Borrowing to invest in a unit trust

Hi all, haven't posted for a long time but have been lurking for many years.

I have a question about non-traditional investment funding that I'm wondering if anyone can shed any light on.

We have a unique opportunity to make an investment in a commercial property investment trust of very high quality. Strong returns (approx 10% per annum) are expected. However, the investment would be structured via a unit trust, with a unit certificate issued to all stakeholders. Our bank does not see the unit certificate as a useful security.

So, what I'm wondering is, in a situation where we are already pretty highly leveraged, how best to borrow to fund such an investment? Do we go to our bank and ask for the best unsecured finance deal we can get? Or, are there banks that will lend to unit holders under this sort of scenario? We would rather not use cash for the investment.

Some limited searching around the place has suggested that St George might be good at this sort of thing, but I'd appreciate any thoughts from anyone with some experience in this area.

 

borrowing ( unsecured ) to finance a ( possibly) 10% pa return .

so after interest on the loan , ( and the obligatory tax )

is this worthwhile compared to the risk .

there is a push to lift interest rates ( except so far , at the RBA )

unless your unit trust is likely to have capital gains ( as well as returns ) i can't see enough reward to attract me .

 

Thanks for the reply. The investment will have very significant capital gains. The 10% yield is also quite conservative. We are satisfied that the the risk/reward is sufficient for us.

The question really is if there are other options outside of borrowing unsecured.

 

Unless you have other security you won't be able to borrow for this sort of thing - other than a small unsecured loan.

You should also carefully consider structure. Perhaps a corporate trustee of a discretionary trust to own the units may be worth considering for tax and asset protection reasons - in case there is litigation.

ps. Don't believe all the hype.

 

Will all unit holders be borrowers? Definitely simple option here that I do quite a bit using a lease doc structure with the unit trust being the borrower and all unit holders acting as guarantor.

Servicing will not take into account the personal financials of each guarantor, only the unit trusts income and expenditure from the proposed purchase.

Being a unit trust structure, it will ONLY work if all parties are on the loan providing a guarantee. The parties will still need to provide a sufficient deposit, there must be a suitable lease in place on the property etc.

 

No - most lenders still borrow. Would need more clarification from the original poster, but it sounds like they're trying to borrow against the units themselves without serviceability assessment etc (hence why they mentioned being highly leveraged).

Pending all the right details, there isn't an issue with borrowing to buy a commercial property via a unit trust, even without personal serviceability assessment.

As per HDT's - they're pretty much dead with almost very very very few lenders willing to go anywhere near them.

 

Indeed - that's the issue.

From a lenders perspective - the commercial property within the trust isn't a value security at that point as it's not like they can repossess it, only the units themselves which don't assist the bank.

Very poor structure overall if that's the idea - it leaves an unleveraged commercial security whilst requiring external funding backed against other securities - or a huge amount of unsecured lending at 2-3x the normal interest rates available.

 

Indeed - it is the general way it's completed. The question is to how effective is with use of finite capital/security available. Especially where this sounds like a single security (and unknown value, this may be a low value purchase which could then be tying everyone up with marginal effective return).

I think of it like this - depending on the numbers, consider the ROI on injecting cash funds into a UPT with no internal gearing vs making a standalone purchase with a single name vs making a purchase with a group within a trust with standard gearing within the trust.

 

Thanks for your replies, everyone. Looks like we would need to use our own equity or cash for this particular investment, if we proceed with it.

 

Its not that banks don't lend to acquire units. What they usually do is to lend to the owner of the property. With these unit trust arrangements the unit holder is not the owner of the property so that means the bank must lend to a third party using someone else's security. This is what prevents most people borrowing to acquire units.

The last time I set up a loan like this was about a year ago and I used St George as the lender. The trustee company owned the property and mum and dad where unit holders and they borrowed using the company's property as security with the company giving a guarantee.

 

No not for this situation.