NAMA may only have concluded one deal so far where its new staple finance initiative has featured, but the Agency has announced that it ultimately intends making €2bn available to buyers of its commercial property. And in a market the size of Ireland’s and in an economic climate where there is precious little credit available from traditional sources, NAMA’s staple finance scheme is likely to be a game-changer. The European Commission has today confirmed that NAMA has not received approval for its staple finance scheme and that there is no documentation to show that NAMA sought approval for the scheme.
Staple finance, or vendor finance is where NAMA will convert part of the sale price of one of its assets into a loan to be paid by the buyer after a period of years. For example, if NAMA or one of its developers has an office block for sale at €30m and you want to buy the office block, then NAMA will take perhaps 30% in cash from you today – so you need to find a €9m deposit – and the remaining 70%, or €21m will be due from you in five years. And for the next five years, you must pay NAMA 3.5% per annum interest on the €21m loan. In five years, you hope to sell the property or refinance the €21m loan with a traditional lender and in that way, NAMA gets its €21m “loan” repaid. And if, for some reason, you don’t pay the €21m, then NAMA takes the property back from you and keeps your deposit and any interest payments.
When NAMA was planning the introduction of another scheme – its “negative equity mortgage” or as NAMA calls it, the “80:20 Deferred Payment Initiative” – it delayed the launch for several months so as to secure European Commission approval. And yet the negative equity mortgage product might apply to 750 homes – 115 in the pilot launched in May 2012 – and even if the typical home costs €300,000 then the value of the scheme for 750 homes is “only” €225m or one tenth of NAMA’s staple finance initiative.
The Minister for Finance, Michael Noonan has recently said that NAMA doesn’t have a standard template of terms for its staple finance initiative, and indeed he has refused to provide details on the parameters of the initiative. NAMA’s cost of funding is theoretically the 6-month Euribor interest rate – currently 0.8% per annum, though NAMA does hedge its interest rate which adds some cost to that. But still, with a cost of funds at around 1%, NAMA is in a very special position to be able to provide loans to buyers of its property. Ulster Bank and Certus can’t be too happy as they sell similar assets in the same marketplace but without the apparent wherewithal to provide financing, and even if they could, with a cost of funds that is likely to be 3%-plus, that they can’t provide staple financing at the same interest rates as NAMA.
NAMA was asked for a comment on its contact with the European Commission in respect of its staple finance initiative, and specifically if it has considered the potential for it to distort the marketplace and set itself at a competitive advantage. Any response will be posted here as an update.
Dear God…..
It’s possible, just possible that the EC/EU/ECB themselves simply never gave permission in writing—the Irish government system applied on the continent. However, I think it is more likely that permission was given via emails or text messages or phone calls which never went through any official channels.
In any event, I think it’s pretty clear that no-one is in charge of this particular failboat.
Nothing changes – two major new roads for the Minister’s Wexford constituency.
Nothing preventing the ‘competition’ providing this,but it is very funny,great work NWL,laughing here about this.
Poor old NAMA,VTB or vendor take back mortgages is actually a tried and tested method off shifting product stateside,you are frequently asked to submit two bids,all cash or seller financed.
The inability to provide standard documents for review and comments is indicative of the increasing paranoia at NAMA,considering the head of legal is x NTMA,and would not know a set of loan doc.’s if it fell off a shelf and hit her on the head,who is actually drafting these documents.
Most likely they were outsourced,resulting in external counsel being involved in ALL the negotiations,the amount of hand holding at that place has now reached farcical proportions, think of the fees !
Here you go NAMA,produce a standard generic set of loan doc.’s inform ‘buyer’ if comments on said loan doc.’s don’t fit neatly on one sheet of A4 paper,move along.Do not negotiate your OWN loan doc.’s with buyers,if they don’t like them they don’t have to take it,standard practice.Make sure your loan doc.’s are extremely favorable to yourself,and the Irish taxpayer, explain that its just impossible to change them-board approval required etc.
