Case Study 2

docx

School

The University of Queensland *

*We aren’t endorsed by this school

Course

BFMB2

Subject

Finance

Date

Feb 20, 2024

Type

docx

Pages

Uploaded by SuperMask12717

Dear Bill and John, Thank you for the opportunity to provide you with options to secure funding for the acquisition of a new owner occupied commercial premises aimed at facilitating expansion of the real estate business. This report seeks to offer insights into the available financing options available to you, alongside the application process and what will be required from you both to progress with the property purchase. Furthermore, the report will outline relevant financial and transaction risks associated with the procurement of the machinery. As co-directors of the company, please take the time to read and understand this important information, and ensure it is consistent with your views and reflects the information we have discussed. The recommendations posed are specific to your circumstances and address your goals and objectives in the context of your medium-long term view of business growth. Please note that that the information herein should be discussed with your relevant financial partners, such as accountant or financial advisor to ensure this meets your financial and taxation obligations and objectives. The specific details related to these options is provided below. Borrowing Structure Borrower  True Blue Investments Pty Ltd ATF Smith Jones Williams Unit Trust o ABN 24 576 576 570 (Unit Trust) Mortgagor/Trustee  True Blue Investments Pty Ltd ATF Smith Jones William Unit Trust o ACN 576 576 570 (Trustee) Guarantors  Bill Smith – Trustee Director o 33% unit holder of Smith Jones Williams Unit Trust  John Jones – Trustee Director o 33% unit holder of Smith Jones Williams Unit Trust  Loan Options Bridging Loan (with variable rate term loan to follow the bridging period) Commercial bridging loans are short-term funding solutions designed to bridge the gap between purchasing a new property and selling an existing property. Bridging loans provide the necessary funds to complete a property transaction when the timeline doesn’t align. A bridging loan is a secured loan, utilising either the new or existing property (or both) as collateral to help secure funding. Commercial bridging finance is generally provided by non-bank lenders and allow you between 1-12 months to sell your current commercial property and pay down debt levels. Given there is more risk associated with a bridging loans, interest rates and establishment fees make it more expensive than a traditional variable rate term loan. During the bridging period, repayments are generally set as interest-only until you’re able to repay the full principal amount borrowed. Any residual debt owing is then rolled over to a commercial rate loan over a loan

term of up to 30 years.  Loan Terms available up to 12 months (generally 1-6 months)  Interest rates range from 8.69% p.a. to 18.01% p.a. (generally charged monthly)  Establishment fees range from $495 - $1,500 or 0.99% - 1.35% for some lenders  No annual or monthly fees applicable  LVR 70% maximum Variable Rate Term Loan Variable rate term loans are commercial property loans that are used for funding a commercial property purchase, buying new equipment, increasing your working capital or funding other business activities. A commercial property loan is a secured facility, meaning the loan will utilise the commercial premises as collateral. If the borrower defaults on the loan, the lender has the right to sell the property to recover the borrowed funds or any potential losses. Secured commercial loans typically offer lower interest rates compared to unsecured loans or bridging loans. Additionally, secured loans may have more favourable terms and larger loan amounts available whilst providing the ability to repay these over longer loan terms to assist with business cash flow due to lower repayment obligations. You can generally choose between principal & interest or interest only repayments over the life of the loan, with most lenders allowing extra repayments and the ability to redraw these funds if required.  Loan Terms available up to 30 years  Interest rates range from 6.99% - 10.15%  Establishment fees range from $1,000 - $2,000  No annual fee or monthly fees in most cases, however some lenders charge monthly fees between $25 - $50 per month  LVR 70% maximum Following discussions with yourselves as well as your accountant, the recommendation would be to proceed with the commercial property purchase via a variable rate term loan. The general overview of this discussion is below:  80 Smith Street (sale) settlement is due in 120 days and 100 Smith Street (purchase) settlement is due in 90 days – this gap will allow you to purchase the new premises and move in with a 30 day gap between you needing to vacate your current premises to ensure minimal business disruption.  The business has ample funds to contribute a 30% deposit + associated costs and the bank/lender will require the unconditional contract of sale for 80 Smith Street to confirm the sale and exclude this debt within your finance application.  Bridging finance from the lenders requires property as security, meaning the lender would need to refinance your current debt which will have associated discharge costs  Based on your current property value, owing balance, cash contribution and required funds for the new property the ‘peak debt’ LVR exceeds the requirements set by the lenders (76% versus 70% maximum)  The interest rates and establishment fees are much higher than a traditional variable rate term loan

