First Class Accountant in their Forever Home

Success Factors

  • Establishing a corporate tree is a must when multiple entities are involved, directors and shareholders are non-standard and to establish flow of income.
  • Thoughtfully worded and explanation-rich Accountants letters are required when making any non-standard exception requests. Your word is not enough, even if your financial position is evidently strong.
  • Ensure your financier knows how bridging, and how other niche policies, work before they need execute. When the scenario arises they may not have enough time to learn and apply at the same time.
  • Know your numbers and how policies can advantage you. For example, moving costs, renovations and most importantly stamp duty can be factored into the bridging loan where there is enough equity.
  • Networks matter. We spent a lot of time meeting the right private and commercial bankers to approve a deal like this. This transaction could not have been done in the regular retail and broking channel.
  • Interim Financials are necessary where you are seeking a favourable treatment of income in servicing, especially acceptance of later years income for servicing.
  • You and your broker should remain flexible throughout the process. The discharge process can be frustrating. We learnt, its not over until its over – that is, until the deal settles.

THE SITUATION

Our client had put a 10% deposit down on a beautiful $3Million+ 5 bedroom home in Sydney’s Lower North Shore. With his wife fast expecting and due in 3 months, and 2 children already under 2, this was truly to be his forever home .

Following payment of the deposit, our client had less than $100,000 remaining in cash making him reliant upon the equity of his existing home to settle on his new purchase. As an Accounting Partner at a high performing and fast growing firm, he was completely time poor and run off his feet. He needed a financier to secure him and his family a high stakes bridging loan as soon as possible.

THE CHALLENGES

Challenges were aplenty ranging from short timing, transactional complexity and multiple entities:

  • Our client was already 1 weeks into a 6 weeks settlement period, and had not arranged a pre-approval prior to securing the property.
  • Our client had not yet listed his current property on the market. Settlement of the new property was imminent, making a bridging loan required.
  • As a partner of a fast growing firm, each year’s financials were significantly higher than the previous year. The latest year’s figures would definitely be needed for servicing. His wife had also recently gone on maternity leave with no immediate plans to return to work making servicing income solely dependent on him.
  • Our client’s entity structure was tax effective, but not a structure liked by the banks. His share of ownership of the accounting firm was held in a family trust of which a family member other than his wife was a shareholder of. Furthermore, dividends flowed to a corporate beneficiary which he was NOT a director of.
  • Our client was extremely time poor, occupied with the day-to-day management of his accounting firm, a pregnant wife and a young family.

THE RESULTS

This scenario showcased the full range of our technical ability and the highest levels of service for private clients and professionals who are business owners.

THE PREPARATION

Immediately after the initial brief, we diligently and expeditiously moved to collect the relevant supporting documentation to assess our clients income to establish servicing. We developed a bespoke document tracking sheet to allow our client to easily visualise what documents we had received and which remained outstanding. We also quickly contacted the client’s offshore bookkeepers and tax agents to collect the relevant financials. From collecting “Wave 1” of the supporting documents we generated several key outputs for presentation to our lenders:

  • Servicing analysis including a complete “group servicing” across all entities and servicing calculators completed for 2-3 initial lenders.
  • A corporate tree setting out the directorships and shareholdings of each relevant entity, and in the same diagram, setting out the flow of funds received as salary, directors fees and dividends.
  • Calculation of before and after funding position for the purposes of the bridging loan. We calculated immediate financing requirements for the “Peak Debt” followed by the “End Debt” once the existing home had been sold and proceeds used to pay down the loan.
  • Importantly in the funding breakdown we also made sure to establish all moving and transaction costs so our client was not out of pocket during the bridging period.
  • Initial credit paper for policy testing across our lenders to establish who had appetite. This included making the case for several non-standard add-backs which were extremely important to establish servicing.

We then went to work to present the deal to our specialised network of BDM’s and Senior Credit Officers to test the deal. Due to the level of servicing income and the size of the loan, we felt our client was also suitable for Private Bank and hence contacted our network of Private Bankers and Business Bankers as well.

The Broking

As expected, the standard retail channel did not like the fact that our client had distributed his share of the accounting firm’s dividends to an entity he was not a director of. Essentially, despite our compelling arguments, their strict black and white application of policy would not allow the dividends to be treated as an addback, hence causing servicing to fail.

Our Private Bankers said they could “consider it” as they had seen the structure before for other High Net Worth Individuals, however we regarded “consider it” as not good enough when the stakes were this high.

