The FCA requires Assetz Exchange to disclose its role in the origination and on-going operation of Loans on the platform.
Nature & Extent of Due Diligence in Respect of Borrowers
Assetz Exchange undertakes extensive due diligence on the Limited companies that we lend to, the properties that they invest in and the relevant related parties to those companies such as, for example, letting agents. This due diligence at the time of origination includes:
Appointing an independent and indemnified RICS Surveyor from our panel of appropriate firms to undertake and provide a valuation. This valuation is publicly available to Lenders.
Reviewing public data about property prices and trends, rental yields and trends and other demographics and data for the relevant area surrounding the property.
Considering the rental demand and sales demand for a property appropriate to its short-term investment purpose.
Legal title to the property, planning permissions, management company, building warranty, service charge, searches and any freehold/leasehold property related matters are reviewed by the solicitor employed by Assetz Exchange to carry out the conveyancing of the property purchase.
In the case of buy-to-let, charity or corporate tenanted property, the borrower is a special purpose Limited company established by Assetz Exchange for the purpose of the transaction with specific Articles of Association which require the Directors to act in the best interests of and under the instruction of the investors. Those Directors are Assetz Exchange employees. Due diligence is not required on those borrowers therefore as they are controlled by a known party and all decisions are made by the lenders to that company.
Loan Risk Assessment – Property Loans
All loans are assessed in terms of potential risks. These assessments are based upon our lending guidelines for the particular type of property and for buy-to-let residential properties include:
Properties acquired by borrowers are principally intended to produce rental income to pay interest on the loan. The rental potential for the property is therefore a principal consideration when considering loan risk and is assessed by Assetz Exchange using market data and also via the instructed valuer. Properties must be in a good location and be assessed to have a healthy rental demand in that location considering their type in order to reasonably deliver and continue to deliver indicated rental levels.
Properties acquired by borrowers are also intended to be able to repay the loan capital when the loan is repaid and ideally to also produce capital growth. The capital security and capital growth potential for the property are therefore a principal consideration when considering loan risk and is assessed by Assetz Exchange using market data and also via the instructed valuer.
Loans to borrowers who are acquiring properties with discounts to market value (in the opinion of the independent RICS valuer) are preferred in order for the borrower to mitigate acquisition costs as all Assetz Exchange loans are for 100% of property and acquisition costs and therefore reliant upon future capital growth and/or acquisition discount to repay the loan in full. Consideration is also given to the fact that lenders receive the potential benefit of capital growth in return for the risk of loan losses.
There must be a clear exit strategy through which to return the principal of the Loan.
The property must be of a good quality and not likely to require unplanned investment or repairs throughout the Term of the Loan.
The property must be completed and in a good habitable state. In the case of a charity or corporate tenanted property the tenant may require certain modifications in order to meet their specification or legal obligations. If this is the case these modifications will be disclosed as part of the financial promotion prior to the loan being arranged.
Where a lettings and management company is used, it must be suitably experienced for the property type.
Loans have no minimum term but will typically be from 2 years to 21 years and will be interest only.
Appropriate buildings insurance must be in place.
Loan Risk Assessment – Development Loans
Development Loans are assessed by a different criteria, which includes an assessment of the likelihood of capital preservation and appreciation as well as an assessment of the proposed interest rate to be paid:
All development loans are assessed against the RICS value of the underlying property. Wherever possible the land to be purchased will be purchased at below RICS value, where this is not possible it will be communicated to potential lenders ahead of any commitment and would only be permitted in special cases where the value of the underlying land can be increased substantially in the near future, such as upon completion of a successful planning application.
The valuation assessment also takes account of the valuation method, for example is the land and/or property valued on an open-market vacant possession basis or does a specialist use or lease that is in place affect the valuation?
An assessment of the price trend of properties similar to the proposed development in undertaken to understand the price volatility in the local marketplace. Would the proposed development lead to an oversupply of the proposed property type causing deflated values?
The proposed property or properties to be built is considered, is the proposal conventional property with a large potential pool of purchasers, or is the proposal for more specialist property which may have a limited pool of purchasers? Is the property likely to have usage covenants that would restrict its potential value?
The counterparty to the loan’s activity, history and ability to repay the loan.
The proposed interest rate to be paid, as well as projections as to interest rate inflation over the course of the loan, hoping to ensure that there is a realistic possibility of interest in the loan though the Secondary Market throughout the loan duration. However, an agreed interest rate which is abnormally high may prove to be an undue burden for the contractual party, increasing the likelihood of default, or a counterparty that is unable to secure commercial rates of funding elsewhere.
The source interest payments for the duration of the loan, are interest rates to be paid from existing cash reserves or the loan’s own funds. Are the projections for the development realistic and do they show that cashflow to make interest payments is expected quickly?
Pricing of the Loan – Buy to Let Residential Properties (Including Charity or Corporate Tenants)
All Loans are sufficient to cover the cost of the purchase of the underlying property by the borrower and the associated purchase costs and repairs fund. The purchase price of the property is compared to an independent RICS valuation and must in all cases be less than or equal to the value established by the valuer.
