Hi
I've tried searching for removing personal guarantees from trust/company loans. Cannot find much information. I was wondering if somebody could tell me if this is possible.
Ie a couple of scenarios
1) personal guarantees made when taking out initial loans. Trust buys several properties. After 2 years has 2 tax returns showing that it has earnt income for those 2 years. Based on this can refinance against just the income of the trust thus removing guarantees?
2) a director of a corporate trustee over the trust. Signs personal guarantees using his income. 2,3,4 loans are accumulated in the trust.
That director then leaves his position as director of the company. Will majority of big banks allow his personal Guarantee to be removed. Providing of course the company/ trust has tax returns of 2 years that would enable the Serviceability of the existing loans.
3) any other possible ways
Thanks Gemma
Hi Gemma
The answer to both of your questions is fairly simple in the current climate and that is the Personal Guarantee would not be released.
In the case of a Director moving on and resigning (I have been there and done that) this requires the loan to be re-written. Unless the lender is satisfied with the Guarantees provided with the remaining Directors they would not release the Guarantee from the Director being released.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Hi Gemma,
This need actually comes up more commonly than people think. You definitely cannot remove the personal guarantees.
Has the Director moved on or has he been replaced by another director?
Regards
Shahin
TheFinanceShop | Elite Property Finance
http://www.elitepropertyfinance.com
Email Me | Phone MeResidential and Commercial Brokerage
Gemma Lea wrote:HiI've tried searching for removing personal guarantees from trust/company loans. Cannot find much information. I was wondering if somebody could tell me if this is possible.
Ie a couple of scenarios
1) personal guarantees made when taking out initial loans. Trust buys several properties. After 2 years has 2 tax returns showing that it has earnt income for those 2 years. Based on this can refinance against just the income of the trust thus removing guarantees?
2) a director of a corporate trustee over the trust. Signs personal guarantees using his income. 2,3,4 loans are accumulated in the trust.
That director then leaves his position as director of the company. Will majority of big banks allow his personal Guarantee to be removed. Providing of course the company/ trust has tax returns of 2 years that would enable the Serviceability of the existing loans.
3) any other possible ways
Thanks Gemma
Hi Gemma,
It is possible at lower LVR for commercial loans, with some lenders, subject to the quality of the property, tenant and lease. It is not possible with residential lenders.
Exactly as Alistair says at a lower lvr on a Commercial property but no chance on a residential property.
We have done a couple with Unit Trust where the property is self funding and the lender can assign the Lease to cover their repayments.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Qlds007 wrote:Exactly as Alistair says at a lower lvr on a Commercial property but no chance on a residential property.We have done a couple with Unit Trust where the property is self funding and the lender can assign the Lease to cover their repayments.
Cheers
Yours in Finance
Most of the non-recourse (this is the name given to a loan no individual guarantors) loans we have written have been for small syndicates or wealthy individuals. This is because to get the quality of tenant required the property is generally quite expensive. By quality, this refers to the ability of the bank to make a decision as to their quality, which may or may not reflect reality.
Looking at my situation.
Currently 3 directors all of varying levels of income. In the future one of the directors is looking to remove himself from the company/trust to go off and do other things. So the only way that his personal guarantees for existing loans to be removed is to show that the existing directors income can satisfy the loans within that trust and then have them rewritten/refinanced. Can the 2 years of trust income be used to satisfy serviceability as well at this stage?
ie example
director 1 170 k income
director 2 75k
director 3 60 k
Trust earns 50k 1st year, 100k 2nd year. Taking the average of the two, 75k.
director 1 then leaves. So as long as the remaining income of the two directors + the income of the trust was enough to cover serviceability requirements the bank would allow his personal guarantees to be removed.
On another note. How do banks treat increasing sales, income through trusts. Ie. if you can show a clear case that you are having more sales/making more profit. Ie. 1st year – 50 k income, 2nd year 100k. Can you get them to average it higher then just 75k. I have read somewhere about perhaps 20% towards the higher figure if can prove increasing sales/profit etc
.
