How to unlock value through work-out
solutions
"Our recommendation to lending clients
faced with defaulting property loans, is to avoid the temptation
for a fire sale of the assets, and undertake a ‘work out’ solution
prior to a sale."
In January 2007, the US Government introduced legislation
requiring investor institutions to declare all types of investments
in their company accounts. It meant that every investment needed to
be assessed on its value. This exercise unearthed a large number of
worrying US residential investments which had little or no value.
The knock-on impact was colossal and spiralled into the worldwide
crash we are now all experiencing.
Current market conditions mean that our clients can rarely
borrow for investments and developments and the values of property
have decreased annually by up to 20%. The effect has been that many
banks have schemes that breach the agreed loan to value ratios with
additional equity being required to fill the gap. In some cases,
the developers are not even able to pay off the interest.
As a result, the lending banks have an unprecedented volume of
defaulting property loans across Europe.
Our recommendation to lenders faced with such situations, is to
avoid the temptation for a fire sale of the assets, and undertake a
"work out" solution prior to a sale.
A work-out solution will state the financial exposure, and
propose a plan to mitigate losses and maximise values from
defaulting loans. It is best carried out by an integrated team of
experts.
Our case studies demonstrate that funders recover 25% higher
values from a work-out solution.
Typically, a built asset consultant will achieve this with the
funder’s team by renegotiating S106 contributions, re-positioning
the assets for alternative tenants and buyers, re-phasing,
recovering tax credits, re-procurement and stepping in to take
control of the outstanding development.
Another option to unlock value is through lease gearing. This
process can both increase the capital value of the asset through a
review of the lease structure. In some cases this can be achieved
with reductions to the tenant's rental.
Funders will achieve exceptionally high returns when, following
a work-out solution, the improved assets are retained until more
benign market conditions return.
Case Study: How to improve returns by 25% against a falling
market
The bank commissioned the EC Harris team when a developer for a
£1 billion regeneration scheme breached the loan to value covenant
following a collapse of 30% in property values.
Our brief was to provide the bank and their borrower with the
most appropriate work out solution to maximise the returns. The
bank was also concerned about certainty of the CAPEX spend and
requested a thorough diagnosis of contractual liabilities to
identify all unplanned future spend.
We revised the master plan to add value and renegotiated the
Section 106 to reduce costs. Phase one is now a forward funded food
retail store with a well known operator. The procurement strategy
was changed to fully realise the benefit of falling tender prices
and to avoid risk premiums.
The current site value has been increased by circa 25% over a
fire sale based upon the original master plan. Also, the cash flow
has significantly improved and is now self financing by bringing
forward the affordable housing phases.
Key to the success of this commission was the bank’s realisation
that they did not have all the key skills and processes in-house.
We deployed a multi-skilled team, alongside the bank, comprising of
development managers, contract experts, and cost engineers led by a
project re-structuring expert.
The four key steps to unlock value for this project, and
other projects "in distress" are summarized in Fig 1. For
each step we have developed detailed processes to ensure a
consistent approach to maximising the value for our clients.
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Work-Out Solutions [343kb]