Urban myths and standard modules
I was going to call this month’s column The 10 myths of finance but recent events have caused me focus on myth number 1.
That is ” the banks won’t fund standard module 10-year agreements”. I am hearing this feedback from potential purchasers, sales agents and existing operators and it’s simply not true. Certainly different banks have different credit policies and within those policies some managers will interpret things differently.
This is as it’s always been with lender credit guidelines and so far as I can tell, among the traditional management lenders, not much has changed. Unfortunately there are banks out there who advertise their support for the industry while undermining a substantial portion of the market by talking down the opportunities that exist in the standard module management rights businesses. We are currently dealing with a number of clients who have not only been told by various major banks that they can’t help with finance but have also been told not to buy a standard module regulated management rights.
In the cases we are looking at right now we can place funding on favourable terms but the buyers are understandably spooked by the feedback they have had from the so called market experts in finance.
Here’s the thing. Some bank credit policies don’t fit 10-year agreements and some do. I think its fine for a banker to decline a deal but incredibly unprofessional to suggest that the purchaser should not buy an asset just because of an unimaginative credit policy. The banks that continue to support the industry via reasonable credit policy will assess a 10-year agreement on the following basis.
• Maximum 70 per cent all up lending against the combined value of the unit and rights
• Of the total lending 80 per cent of the unit value allocated over a maximum term of 25 years with the first three years interest only if required
• The balance debt over a maximum term of 10 years with interest only sometimes available
Essentially these lenders understand that the unit is not going to magically disappear should the agreements wind down to zero after 10 years with no top ups. They also understand that most standard module buildings have historical evidence of top up approvals with instances of agreements being left to come to an end being very rare. Of course, these same banks will lend 80 per cent or more for a residential house purchase to a borrower who certainly doesn’t have a guaranteed income for 10 years so they see the risk as being acceptable given standard home lending practice. Makes sense.
The debt servicing test is then applied in terms of capacity to repay the portion of debt notionally secured by the rights over 10 years. If the borrower can demonstrate capacity to repay in full over nine years then one year interest only is possible. If the agreements get topped up then the term of the debt and the interest only period can be renegotiated. If the borrower has substantial supporting security or additional income such as rent or an ongoing job then these loan terms can be negotiated on even more flexible grounds.
So why the recent negativity in respect of finance for standard module agreements?
Here’s a theory. There has been a steady trend of foreign buyers into the management rights industry and many of these buyers are looking at permanent management rights. Many permanent schemes are regulated under the standard module. The buyers tend to gravitate toward one particular major bank. That bank has an interesting credit policy that takes the agreement term and deducts three years, then the debt service calculations are done. Essentially the debt service test is being done over seven years and that bank treats the entire purchase as a commercial transaction so it’s all the debt over seven years. Virtually no standard module building can meet these guidelines and the deal gets declined.
The message this significant buyer segment is getting from the bank is that standard module buildings are risky and best avoided just because they don’t stack up against a very odd and uncommercial credit policy.
My suggestion to buyers is to engage someone who can articulate exactly what the banks will do and navigate through the minefield of bizarre credit policies and personal agendas. Good quality standard module management rights with strong historical top up evidence and decent incomes can be financed on favourable terms via mainstream banks. It’s that simple.
In conclusion, I’m not bagging the banking industry here and certainly we and our clients appreciate the tremendous support we get from the seasoned professionals. It’s just that if you are a lender promoting support for the management rights industry but then knocking 30 per cent of buildings (my best guess for the number of standard module regulated management rights) maybe time for a bit of reflection and maybe a more balanced approach.