Fortunately, we came across one talented Business Banker with an appetite to assist accountants who gave us the confidence they could do the deal. He said he had seen the structure several times before and the income could be added back if we re-appointed our client as a director of the corporate beneficiary and we had a written statement from our client and his accountant explaining the reasons for the structure. An additional letter would also be needed from the other accounting partners supporting the distribution of future dividends. Finally, the interim financials would be needed to allow the latest year’s income to be used for servicing.

 

The Execution

With a solution at hand, we then moved quickly into execution mode. Within 48 hours we prepared:

  • Final Bridging Calculations
  • Final Credit Paper explaining all policy exceptions and add backs
  • Final Group Servicing Income Assessment
  • Final Servicing Calculators – one for Peak Debt & one for End Debt
  • Draft of all client and accountants letters for review and signing
  • Drafted additional letter from fellow accounting firm partners regarding future dividend distributions
  • Pre-filled all application forms for review and signing
  • Prepared all compliance forms for review and signing
  • Prepared list of outstanding documents required prior to submission
  • Email to the tax agent and bookkeeper to finalise the latest tax returns and start preparing interim financials for the current financial year

Our client was very impressed with the quick turnaround, signed and returned most of the relevant documentation (“Wave 2”) the next business day. We promptly packaged up all documentation and formally submitted the deal to our banker.

There were still some minor outstanding documents but we were promised these were soon forthcoming. And they did – three business days later we returned all outstanding letters, finalised latest years financials and updated bank statements. We were still missing the interim financials at this stage, but that was ok for the moment.

The Credit Process

We then played the waiting game with the bank. In commercial and private bank lending, you can expect a slower assessment timeframe as the process is more manual, and credit conduct a more detailed assessment as the try to get to know the client so that they can make more critically evaluate the risk to form a longer term relationship.

It wasn’t until 5 days later we heard the first piece of good news – credit was pleased with the deal however we would need (1) final lodgement of the latest year’s financials (2) the current year’s interim financials (3) explanation of the performance from year to year.

Upon receiving this news, it was now 3 weeks out from settlement. However we had hit a major milestone and our client was very happy with the progress. We were getting closer to the final result and more certainty had been obtained.

 

Knowing this, we diligently contacted the client’s bookkeeper to lodge the tax returns and produce the interims. In the meantime, we were with our client to prepare an explanation of each year’s financial performance discussing staffing levels, marketing and business development, offshoring component and productivity improvements, where growth had come from and how it will be maintained.

By the time we had finished working with our client to document the explanation, the latest financials had been lodged and the interims finalised. Fortunately, the interims were even stronger than the previous year, substantiating our case to use the latest financials for servicing. We then promptly sent all remaining documents over to our banker.

Settlement

Another 3 slow days days went by but we eventually received the good news from our banker, the deal was formally approved! We shared this with our client who was ecstatic! That same day we also sent the discharge form off to the outgoing bank of the clients’ existing home. It was now 10 business days from settlement.

All seemed well however, new dramas started to emerge. Our client was traveling for an international conference the next day for a week and loan documents were not ready. Our banker explained there was no way they would be ready in time given the complexity of the loan. Furthermore, the outgoing bank, had dug in their heels and advised it could be up to 4 weeks before the mortgage could be discharged.

While here was nothing we could do about the timing of the loan documents, we jumped straight into action again to develop a personal relationship with the client’s incumbent bankers. We diplomatically explained that there was an urgent settlement attached to the request, and it was our client’s own home.

At first we received resistance from the Associate Banker. The standard protocol and SLA dates were shared. It wasn’t until we made a call to the client’s Senior Banker and wrote a tersely worded email threatening an ombudsman complaint, that NAB agreed to oblige and process the discharge within 2 business days.

By that time, documents had well been arranged and it was 3 business days from settlement. Early that morning, I drove to the client’s house and waited in his driveway while he and his wife were driving back from the airport. Our client, though visibly tired from jetlag was glad to see us and happy the loan was approved and we were “almost there”. We promptly signed the documents and I returned back to the office. We helped the client to finalise all loan documents, and return them back to the banker the same day.

Two days later, settlement happened smoothly without a hitch, and our client picked up the keys. His wife was now 1 month away from delivery date! It has been quite a ride for us, our client and our banker, but we made it! A First Class Accountant in his Forever Home!

WHO TO TALK TO

Tommy Lim
Managing Director