Section 2: Case Study B — Bill Smith and John Jones – Commercial Premises Finance
Note: You only need to complete Section 1 or Section 2 tasks 1-4 in this assignment, plus Section 3 task 5.
Background
You are meeting with prospective clients, Bill Smith and John Jones. They have been referred to you by their accounting firm, Buckland Accountants.
The prospective clients need assistance with the acquisition of owner-occupied premises to replace their current business premises, which they rent and is becoming too small for their growing business.
True Blue Pty Ltd trades as True Blue Real Estate and was purchased as an existing real estate business three years ago. Bill Smith and John Jones are the directors.
The shareholders of True Blue Pty Ltd are Bill Smith, John Jones and a private investor, Amanda Williams, who does not work in the business and has no involvement in its day-to-day operation. Each holds an equal one-third share in the company.
Bill and John have each been in real estate for approximately 15 years, focusing on residential sales and leasing. They have gained their work experience in the local area. A wealth of knowledge of the area, coupled with an ever-expanding client base, has resulted in sustained and solid growth for the business.
Details of the property
Sale price of the property is $950,000. (There is no GST requirement as it is being purchased as a going concern.)
A deposit of $95,000 has been paid and is being held in the trust account of the settlement agent/solicitor.
A cash contribution of $233,240 will be made from the general working account of the business.
Property purchase and loan to be in the name of a new entity — True Blue Pty Ltd as trustees for the Smith Jones Unit Trust. There are a total of 99 units in the trust and the unit holdings mirror the shareholding of the trading entity, True Blue Pty Ltd.
The property is situated at 100 Smith St, Yourtown, with contracts exchanged at today’s date and an anticipated settlement date of 90 days.
General observations about the property
The property is in good condition and is well located in the same street as the current rental premises.
It is anticipated that the premises will meet the needs of the business for the next 10 years.
Summary of initial client fact find
Bill and John have provided the last two years financial accounts for the trading business, as well as interim accounts for 10 months of the current financial year.
True Blue Real Estate’s financial accounts
Year 1 (previous) Year 2 (current)
Net profit after tax $92,000 $140,060
Current year projected - $175,000
Add back (rent) $47,000 $49,142
Additional superannuation to director $31,400 $34,539
Wages to partner one $70,640 $70,640
Wages to partner two $70,640 $70,640
Payment to private investor (fixed flat profit fee) $45,000 $45,000
Applicant information — Bill Smith
Personal details
Address 26 Nowry Road, Yourtown, 1234
Date of birth 17 February 1958
Phone 7890 1234
Financial details
Gross income $70,640
Owner-occupied property valued at $550,000
Outstanding debt on owner-occupied property $210,000 repayable at $1,379 per month P & I, 6.2% p.a. interest rate
Credit card with limit $15,000 Outstanding debt — $5,000
Superannuation $250,000
Motor vehicle valued at $30,000 (nil debt)
Applicant information — John Jones
Personal details
Address 14 Mary Street, Yourtown, 1234
Date of birth 14 October 1970
Phone 0146 234 577
Financial details
Gross income $70,640
Owner-occupied property valued at $750,000
Outstanding debt on owner-occupied property $300,000 repayable $2,159 per month P & I, 6.2% p.a. interest rate
Credit card with limit $5,000 Outstanding debt — $1,000 cleared monthly
Superannuation $200,000
Motor vehicle valued at $45,000
Outstanding debt on motor vehicle $15,000 repayable $623 per month, fixed interest rate
Additional Business details
Cash in business account $400,000
ABN 64 123 123 123
Business Name True Blue Pty Ltd trading as True Blue Real Estate
Trust Smith Jones Unit Trust
Other information
Applicants’ solicitor Moffat and Co (contact is Maree Moffat)
16 Tatlor Street, Yourtown, 1234
Phone 7890 5678
Applicants’ accountant and registered office Buckland Accountants (contact is Simon Williams)
28 Mary Street, Yourtown, 1234
Phone 2982 0987
Applicants’ banker Westcoal Building Society, Yourtown, 1234
Notes:
• Assume for credit card debts, the minimum monthly commitment should be calculated at 3% of the credit limit.
• Each of the working directors has appropriate death, income and disability insurance in place.
