Bill Smith and John Jones – Commercial Premises Finance case Study

Task 1 — Identify the clients’ complex broking needs

It is the broker’s responsibility to understand the client’s business, potential risks, their history, experience and business performance. You will also need to understand specific aspects of the transaction such as the client’s intended goals, objectives and requirements in purchasing the property.

1. Prepare a list of questions that you would ask Bill and John in order to gather information in preparation of the loan application for their commercial property purchase.

Your questions to Bill and John should uncover the following areas:

• the reasons behind the complex trust structure they have chosen – particularly with the shareholder involvement and their willingness to be involved in the transaction with the lender
• the benefits and risks with this property purchase
• their risk tolerance with different product types (i.e. fixed rates/interest only, term of loan etc.)
• the impact this purchase will have on the business and its financial position
• anticipated costs to fit out the new premises to suit their business needs
• the business structure/key personnel risks
• the business and industry risks (e.g. required licencing and professional indemnity). (200 words)

Task 2 — Prepare complex broking options

You are required to prepare a full report for Bill and John by outlining the application process and the risks (potential and real) of which they should be aware. This must be presented in a suitable format that would be sent to the client.

You will be required to outline to the directors the product options available to them and the process that will need to take place for them to complete the new property purchase and establish the loan.

In preparation of researching the product options, you will need to understand the client’s situation and what funds will be available between the purchase and the sale settlement as outlined in the case study.

The two (2) product options for the property purchase are as follows:

Option 1: A bridging loan with a term loan following bridging period (post sale settlement)

Option 2: A variable rate term loan (to effect the purchase in 90 days time).

In developing your report, you should cover the following:

1. Who are the parties to the loan, given the Trust involvement
2. Provide Bill and John with two (2) complex loan product options

– Option 1: Bridging loan with a term loan to follow the bridging period

– Option 2: Variable rate term loan.

3. What are your recommendations of the best loan structure option, including:

• the loan amount
• security/collateral including personal and company guarantees
• the loan term
• an explanation as to why the other option is not as suitable for the clients (include pros and cons and differences in fees and interest etc.)

4. Name three (3) lenders that offer the recommended product option required to facilitate this transaction. Advise the client of the product type, loan term, interest rate, ongoing fees and monthly repayment for each of the lenders.
5. What is the procedure to implement the loan, including the documentation Bill and John are required to provide and the security they need to provide?
6. Outline the risks of which Bill and John should be made aware. Information should cover risks associated with the selected loan products and required security, including guarantees and forms of security required in addition to property.
7. Provide the name of the borrower that will be on the loan contract. Also, what name will go on the Certificate of Title (given the Trust involvement) when it is registered with the Land Titles Office? (This varies from state to state so please advise which state you are from – refer to the Toolbox for assistance to conduct your research.)
8. Prepare a full funding description including a summary of fees and charges for the purchase of the property and also the setup costs (e.g. solicitors fees) and the lender’s fees and charges. If there is a shortfall of funds, how will this shortfall be covered?
9. The clients enquired about claiming back the GST that is included in the purchase price after settlement. In accordance with your qualification as a mortgage broker, what do you advise the clients to do regarding this question?
10. You request that the client informs you of any questions about the transaction and/or provide instructions for you to proceed.
11. Advise which relevant disclosures need to be made to the client regarding the broker remuneration.

(800 words)

Task 3 — Implement complex loan structures

Bill and John have accepted your recommendations and have given you authority to proceed with their application.

As part of implementing their loan application you are required to prepare a formal written loan submission to the lender for pre-approval.

Note: Lenders have different templates, therefore, credit policies and submission requirements will vary from lender to lender.

Your loan submission must include:

• details of borrower, guarantors and their contact details
• what the business does, borrowers’ backgroundsincluding directors’ management ability
• an overview of the proposal — what the finance is for, the proposed structure and loan recommended, including:

– product type

– deposit amount (if required)

– loan amount

– term

– interest rate

– loan repayments.

• a funds-to-complete table, including statutory costs and any relevant fees
• debt service cover ratio (DSCR) calculations using information provided in the topic notes and the case study
• full details of the security being offered
• any proposed conditions relating to the loan (e.g. proof of sale of existing premises)
• the relevant risks. Include industry, business, transactional, economic and personal and how they can be mitigated
• any other information that is relevant to assist the lender provide an approval
• a list of the documents that you would attach in your written submission
• your comments and recommendations.

(800 words)

Task 4 — Verification of Applicant’s Financial Situation

Commercial/business lending is less prescriptive than consumer lending, therefore the information provided to the lender may seem quite thorough to the broker, yet once the lender receives the loan application, it is likely they will seek further information and clarification.

Task 4: Question 1

(a) Identify a minimum of four (4) areas where the lender may require additional information.

(b) What financial services professionals could you engage if you were not able to answer all of the lender’s enquiries?

(c) If you needed to escalate any risks or concerns, who would you engage within your own organisation to assist?

Task 4: Question 2

In task 2 you obtained the client’s agreement to proceed with the loan application. In accordance with regulation, legislation and codes of practice, where should this information be recorded?

Task 4: Question 3

When identifying commercial borrowers and directors, legislative requirements concerning AML/CTF verifications must be met. What checks would you complete to meet these requirements and what would be two (2) possible impacts if you did not complete these checks.

Task 4: Question 4

In Task 1 you identified potential risks for Case study 2, Bill Smith and John Jones.

Choose three (3) risks that you identified and develop recommendations on risk management strategies that would help to mitigate these risks.

Student response to Task 4: Question 4

Task 4: Question 5

Following your review of the borrower’s financial position, compare their current and future outgoing commitments once the new loan is initially in place.

(a) What are the two (2) key impacts/changes to their cashflow?

(b) What is the change in the amount of their outgoing commitments? Demonstrate how you arrived at this figure.

Please note: you are not expected to discuss any GST or taxation implications.  

Task 4: Question 6

(a) Refer to Task 3 and list at least two (2) of the security instruments to be used for this transaction.

(b) What would the impacts be for the individuals and/or companies if the lender was to call upon the securities?

Task 4: Question 7

Provide two (2) examples of any legal, financial or other issues that the client should be aware of when applying for credit in the name of a trust — for example, additional documentation that may be required, taxation issues or fees.