Unit Holders required to produce financials???

Hello Brokers,

I have been a little stumped of late owing to some recent meetings with mortgage brokers. We are looking to start a new property trust however the MB's I have been speaking to (and bank staff) all want detailed financials of the unit holders and for them to be guarantees. In lieu of this they want to bring in a financial planner, accountant, lawyer to sign documents (basically saying we know what we are doing)

The thing that is really confusing is that they have suggested (the MB's) that we explore having the unit holders instead become 2nd mortgage or caveat lenders to get around this.

My questions are;
1. Is this for real? (unit holder financials?)
2. Is this news to any of you
3. Are other unit trusts being "caught out"

Some details:
Structure is fixed unit trust
Debt levels are < 65% LVR
Loan amount < $5 Million
Security Agricultural land
Serviceability is excellent

Regards
ComPropAgent

Edit: the unit holders are being asked to guarantee the loans when the whole point is not to have them guarantee...

 

Are the unit holders guaranteeing the loan?

 

Sorry I wasn't clear @Trainee I have edited the op

 

Generally unitholders of a trust will be required to provide personal guarantees. The trustee will be the borrower.

This is pretty common. many years ago I had a woman with bad credit rating so we set up a unit trust with her mum as trustee and the mum borrowed and no personal guarantee was required of the daughter, but i think this just slipped through the cracks.

If the unit holder owns less than 10% it might be a possibility.

You could also seek legal advice on how to structure this so as to avoid personal guarantees - except from one or two perhaps.

 

I'm often asked the question - Should my trust prepare financials ??

Absolutely YES. A trustee that fails to account for trust assets and liabilities and the income and expenses of the trust may be derelict in their obligations and it may bring into question what the trust property is. A trust should NEVER ignore this responsibility. A tax return should always be based upon the financials and a trust shouldnt just prepare a tax return.

I dont accept engagements to just prepare a tax return for discretionary, unit or hybrid trusts.

Some exceptions apply :
- A deceased estate where the executor may account for the trust property, liabilities and beneficiary entitlements in a different form of report
- Bare trusts where the bare trust wont produce financials. For example a SMSF bare trust. The trust is accounted for within the SMSF.

Lenders will often look at unitholders and seek guarantees from them as well as trustee Directors. Discretionary beneficiaries wont be asked to provide a guarantee however. But a beneficiary / unitholder who is also a trustee Director may still end up with a guarantee. Care has to be taken for Hybrid trusts or deeds which appear to be hybrid. Some lenders have fatal policies and others dont. Each lender will have different policies. Borrowing by a trustee doesnt fit with all lenders and a smaller pool of lenders occurs when a trustee borrows. And it can be impacted by Consumer v's Business debt eg a commercial factory v's a residential property. A broker often helps.

 

Really? Last trust we set up it wasn't necessary (circa 2007) only a Directors Guarantee from the corp trustee was required at the time. I am happy to provide the DG. Would you expect the same if the structure was a corporation (i.e. unitholders become shareholders)?

 

Yes the lenders would probably want to get personal guarantees from a shareholder if they are different to the directors. but I haven't had any cases involving a company where this was the case.

 

My partner works for a lender and from what I can see the lender just needs to be able to protect themselves from a loss.

In a commercial lending context, pulling in additional parties to provide guarantees is more likely when the relationships within the group might enable assets or profits to be transferred out to a related party (or, the deal is considered higher risk or outside policy).

As to unitholder financials - for an individual this is more likely to be just A&Ls & tax returns rather than business financial reports.

 

I have done them without unitholder guarantees before for a 'general use' commercial purchase, but only where we did not require the income from the unitholder to service the proposed debt. In this case, the trust had an existing unencumbered property and was only looking to borrow at 60% based on the new purchase, so basically 2x rental income and a low-ish LVR. This is sometimes called 'Lease Doc'.

If serviceability is excellent (from trust income only) then I think you could find a lender to take it on, but obviously less security = higher interest rate.

 

And don't forget these sorts of things are sort of negotiable.