Matters To Be Aware Of When Dealing With Non-Bank Lenders - October 2020
By Guest Blogger: Peter Faludi, Peter Faludi Consulting
Non-bank lenders (NBL’s) are now becoming a much greater force in the commercial real estate debt market, due to the banks pulling back from this sort of funding, according to the Australian Financial Review (6 October 2020).
While NBL’s have been around for a number of years, their share of the property financing market is growing as the risk profile of various sectors of the property market have increased during the pandemic. This has resulted in even less appetite for such lending by banks.
While NBL’s are an increasingly important source of funding, borrowers need to beware of the differences between NBL loan documents and bank loan documents. They also need to be aware of the diversity of NBL’s compared to banks.
Traps for the unwary - NBL Loan documents
NBL loan documents can contain clauses dealing with such matters as:
- Minimum interest requirements,
- A right for the lender to terminate or vary the loan for reasons unrelated to the borrower,
- Additional fees,
- Options to purchase the ownership of the borrower in circumstances of default,
- A right to change the interest rate and fees payable at will.
None of the above are in the interests of a borrower.
Clauses such as those above would not normally be included in bank documents.
Whether or not such clauses are included will depend on the nature of the NBL and where it sources its funds.
Consequences of the diversity of NBL’s
The diversity of NBL’s range from institutional money (such as insurance companies and pension funds) to individuals and high net worth people.
This, as well as the country of origin of the NBL, will dictate the type of clauses included in their loan documents.
Care needs to be taken by borrowers when considering any financing terms, particularly where an NBL is involved. In addition, unlike dealing with banks, due to the diversity of NBL’s, it is prudent for borrowers to do due diligence on any NBL the first time they wish to deal with it.
Will the funds needed for settlement be available? Will funds be available to meet drawdowns required during the term of a construction loan?
Most NBL’s pride themselves on being able to process loans quicker than banks. They are also interested in developing long term relationships with their borrowers. These qualities are particularly important in the current environment and the foreseeable future.
While not a new world, the increasing presence of NBL’s is becoming the new normal and borrowers need to adapt to their different way of dealing with matters, relative to a bank.
The increasing competition between NBL’s and the banks, as well as between the NBL’s themselves, should provide good outcomes for borrowers. But as always, borrowers’ need to get good advice on the terms and conditions of their loans before committing to proceed with a lender.
This is increasingly important in the new normal.
Please feel free to contact us about any loan facilities, current or future, in respect of which we may assist you. We can help you in negotiating changes to fairly account for your financial circumstances and navigating the increasingly complex provisions found in such documents. Our sole objective is to achieve better commercial outcomes for you in your finance arrangements.
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The comments made in this Article do not constitute the provision of any legal, tax or accounting advice by Peter Faludi Consulting or any Director or employee thereof and therefore you should not rely on this Alert in making any decisions relating to present or future transactions in which you are involved. We strongly recommend that you seek legal, tax and/or accounting advice (as relevant) in relation to the same.
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