Rents earned for the letting of a property are entirely passed on to lenders, net of costs and fees, and are not set by Assetz Exchange and Lenders make their own decision as to whether to invest in the Loan at the indicated interest rate created by the net rental income. Loan transactions on the Secondary Market are priced by mutual negotiation between seller and buyer of the loan parts (Lots) and pricing is not set by Assetz Exchange (see Secondary Market section below). Assetz Exchange does however provide updated valuations for properties from time to time and publishes these on the property records and in between formal valuations provides property market indexing for the region in which the property is located. This is intended to provide guidance to Lenders of the underlying value of the property held by the borrower and help them when the set selling offers or buying bids on the Secondary Market.
Pricing of the Loan – Development Loan
As with Buy to Let, all Loans are sufficient to cover the cost of the purchase of the underlying property (or land) by the borrower, as well as all associated purchase costs. However, there is also likely to be a significant pool of cash which is to be used to develop or improve the property (or land), with the goal of increasing its value and allowing the borrower to make all contractually due interest payments in a timely manner as well as repay the entirety of the loan principal upon the completion of the project.
The determined interest rate and proposed frequency of repayment is determined between the proposed Borrower and Assetz Exchange after a review of the anticipated expenditure on development, the anticipated value and, where appropriate, frequency of sale(s) as well as the cost of commercial funding on a similar development.
Loan transactions on the Secondary Market are priced by mutual negotiation between seller and buyer of the loan parts (Lots) and pricing is not set by Assetz Exchange (see Secondary Market section below). Although Assetz Exchange may impose a cap on the secondary market ensuring that the principal of the loan does not trade at a premium in some cases.
Assetz Exchange does provide updated valuations for land and/or properties from time to time and publishes these on the property records and in between formal valuations provides property market indexing for the region in which the property is located. This is intended to provide guidance to Lenders of the underlying value of the land and/or property held by the borrower and help them when the set selling offers or buying bids on the Secondary Market.
Procedures For Late Payment or Default of Interest Payments
In the event that a tenant of a property is late in paying the rent due, the platform will take the following action:
The properties are fully managed by a professional property management firm.
The Property Manager will inform the borrower and hence Assetz Exchange of the late payment.
Assetz Exchange will determine with the borrower and Property Manager the potential remedial measures to be taken and present these to Lenders for a voting decision as to the preferred course of action. Day to day chasing of late rental payments is necessarily delegated to the letting agent.
In the event that rental insurance has been taken out for the property, the borrower will trigger the Rent Default Insurance.
In the event that late rental income is not recovered and there is no rental shortfall payment from a Rent Default Insurance the Lender will not be paid interest, in the same way as if there is a rental void between tenancies and this is an acceptable situation as per the loan agreement between Assetz Exchange and the borrower.
In the event that a development SPV is late in payment or a default of interest payments has or is likely to occur, Assetz Exchange will pursue the debt in line with the intentions of the Lenders, as communicated by way of votes through the platform, who have ultimate control over the SPV’s activity.
How the Secondary Market Works
Each Loan can be traded upon the Secondary Market unless it is suspended. Assetz Exchange has the right to suspend the Secondary Market at any time and does so if there is ongoing activity which may affect the price of the Loan, such as a vote to sell the property. The Secondary Market is activated from the moment that the Loan is drawn. The Secondary Market enables Lenders on Assetz Exchange to potentially buy or sell their Loan Parts. Lenders can set the price at which they wish to buy or sell Loan Parts and transactions will only take place if a willing buyer and a willing seller exist at the same price. There is therefore no guarantee that a loan may be exited before it is repaid by the borrower and early exit from a loan is dependent upon willing buyers offering to purchase your Loan Parts at an acceptable price to yourself. You may need to wait until the loan is repaid in order to receive back your Loan capital and will continue to earn interest until that time.
How Tax Liability is Calculated
The tax calculations vary by two types of loan and each property will have its taxation position identified clearly. Assetz Exchange provides no direct tax advice but instead has provided the following information with the aid of its tax advisers.
Borrowers with property whose rents vary according to market demand may have variable loan income. This income is paid as interest to Lenders but is taxable as a distribution by the borrower and attracts dividend tax rates and dividend allowances. The income will be net of current corporation tax rates upon the borrower, even in the case of IFISA Lenders.
Borrowers with property whose rents are fixed by way of lease or contract will have fixed interest payable to Lenders. This income is paid as interest to Lenders and is taxable under income tax regime and with income tax allowances. This income will have no corporation tax deductions within the borrower.
In both cases capital gains on property owned by the borrower, net of sales costs and fees, is intended to be passed on to Lenders, subject to any annual growth cap identified on each property. These capital gains, if such sums are available to be distributed upon the sale of a property, are expected to be taxable in the hands of the Lenders under the Capital Gains Tax regime and its allowances.
Tax Law and tax rates are subject to change, as always.