Borrowing to invest in a unit trust

Discussion in 'Finance & Banking' started by C3PO, 30th Apr, 2017.

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  1. C3PO

    C3PO Well-Known Member

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    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.
     
    Last edited by a moderator: 30th Apr, 2017
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  2. twisted strategies

    twisted strategies Well-Known Member

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    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 .
     
  3. C3PO

    C3PO Well-Known Member

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    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.
     
  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    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.
     
  5. Corey Batt

    Corey Batt Well-Known Member

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    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.
     
  6. Simon Hampel

    Simon Hampel Founder Staff Member

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    Are banks simply not lending on units in unit trusts anymore?

    How was it that people were getting finance for hybrid trusts then? Or has that changed along with the disapproval of the ATO for most of these types of arrangements?

    I would have thought that since there was a real asset backing those units, they would have some real value - although I guess that since they wouldn't be able to force the sale of the asset to recover their money if the loan was defaulted on and the units are potentially illiquid with no ready buyers ... so I guess the risk to the lender is significant.
     
  7. Corey Batt

    Corey Batt Well-Known Member

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    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.
     
  8. Simon Hampel

    Simon Hampel Founder Staff Member

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    That was my understanding of the OP ... there are multiple parties, each being assigned units in a trust which will hold the asset. The trust isn't doing the borrowing, the parties would need to source their own finance - hence borrowing against the units themselves.

    I suspect that's where the issue lies (the quality / liquidity of the security on offer - being the units themselves rather than the underlying real estate), much more than any serviceability questions (which obviously play a role too).
     
  9. Corey Batt

    Corey Batt Well-Known Member

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    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.
     
  10. Simon Hampel

    Simon Hampel Founder Staff Member

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    Isn't this common for an unlisted property trust though? A simple unit trust owning the assets and people are expected to bring their own capital to invest?

    Presumably it's less of an issue for most UPTs because there would be an associated PDS and you typically have quite a few (ie more than 20) investors and so the minimum investment amount would be somewhat smaller than what we are likely talking about here.

    Or is this not common anymore? I haven't looked at UPTs since well before the GFC.

    A quick Google shows that management companies such as Trilogy Funds will typically arrange internal gearing (usually below 50%) for the funds they manage.

    Now that I think more about the logistics of it all, I think you are correct, @Corey Batt ... the only way something like this can work effectively is if the unit trust were to arrange internal gearing - and thus the capital required from investors will be substantially less than it would be otherwise (but it still may be a showstopper if people simply don't have access to that amount of capital ... we're talking 50% gearing or there abouts ... not 85%+).

    I'm interested to hear more details from @C3PO about the structure - since this is something I did start looking at in the past.

    I'd also be interested in hearing about the planned exit strategy - since there is no guarantee that the units will be liquid.

    Most UPTs are operated on a fixed term and it is assumed that you will most likely be unable to redeem your units until the term is up - at which point the property is sold and any net profits distributed to unit holders.

    If that's not the plan here, I'd like to learn how they intend to manage that.
     
    Last edited by a moderator: 2nd May, 2017
  11. Corey Batt

    Corey Batt Well-Known Member

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    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.
     
  12. C3PO

    C3PO Well-Known Member

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    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.
     
  13. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    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.
     
  14. Simon Hampel

    Simon Hampel Founder Staff Member

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    But that wouldn't really work in this situation where there are presumably multiple distinct and possibly unrelated parties who are the unitholders?
     
  15. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    No not for this situation.