Overall, the commercial rate loan will provide a simple and flexible business loan solution which will allow more favourable terms such as lower interest rates and fees, longer loan term to allow for greater business cash flow and the ability to make extra repayments with the ability to redraw these funds if required. The commercial property will be held as collateral by the bank/lender, where they will hold the first mortgage. Generally, with a 20-30% deposit the bank will not require a general security agreement (GSA) however may still require personal guarantees from the directors. Loan Providers Commercial Variable Rate Loan (Secured) ING · Interest rate 6.99% (Variable) · Indicative Repayment: $5,973.49 per month (to nil) over 15 years (principal & interest) · $1,000 establishment fee · No Annual or Monthly Fees · Valuation fee applicable (not ascertainable at this time) · 15 year loan term (maximum loan term 20 years) · $665,000 loan amount · LVR 70% · Additional regular or lump sum repayments at any time with redraw available · Available for sole traders, trusts and registered companies Gateway Bank · Interest rate 7.04% (Variable) · Indicative Repayment: $5,992.09 per month (to nil) over 15 years (principal & interest) · $1,500 establishment fee · No Annual fee, $25 monthly fee · 15 year loan term (maximum loan term 30 years) · $665,000 loan amount · LVR 70% · Additional regular or lump sum repayments at any time with redraw available · Available for sole traders, trusts and registered companies NAB · Interest rate 10.15% (Variable)

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

· Indicative Repayment: $7,207.27 per month (to nil) over 15 years (principal & interest) · $2,000 establishment fee · No Annual fee, $50 monthly fee · 15 year loan term (maximum loan term 30 years) · $665,000 loan amount · LVR 70% · Additional regular or lump sum repayments at any time with redraw available · Available for sole traders, partnerships, trusts and registered companies Fees & Charges: Fees payable by you We do not charge you for our services as we are paid commission by the lender. However, you may need to pay the lender's establishment fee, or other fees depending on how your loan is structured. Other fees and government charges associated with the chattel mortgage will vary depending on the state, the amount of finance involved, and any Federal government charges which will be disclosed to you within the finance application process. How are we paid? The lender will pay a commission based on the amount financed, the commission is structured as follows: Upfront 0.66% of the amount financed (inclusive of GST) Trail 0.165% of the amount financed, calculated on the owing balance throughout the term (inclusive of GST) The exact amount paid by each lender will be included as a commission disclosure within your finance agreement documentation which will be provided to you. What security will be required ( Commercial Variable Rate Loan) First Mortgage (First Registered Interest) A first mortgage refers to the loan that is secured first in line against the commercial property, known as collateral. A first mortgage holder has priority over any other claims against the property, meaning that if the business defaults on the loan then the bank/lender will have first priority to recoup the owing balance or any losses upon sale of

the property. The lender will hold this mortgage until the loan has been repaid in full. Terms and conditions will be provided to you by the lender. Personal Guarantee A personal guarantee will be required by the lender, from you, the Directors of the company. A personal guarantee is a promise made by a guarantor that they will personally meet the obligations of the company if that company defaults to the creditor under the original, or primary agreement. Independent legal advice should be sought when accepting a personal guarantee. Supporting Documentation Required For the Application: Identification (ID) – 100 points Primary documents: 70 points  Birth certificate  Current passport Secondary (photograph and name): 40 points  Driver license issued by an Australian State or territory  Road and Maritime Services photo card  License or permit issued under a law of the Commonwealth, a State or Territory government  Identification card issued to a public employee  Identification card issued by the Commonwealth  An identification card issued to a student at a tertiary education institution Secondary (must have name and signature/date of birth): 30 points  Credit card  Foreign driver license  Medicare card  EFTPOS card Trust Deed:  Certified copy of the original document of the trust deed, including constitution of the trustee company and any amendments to the original deed Income Documentation  Last two consecutive years company tax returns  Last two consecutive years company financials (profit & loss, balance sheet)  Most recent tax return and notice of assessment for each guarantor/director  Company and guarantor/director tax portals Transaction Account/s  Last 12 months transaction statement/s for the business account less than 45 days old (showing account name, account number, balance and all transactions) Liabilities (credit cards, home loans, leases, car loans)  Last 3 months statement/s less than 45 days old (showing account name, account number, balance/limit and all transactions) Property  Executed contract of sale for the purchase property at 100 Smith Street

Documentation  Executed contract of sale for the sale property at 80 Smith Street (unconditional status required) – this is to exclude existing debt Important to Note: • If you do not, or are unable to meet your loan repayments, the lender may repossess the property. The lender may sell the property to recover outstanding amounts due. You as the guarantor/director, remain liable for any deficiency. Therefore further claims may be made against you personally to recover outstanding amounts. • If you repay your loan early, there may be fees payable. Before you sign, ensure you understand any fees or charges that may be applicable. • As the business takes immediate ownership of the property, the business takes full responsibility for the assets operations expenses such as repairs, maintenance, government charges and any required insurance products for the premises. • Before you accept any loan offer, make sure you read the credit contract/loan agreement carefully to ensure that the terms of the loan do not vary from what you require. If they do, please inform us immediately so that we can assist you. • We do not provide legal or financial advice. Accordingly, it is important you ensure you understand your legal obligations under the loan, and the financial consequences. If you have any doubts, you should obtain independent legal and financial advice before you enter into any finance agreements. Lastly, in regards to your questions surrounding the purchase price GST claim – it would be advisable that you to discuss any GST, depreciation and interest related deductions with your accountant given they are the expert in this field. Next Steps: To proceed with the finance application, please review the information above, discuss with your accountant and solicitor and revert back to me with a decision of one option from the three lenders noted above. Alongside this decision, please forward me the documentation requested. If you do have any questions in regard to this proposal, please give me a call or shoot me an email and we can discuss further. Kind Regards, Liam Pahl

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version