Property loan books are under scrutiny – how to get on the front foot

By Jason Martin, property expert at Leonard Curtis

The recent turmoil in the financial markets may have started to settle down, however concerns over the economic outlook remain.

Given this volatile background, we are not surprised that we have seen an increase in the number of requests for assistance from borrowers in the commercial real estate sector.

Specific to this sector, affordability (mortgage payments as a share of take-home pay) is at its highest level since the financial crash and a fall in house prices is widely predicted.

Residential developers are already seeing buyers’ enquiries falling at a sharp rate. Investors are coming under pressure to meet increased debt servicing costs when they are struggling to pass these onto their tenants.

The cost and availability of building materials continue to be viewed as major challenges for the construction and house-building industries, particularly for SME contractors on fixed price contracts.

In light of this, we expect lenders will now be reviewing their loan books to identify both under-performing loans and which customers look likely to have future problems.

They will then be formulating action plans to either rehabilitate the loans or exit these borrowers.

Here are eight tips for a business owner who thinks they might be facing issues with their lender:

Be proactive: Do not ignore the problem. Being upfront with your funder will gain you credibility and may help any request you make to be viewed more favourably as you have introduced a solution rather than just left them with a problem.

Review your facility documents: Remind yourself of the terms of your loan and any covenant requirements that need to be adhered to. There will be key covenants that should not be breached, such as loan to value % or debt serviceability ratios (debt to rent coverage).

For development loans it could be gross development value or loan to cost covenants. Many businesses are unaware they are in breach until it’s too late.

Fully understand your position: Are your financial accounts up to date? Make sure tenancy schedules are accurate. When are any lease reviews due? What management information is produced to help you manage your portfolio?

Understanding what you are asking the lender to do and for what reasons is key. The worst position to be in is to secure a restructure package only to have to go back and change it quickly afterwards. The lender will soon lose confidence in your ability to manage risk and evaluate options.

Appraise your future cash requirements: This will help to identify funding gaps and take steps to mitigate your position. Forecasts should be prepared on a sensitised basis to account for unexpected price rises and delays to payments, which is particularly important for construction companies.

You are then showing the business’s resilience to change which may impact on your ability to manage your loan and then building that headroom into your negotiations with your lender.

Reassess your property values: This is critical if you are at risk of breaching a loan to value covenant or anticipated property sales could result in losses for you and/or the lender.

Be realistic and take advice where necessary. Lenders will probably have the right to have your portfolio formally revalued at your expense, so coming to an agreement with your lender about your properties’ current value may save you money.

Formulate a recovery plan: Your lender would much prefer to work with you to implement a recovery plan rather than impose one on you so identify essential expenditure e.g. house builders should make sure they can make their properties mortgageable by ensuring new build warranty premiums have been paid.

Have a “Plan B”: Lenders may not agree to your initial proposal. In a worst-case scenario a consensual disposal plan or managed exit will provide a better outcome and help reduce potential personal guarantee liabilities.

Talk to your trusted advisers: Your accountant, solicitor and property specialist will have seen similar issues many times over. They can add real value to your business, so see how they can help you.