It is a mystery to me why NAMA should be doing this at all. They will only lend to large funds (not to the great unwashed). These funds are private equity vulture funds.
So let’s look at the maths. NAMA has a property that produces an 8% yield. So in simple terms it sells a €100 million property to a Vulture Fund (VF) and lends €75 million in return for €2.625 million per annum (3.5%) for a minimum of 5 years. The VF receives an annual rental balance of €5.375 million per annum which represents a 21.5% return on its capital investment of €25 million. In other words, after 5 years the VP has received 107.5% of its money. If the property suffers a further loss in value over the 5 year term it walks away from the loan and the property with its money back and a 7.5% profit.
Its a no brainer for the VP – almost like Santa Claus bearing gifts. But why is NAMA doing it?
Can utilize a ‘live’ one to illustrate why NAMA is providing this.
The Forum is currently for sale with Knight Frank.
47,108 sq.ft. leased to Depfa(parent guarantee) exp./break option 2019
370 Parking garage-leased to Parkrite exp. 2013.
Combined Rent 2,724,00-Depfa at 1,858,840,Parkrite at 675,000
*Depfa pays additional 165,000 for parking.
Note:There is a inconsistency in the KF number and the IT-but not material.
Asking Price 28,000,000
NAMA Financing-as per Knight Frank
Term 7 years-matches exp. of Depfa.
Interest only ?
4%-assume
Fee’s 1% origination fee to NAMA-on 2 Billion !
75% of Purchase Price available.
Assume PP of 25 million.
VTB-mtg. @ 75% 18,750,000
Pmt. 750,000 p.a. I.O.
Equity Required/Cash 6,250,000
Net Cash Flow(rent-DS.) 1,974,000
Return On Equity 31.58%
ALL CASH 10.89%
If the buyer paid all cash they would not receive,their money back plus a return before the ‘event’,which is the out clause for Depfa.
With,NAMA financing,buyer receives their equity back plus a very very healthy return,can walk away in 7 years.
It expands NAMA’s audience of buyers dramatically,as opposed to all cash.
A normal market lender would look to amortize some of the principal over the loan term, AND escrow a tenant improvement amount as a reserve,concerns over the tenant vacating.
NAMA also receives a 1% origination fee,but more importantly for them this attracts more buyers.
If buyer walks away in 7 years,NAMA has the equity of 6,250,000 and the empty building back,but that’s 7 years away and the building will require substantial tenant improvements,upgrades,down time.They have also made a spread of 300 basis points on their cost of funds.
NAMA,is theoretically an Asset Management Agency,so the possibility of getting the building back should not be a concern-if they still around.
It actually DOES make sense for NAMA to engage in this,but NOT for 7 years,fee income from origination,equity in the bank,downside they get the building back,they ‘own’ it in a dead market.
Dependent upon what they paid for the loan,one approach would be to restructure the Depfa lease today,extending it beyond 7 years,likewise with the Parkrite,but that’s Asset Management,easier to offer below market financing to buyers who will actually undertake this !
One concern is that 7 years is beyond the NAMA remit,who will own and be responsible for the NAMA loans,that they originated ?
W/O NAMA financing buyers may look to receive all their money back over 7 years resulting in a much lower PP.The problem/issues with this NAMA listing, is its all downside risk no upside,buyer is a passenger they have very limited opportunity to add value,basically an event driven deal.But its perfect for say Deutsche Bank/Kennedy Wilson given their strong connections with Depfa.
Its an exceptional opportunity for the right buyer, facilitated by below market NAMA financing,but 7 year term is way too generous,try 5.That gives you two years if buyer walks away,to re-position building with income in place.
*numbers x closing costs fee’s etc.
http://investmentsearch.knightfrank.ie/property/display/130799#
http://www.irishtimes.com/newspaper/commercialproperty/2012/0627/1224318800562_pf.html