Tom Howells, Legal Director at Signature Property Finance
We’ve said it before, and we’ll say it again, but in our line of business, clarity means everything. Deals that involve such tight timescales, huge amounts of capital and a complex legal infrastructure should only ever be approached in an upfront, open and honest manner. Otherwise, it’s likely that the deal might falter at the first hurdle.
At Signature Property Finance we appreciate that each deal will have its own individual nuances, but often for us, it’s a case of taking all those tricky jigsaw pieces and using them to build a bigger picture.
One such example is when it comes to deposits. Essentially, we need to understand as early as possible in the transaction where the shortfall of funds that the client is bringing into a deal is coming from. This is because the source of a deposit can impact the trajectory of a deal and result in all manner of legal considerations.
There are various potential sources that a client can use for their deposit, here we take a look at some of the most common ones and assess how those sources can dictate the structure of your financing deal:
Was your money gifted?
Money held in savings might be the most obvious solution. That money might be from an income, or from a gift, but it helps us to get loans drawn down quicker if we know the full story on day two, rather than finding out late in the day.
If the deposit is solely made up of the borrower’s savings, then all we would need to progress the deal would be an explanation as to how those savings were amassed along with supporting documentation such as bank statements or payslips.
For individual borrowers then the above also applies, but where money has been gifted, this should be outlined to us at the earliest opportunity. With gifted money, we need to be confident that the person who gave the cash does not have an interest that carries into the purpose of our loan. An example might be that the donating party expects some kind of profit share or interest payment in return. If this is the case, the entire finance deal will be scuppered.
However, if it is just a straightforward no-strings-attached financial gift, simple documentation confirming that it has been made in good faith, is non-repayable, and that the person who made the gift does not hold any interest in the subject property, should be enough for us to progress.
Are you a corporate borrower?
For corporate borrowers, it gets a bit trickier but there are solutions to most scenarios. Firstly, as above, savings or income that the company has accumulated is completely acceptable as a deposit source. All we would need is the same explanation and information as previously outlined. However, a more common situation is when an SPV has been set specifically to acquire or develop investment properties. In this instance, generally, there will be a Director’s Loan already in place, or there will be intentions for this to be set up whereby a Director will loan funds to the company.
Whilst this is fine in principle, it needs to be documented properly via a subordinated loan agreement to ensure that the lender is not at risk.
Often, this will be a piece of information that is given to us quite late in the day, however, and as such it will slow the application down whilst we prepare for additional documentation to be drafted and signed. When we know about these kinds of scenarios from the outset then we can prepare the documents early and avoid any unnecessary delays.
Are you working with another company?
As a general rule, the more complexities surrounding deposit arrangements, the sooner we need to know about it. Inter-company loans are a prime example of this.
Inter-company loans, in essence, will see Company A loan funds to Company B (the Borrowing company for our loan as well). These deals are even more intricate to navigate and involve additional due diligence into both companies to ensure that they are not prejudicial to us.
There are various ramifications for the lender and the other parties involved where inter-company loans are concerned, and these will require due diligence on an even greater scale so the potential for significant delays in completing a deal is already heightened. So not being clear about this situation from the get-go could see key deadlines being missed or deals being derailed altogether.
We cannot stress enough the significance of clarity. Property finance is a juggling act and to keep the balls in the air everyone involved needs to play their part and be clear about who’s doing what, why, and when they are doing it.
Once we know the situation you are working in, we can provide a solution that benefits everyone to a timescale that meets your demands. Delays in communicating with us will result in delays in sealing the deal. Very simply, it will cost you time, which will ultimately cost you money.