I agree with richard and alistair above. Must have enough income in the trust and remaining directors to service and thrn get the loan redone. Income of trust can be taken into account. But if it is one off capital gains from the sale of property then this is unlikely to be considered income for loan servicing.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Gemma
In the main lenders do apply a 20% increase of the prior year income rather than merely take an average of the last 2 years figures however in saying that we deal with a couple of lenders that merely take the latest years figures.
On that basis and all other factors being equal the Guarantee could be released with the right lender.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Different lenders have different policies. Some will take average of 2 years, some will take the lower amount and some take last year's figures only (such as ANZ). Also if you are going with the lenders that require the first 2 then you would need to explain why there has been such a large increase or decrease in figures as part of the laon submission.
If the profit is capital gains then you have no hope of using it as income unless you are a developer and you can show this over a number of years and you have a load of documentation from your accountant supporting this. The bank will say yes they made a profit for the last 2 years developing property but whats to say that they will not make a capital loss next year?
Regards
Shahin
TheFinanceShop | Elite Property Finance
http://www.elitepropertyfinance.com
Email Me | Phone MeResidential and Commercial Brokerage
" But if it is one off capital gains from the sale of property then this is unlikely to be considered income for loan servicing."
What classifies as one off capital gains terry? Is it If you had a buy and hold property within your trust that you had decided to sell yes?
If your business is the purchasing, renovating and selling of property within short periods of time, 3-6 months. ie if you bought/renovated and sold 3 homes in a year. Would that not classify you as a developer whereby the houses are your 'stock'. Thereby your capital gains from these properties would be treated as income over capital gains if you were a 'investor' who just decided to sell his property.
Shahin – what type of documentation are we talking about, BAS statements or other?
thanks gemma
If you or a related entity is declaring profits on capital account it is likely to be treated one off. Even when using a discretionary trust the income would flow thru as a capital gain usually.
If you are trading or treating the sales on the revenue account then you are unlikely to be treated as a residential customer and more likely to be a commercial loan client
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
No lender will accept capital gains as taxable income for servicing unless (and this is a maybe not a certainty) you can seriously show that the capital gains is repetitive. By this I mean you need to show the lender a history (minimum of 2 years) capital gains income, you need to show that you are full time in this profession (i.e. a property developer) and provide a stack of further information from the accountant justifying it. It is an incredibly hard sell.
Documentation is dependent on the credit assessor but the accountant would need to a) confirm the nature of the business b) confirm that the business operates as a developer and the income is distributed via the trust entity c) the CG income is consist for the past 5 years as it is their primary source of business income.
Regards
Shahin
TheFinanceShop | Elite Property Finance
http://www.elitepropertyfinance.com
Email Me | Phone MeResidential and Commercial Brokerage
TheFinanceShop wrote:No lender will accept capital gains as taxable income for servicing unless (and this is a maybe not a certainty) you can seriously show that the capital gains is repetitive. By this I mean you need to show the lender a history (minimum of 2 years) capital gains income, you need to show that you are full time in this profession (i.e. a property developer) and provide a stack of further information from the accountant justifying it. It is an incredibly hard sell.Documentation is dependent on the credit assessor but the accountant would need to a) confirm the nature of the business b) confirm that the business operates as a developer and the income is distributed via the trust entity c) the CG income is consist for the past 5 years as it is their primary source of business income.
Regards
Shahin
If this was the case it is unlikely that the income is trested as a capital gain.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Terryw wrote:If you or a related entity is declaring profits on capital account it is likely to be treated one off. Even when using a discretionary trust the income would flow thru as a capital gain usually. If you are trading or treating the sales on the revenue account then you are unlikely to be treated as a residential customer and more likely to be a commercial loan clientIm with CBA and got asked to go to commercial lending as they said that our properties were to be treated as stock. NAB 100 percent would not let us go back to residential lending rates (wanted us in business banking for the extra money grab i suspect). After speaking with a manager at CBA they let us continue using residential lending rates/applications and have continued for at least the last 4 purchases. Might change in the future..
http://www.ato.gov.au/businesses/content.aspx?doc=/content/57402.htm&page=4&H4
That pretty much sums up what would be treated as income over capital gains.
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