Equity Release Option on Commercial Property
Date: 2009-07-14
You’ve been offered a lucrative contract or an opportunity that will boost your business to a higher level, but unfortunately you will require a substantial capital injection to take advantage of this prospect.
You approach your current bond holder for a further advance on your commercial property. Based on your business financial statements, the bank declines your application, stifling your business and all its future growth prospects. It is all about serviceability based on past history. Does this sound familiar?
Another obstacle in companies obtaining credit will be the implementation of the New Companies Act in July 2010, which allows for businesses to apply for a “business rescue plan” when in distress, without prior notice to its creditors, temporary protecting the company from any claims by the creditors. This will have the same effect on commercial lending as National Credit Act had on individual retail lending.
How will you raise this much-needed capital? You can put your property up for sale on the open market, which could take months. If time is a factor, you could have the property auctioned, but you must be prepared to take a knock on the price. Unless, you have the good fortune of having a cash buyer, both these options are not conclusive on receipt of an offer to purchase. The purchase needs to be financed and the banks still have the final say.
Alternatively, you could sell you property to a property fund, quickly releasing the equity available in the property, simultaneously entering into a legal enforceable buy-back option to be exercised within a pre-determined mutually agreed upon date. The fund will warehouse the property for you and it may not dispose of it or encumber the property in any way during the period that it is being warehoused.
The requirements
• Only commercial properties will be considered
• The entity current owing the property must be VAT registered.
• Valuation will be based on capitalization rates and average rental income per square meter in the area.
• The minimum transaction amount is R2.5 million and the maximum is R20 million.
The advantage
• No time spent on waiting for the property to sell, as soon as an agreement between you and the property fund has been concluded, procedures for transfer of the property will commence.
• Net income of the property can be offset against the interest charged.
• Client can exercise his option to buy-back the property earlier than initially agreed upon date, without paying any penalties.
• You can buy back the property at the price that you sold it for, provided you didn’t capitalize any costs or interest.
• All cost related to servicing the property e.g. insurance, rates and taxes will be borne by the property fund.
This product is not for everybody and is not another means of financing an average commercial transaction. It is designed for businesses requiring a short-term capital injection, where the all commercial bank options have been exhausted. While this may not be the most cost-effective means of financing a commercial property, it remains a good option for businesses with future growth prospects, but with limited liquidity.
Tess Rodrigues
Managing Director