About yields, first lien, corporate and personal guarantees
The lowest interest rate we’ve dealt with is 10-12% per annum in British pounds.
Similar rates are offered in projects with a high degree of capital protection. For example, when the investor is given the right of first lien on the object. When the property is sold, the funds from the sale are first sent to the holder of that pledge.
In such schemes, the developer often gives personal or corporate guarantees. The investor transfers the money to the account of the project company (SPV), which is created for a particular project. This is done to prevent the redistribution of funds.
What risks does the investor bear?
On exit strategies, bankruptcies and risk calculation
Naturally, a loan with a yield of 17% cannot but have risks. First of all, the market risks.
If the borrowing company cannot pay back the loan, it is definitely declared bankrupt and its assets are sold in order to pay off the debts. You need to assess whether the assets are sufficient to cover the loan in full.
The main risk is that the market price when selling the property can fall so much that the body of the loan and interest on it can not be repaid. In this case, if the project has no additional corporate or personal guarantees, the investor may lose money.
Here’s an example. There is a development project that used developer equity, a mezzanine loan, and a bank loan. The project was planned to be sold at a profit of 20%. In order for the investor to start losing the money he provided in the form of a mezzanine loan, not only would the expected profit not be generated, but the developer’s own capital would be used up. This is the safety cushion.
You need to look at how big it is. How much profit was pledged, how much equity capital was used by the developer and how prices must fall before the investor starts to lose money. We provide this calculation, and the client can assess for himself whether he is ready for such a risk.
In general, the risks of investors in secured loans are not higher than in conventional real estate purchases. Especially if the loan is issued with a right of first lien and corporate guarantees. The probability that prices will fall by 25% is small, and that by 50% – tends to zero.