Managing large transactions
QUESTION:
My clients are buying large numbers of low-value residential and commercial properties for rental income. They will consolidate their loan facilities into term lending but want me to find ways of keeping the cost and time involved under control. Any suggestions?
ANSWER:
The lender will have to make two basic assessments: will your client pay the interest and repay capital, and will the lender be able to enforce its security if the loan defaults. The lender will decide on the first question, but it will rely on outside advice on whether anything would stop it moving in to realise its security if the loan defaulted. The traditional approach is to have a lawyer check the titles to make sure the borrower has good title and there are no prior burdens to stop the lender getting a first charge. The lender will also want to know that no unknown covenants or other potential problems with title will interrupt the revenue stream or make the portfolio unmarketable.
With portfolios of hundreds or even thousands of properties, full examination of all the titles is potentially time-consuming and costly: and, of course, if it takes too long and costs too much the benefit of refinancing may be lost. One option is for the lender to agree to limiting due diligence to a sample of titles but in effect this transfers a substantial risk back to the lender. A more effective approach may be for an insurer to assess the portfolio much as a rating agency would, carry out its own due diligence and give cover against risk of loss of title, use of properties etc. for the whole portfolio. This helps manage time and cost and effects risk transfer, while the lawyer gets on with the contractual and financial aspects.