• A sensitisation factor of 2% should be used when calculating financial commitments.
Task 1b — Identify the clients’ complex broking needs
Prepare a list of questions that you would need to ask Bill and John about their history, experience, business performance and the property purchase.
In preparing your list of questions you should ensure that you cover the following:
• the complex features of Company and Trust structure and benefits that will come to the Company from purchase of this property
• the identification of potential risks in such a transaction and Bill’s and John’s tolerance of risk
• the financial aspects of the transaction and current financial position of the business.
In addition to the list of questions, please also comment on any potential risks you identify (you are permitted to make assumptions here). In considering these risks you should consider:
– how you would identify the risks and the criteria you used to evaluate these risks
– how you would assess their current debt exposure; the tools you would use in terms of risk probability, impact and consequences.
(800 words)
Student response to Task 1b
Answer here
Assessor feedback for Task 1b — Identify the clients’ complex broking needs:
(Insert Feedback)
Question(s) that need to be resubmitted (if required) (List question numbers)
First submission Not yet demonstrated
Resubmission (if required) Not applicable
Task 2b — Prepare complex broking options
You are required to prepare a full report for Bill and John by outlining the process and the risks (potential and real) of which Bill and John should be aware.
In a suitable format, outline to the directors the options available to them and the process that will need to take place for them to complete the new property purchase and establish the loan.
In developing your report you should cover the following:
1. the parties to the loan
2. what is the best loan structure for this transaction — provide Bill and John with options to use their own residential properties as cross security or use a cash contribution and use the property to be purchased as the security
3. your recommendation of the best option, including amount, security/collateral, term, repayments and potential interest rate
4. name three (3) lenders that would consider and potentially approve this transaction, and advise the client of the product type, loan term, interest rate, ongoing fees, balloon payment (if applicable) and monthly repayment they offer
5. the procedure to commence the loan, including documentation Bill and John need to provide
6. the client responsibilities, so Bill and John fully understand the facility being proposed
7. outline the risks (potential and real) of which Bill and John should be made aware
8. the name in which the client will sign the contract to purchase and, given Trust involvement, in what name will it be registered (this varies state to state so please advise which state you are from)
9. a summary of fees and charges — including those for setup and those of the lender
10. a request for client to inform you of any questions about the transaction and/or provide an instruction for you to proceed
11. advise which relevant disclosures need to be made
(800 words)
Notes: Any assumptions you make should be listed, and not be in conflict with the case study information already provided.
You are to write a report to clients demonstrating your professional writing skill, not simply commenting on each of the points detailed above.
The use of tables in the report, to set out some of the numeric information, may be of benefit.
Student response to Task 2b
Answer here
Assessor feedback for Task 2b — Prepare complex broking options
(Insert Feedback)
Question(s) that need to be resubmitted (if required) (List question numbers)
First submission Not yet demonstrated
Resubmission (if required) Not applicable
Task 3b — Implement complex loan structures
Bill and John have accepted your recommendations and have given you authority to proceed with their application.
As part of implementing their loan application you are required to prepare a formal written loan submission to the lender for pre-approval.
Note: Lenders have different credit policies and submission requirements do vary from lender to lender.
Your loan submission must include the following:
• details of borrower, guarantors and their contact details
• borrowers’ backgrounds
• an overview of the proposal — what the finance is for:
– the proposed structure of the facility being recommended — product type, deposit amount (if required), loan amount, term, interest rate and residual value (if any) Note: Loan is based on a 70% LVR, a 7% interest rate and 15 year term.
– full details of the security/collateral that is to be provided
– Sensitised serviceability calculations including Debt Service Cover Ratio (DSCR) calculation and all personal borrowing facilities of directors (sensitisation rate is disclosed in case background)
– provide a funds-to-complete table, including statutory costs and any relevant fees
– highlight the relevant risks, industry, business, transactional and how they are mitigated
– any other information that is relevant to assist the lender provide an approval
– your comments and recommendations
– list attachments.
(800 words)
Notes: Any assumptions you make should be listed, and not be in conflict with the case study information already provided.
You are to write a formal submission to the lender, not simply commenting on each of the points detailed above.
The use of tables in the report, to set out some of the numeric information, may be of benefit.
