The current lending market is certainly challenging for property developers, even those that have significant experience and a strong track record with a good project in a desirable location. It can sometimes be even more uncertain when, after lodging an application with a Financier, correspondence is received which appears at least at first glance to appear as a formal offer.
But how reliable is the document?
“Offers” from Lenders can take many different forms and I have outlined a few of these below:
Indicative Offer / Terms Sheet - Typically this will be the first correspondence issued by a Lender in response to a loan application. It will generally set out the Lender’s terms and conditions, including any special conditions and indicative pricing (interest and fees), that the Lender is prepared to consider the transaction on. A Borrower must understand that this does not represent an Unconditional Approval and will typically include a number of disclaimers confirming this. Depending on the Lender’s in-house processes the transaction may or may not have been presented to the internal decision makers. In a tender process, a Lender may issue a Terms Sheet to get a “seat at the table” for the next phase in the loan application process.
The Terms Sheet will often list the additional information required by the Lender to formally consider the loan application. At this point the Lender has no obligation to fund your project.
In recent times HoldenCAPITAL has witnessed first-hand Lenders, including the Major Banks, withdraw or materially change their terms of a Terms Sheet that has been issued. This can be done at the Lender’s absolute discretion and could relate to events unrelated to the Borrower or their project such as global economic changes.
Credit Approved Terms Sheet – Sometimes issued by Lenders, more often by Banks to at least demonstrate that the loan application has been presented to the internal decision makers. Once again, this document does not represent an Unconditional Approval. It merely highlights that the Lender’s internal decision makers have indicated a willingness to consider the proposal on the terms set out to the “front line” team i.e. the person or persons that the Borrower or Broker acting on behalf of a Borrower is dealing with, to issue this Terms Sheet.
Letter of Offer – This is issued as confirmation that the internal decision makers have formally approved your loan application. The Letter of Offer will still include loan conditions that must be satisfied by the Borrower and these will typically be listed as Conditions Precedent (to be satisfied prior to Financial Close and or the first monetary advance) and Conditions Subsequent (to be satisfied by an agreed date or post the first drawdown).
An example of a Condition Precedent for a Construction Facility may be that the Borrower needs to achieve an agreed level of presales to achieve sufficient debt cover for the Lender. Borrowers should be aware that the Lender will still reserve the right to withdraw its offer in the event that it identifies an issue which it considers may be prejudicial to its position if it continued to advance the funds.
Once a Borrower has accepted the Letter of Offer, the Lender will then instruct lawyers, which can either be in-house or external to draft the necessary loan documentation. Only after the Borrower and any Guarantors have executed all loan documentation and all Conditions Precedent are satisfied to the Lender’s satisfaction, will a loan be available for drawdown.
The process for a loan application will vary from lender to lender. Banks typically require the loan application to be reviewed by a number of internal parties before an Unconditional Approval is issued. This could include:
- the Relationship Manager (i.e. the “front line” or the person a Developer first meets to discuss their requirements);
- Property Risk – an area of the Bank that forms part of the “Risk” team that is principally charged with assessing the property risks associated with a transaction and the Bank’s entire property loan book. This would usually include instruction and review of valuations, Quantity Surveyor reports in respect of any build cost, a review of Building Contracts and Tri-partite Agreements, concentration risk in terms of asset classes or geographically, assessment of Sponsor, Builder, project, etc.
- Credit Risk – The ultimate decision makers who are responsible for assessing the loan application and will take into consideration any recommendations made by Property Risk team. Depending on the risk profile &/or size of the transaction, decisions can sometimes require more than 1 sign off.
Non-Banks do not typically have as many layers in the decision making process and may be less demanding in terms of the external consultant reports when compared to the Banks but will normally have some form of Credit Committee charged with the responsibility of reviewing the application and making credit decisions.
The HoldenCAPITAL team has more than 116 years direct property finance experience and have worked for a number of the Major Banks in Australia and are therefore highly qualified to guide property developers through the lending process. Contact one of the HoldenCAPITAL team to assist you with funding your next project.