commercial property holdings. The raising of funds through property in its simplest form meant a bank lending money to a business and taking security over a company’s property. More complex structures also became popular such as "Opco" "Propco" structures and sale and lease back arrangements, by which companies would in effect sell the freeholds to their properties taking leases back at a market rental thereby creating an investment, which could either be sold to a fund or investment purchaser or allowing the company to raise money through direct bank lending.

The raising of capital at larger levels became increasingly complex through securitised and Commercial Mortgage Backed Securities arrangements (CMBS).

The credit crunch and the crash in commercial property values has meant that the days of easy money from banks willing to lend on commercial property may be over for some time.

Whilst there is some evidence that bank lending is returning for commercial property deals the market is hampered by the shortage of stock. Much of the recent increase in prices appears to have been fuelled by "cash rich buyers" who see commercial property as a better investment than cash or equities. Lending on property has remained depressed.

Future bank lending

Concerns about the economy generally will be at the forefront of banks’ lending decisions during 2010. More than ever a bank's job is one of risk assessment, especially as banks are still having to deal with borrowers' defaults in respect of loans taken out at the peak of the market. As the lending market improves banks and indeed borrowers will look to refinance existing loans.

Although it seems likely that more banks will enter the property lending market and those that withdrew from the market during the credit crunch may return, it seems certain that those in charge of credit control at banks will continue to take an extremely cautious approach to lending.

If banks do wish to lend on property in this uncertain market it is clear that they will be looking to lend only on boring bullet-proof properties.

What will banks look for?

Lenders are likely to be cautious in their lending. Although there is some evidence that loan-to-value ratios may be rising and interest margins reducing for property investment transactions, this generally would not appear to be the case in situations where a company is looking to raise money on the security of their property for their own business purposes. Banks appear to be increasingly looking towards the underlying business of the company borrowing money rather than looking at the property asset itself.

Companies that wish to borrow money for their businesses secured on property will need primarily to ensure that the business itself is sustainable. Banks will want to be seen to be lending to businesses rather than purely on a property asset. As a consequence development funding may continue to be difficult to find.

Companies that want to raise moneys on their properties will need to ensure that the titles to their properties are clean and that the properties do not contain any restrictions or problems with title, which could prevent a bank from lending.

Planning for the property’s use will have to be in order and banks will want to ensure that there are no environmental problems that would affect the bank’s security. This may be of concern to businesses that could be polluting in nature. If a property is "green" this will appeal to banks.

If a bank is to lend against a lease (such as in a sale and lease back arrangement) the bank will want to ensure that the lease is institutional in nature and suitable as an investment if it has to take steps to enforce its security and sell the property to recover its loan. The bank will want to ensure that the lease term is long enough to make the property marketable, ensure that the repairing obligations of the tenant will mean that the property is kept in repair. The bank will look very carefully to see on what terms the tenant can assign or underlet the property. If there is a rent review the lender may want to see five-yearly upwards only rent reviews. Frequently, the bank may prefer to lend on a lease that has fixed uplifts at rent review.

Banks that have had their fingers burnt by decreases in value of property, in particular where they have lent a high percentage of value, will look closely at the valuations to ensure that there is enough scope for a further fall in prices. Also, banks will look very closely at their security package and may require in addition to security over the property, debentures, guarantees from directors and rent assignments. Additionally, many banks may require the borrower to enter into financial instruments such as hedging or swap agreements.

Certain sectors may be more attractive to lenders. For example, many companies appear to be lowering their stock levels and as a consequence, warehousing may suffer.

Conclusion

Although these are uncertain economic times, many companies will be looking to raise moneys through their property holdings and despite any increase in funds available for lending, it has become increasingly difficult for companies to raise moneys on their property assets. The CMBS and securitisation market has all but disappeared and so banks will be looking to lend on straightforward terms on properties, which give rise to as little risk as possible. Indeed, many of the CMBS and securitised products soon fall due for refinancing and there is some concern in the market as to how these products will be refinanced. Companies that want to raise moneys will need to ensure that their businesses will allow for repayment of interest and the loan, and that there are no "nasties" within their property holdings that will prevent banks from lending.