Student response to Task 3b
Answer here
Assessor feedback for Task 3b — Implement complex loan structures:
(Insert Feedback)
Question(s) that need to be resubmitted (if required) (List question numbers)
First submission Not yet demonstrated
Resubmission (if required) Not applicable
Task 4b — Detailing analysis findings
This task will require you to assume the role of a credit assessor who is making a recommendation to their supervisor for approval of the loan application being assessed.
This will require you to provide a detailed analysis of your research into the applicant and their industry (based on case study background), your findings and risk analysis for the lender.
Verification of the applicant’s information and supporting documents includes testing and checking the integrity of information supplied.
1. Using the the information in the case study, check the legal entity of the business and identify which Australian Business Number (ABN) is correct:
(a) 64-123-241-193
(b) 64-123-123-123
(c) 64-123-123-163
Student response to Task 4b: Question 1
Answer here
2. Identify two legislative requirements that should be reviewed to test and check compliance with identification processes for commercial borrowers.
Student response to Task 4b: Question 2
Answer here
3. What sources could you rely on to verify the financial data supplied by the client?
Note: As this is a case study only, you will need to explain where you would source the information, what processes you use to verify the financial data.
Student response to Task 4b: Question 3
Answer here
4. Following your review on the borrower’s cashflow, provide a summary in the table below, by comparing current and future (projected) cashflow position after the new loan; and any cashflow impact it may have for the applicant.
Student response to Task 4b: Question 4
Current financial year Current year projected
Current year net income after tax Answer here Projected net income after tax Answer here
Rental add back Answer here Add back rent Answer here
Less new loan Answer here Less new loan Answer here
Net surplus cash flow Answer here Net surplus income Answer here
Cashflow impact:
Answer here
5. Detail the security instrument to be used for this transaction and what impact this may have on the business.
Student response to Task 4b: Question 5
Answer here
6. Outline any legal or other complex requirements identified
Student response to Task 4b: Question 6
Answer here
(Task 4b questions 1-6, 500 words)
Notes: To complete this task you will need to refer to the Toolbox and sections True Blue Pty Ltd trading as True Blue Real Estate and ‘Lending organisation’s guidelines, policies and procedures, Legislative requirements, Loan verification and audit standards’ document found in the Toolbox. You may also need to conduct your own independent research to answer these questions.
Assessor feedback for Task 4b — Detailing Analysis Findings:
(Insert Feedback)
Question(s) that need to be resubmitted (if required) (List question numbers)
First submission Not yet demonstrated
Resubmission (if required) Not applicable
Section 3: Improving practice performance
Note: You only need to complete Section 1 or Section 2 tasks 1-4 in this assignment, plus Section 3 task 5.
Task 5 – Develop, research and monitor plans to improve performance
As the owner of your mortgage brokerage practice, you have decided to undertake a review of the business and its processes with the objective: to improve its overall performance for the practice.
1. To achieve this, you will initially need to conduct some research on the internet. Reference sites are located in the Toolbox in the section: Improving practice performance. Once research is completed, you are required to develop and document your plans to introduce the new improvement into the practice. To do this, fill in the table below:
Student response to Task 5: Question 1
Goals Current position Improvements
Answer here Answer here Answer here
Performance Current position Improvements
Answer here Answer here Answer here
Using data Current position Improvements
Answer here Answer here Answer here
Document Current position Improvements
Answer here Answer here Answer here
2. While conducting this research you found that your credit representatives are failing to input all the essential data and document requirements into the aggregator software platform following a software upgrade. To avoid any potential breaches in compliance, provide an effective method you may use to negotiate an acceptable timeframe with the credit representatives to implement these new software processes.
Student response to Task 5: Question 2
Answer here
2. To monitor the progress of these changes you negotiated in question 2 above — with the credit representatives, complete the monitoring improvements table below:
Student response to Task 5: Question 3
Monitoring Improvements
Before Software upgrade After software upgrade Record of changes made
Answer here Answer here Answer here
(Task 5, Question 1 and 2, 350 words)
Assessor feedback for Task 5 — Develop, research and monitor plans to improve performance:
(Insert Feedback)
Question(s) that need to be resubmitted (if required) (List question numbers)
First submission Not yet demonstrated
Resubmission (if required) Not applicable