September 22, 2021

PRICIPLES OF GOOD LENDING-BRIDGE OVER LOANS Introduction Abridging loan is an advance given to a borrower for the purpose of completing a particular purchase with the source of repayment coming from the sale of another property in the near future. There are two types of bringing loan facilities: i) Open ended bridge loan ii) Closed ended bridge loan Closed Ended Bridge Loan This means that the borrower has already identified buyer a buyer for the existing property which is the main source of repayment of the advance. Its one where contracts have been exchanged with a clear completion date on the sale of an existing property which represents the key source of repayment. Since such contracts are legally binding the lending risks are lower now provided a lawyers oath / undertaking is obtained to ensure sale proceeds are received by the bank. Exchange of contracts does not however guarantee that a sale will take place and problems can still arise in the full circumstances. i) The buyer may not have the finance to complete the purchase. However, are put able lawyer cannot allow contacts to be exchanged if the necessary resources to complete the contract are not available but it can happen. Close liaison with the lawyer / advocate is essential indirectly through buyer’s lawyers. It’s also becoming common for buyer to deposit 10% of the value of property to be purchased as a show of commitment to purchase the property. ii) Completion of the contract maybe conditional. For example the buyer might have an option to withdraw from a purchase of property being built / improved if works are not finished on time. Alternatively completion maybe dependent the buyer having a mortgage. iii) Although fixtures and fittings maybe forming a significant part of the purchase price, they may not form part of lenders security if things go wrong. A full valuation of the property should be taken and if significant be included as part of security. However such valuation is not always taken in a bridging situation particularly if bridging appears to be closed. iv) Collision between buyer and seller, they might mutually agree not to go ahead with the transaction in such a situation there is nothing a lender can do to ensure the transaction go ahead in such circumstances and care should be taken when its known that the buyer and seller are related. v) Fees and finance costs. NB: The safest course of action when in doubt completion will take place is to treat the facility as an open ended bridge loan. Open Ended Bridge Loan This occurs especially where contacts regarding the sale of an existing property which represent source of repayment have not been signed for the loan to be advanced to purchase a new property. A lender should not consider an open ended bridge loan unless:- i) The property market in question is a buoyant and it looks like staying that way in immediate future. ii) An early sale of the existing property is in prospect i.e. a definite buyer has been found although contact have not been signed. iii) There is a substantial margin to cover all contingencies. The expected net sale proceed should be able to pay the loan plus twelve month accrued interest and at the same time allow for 20% reduction in the asking price.  General Considerations i) The advance for property purchase must be made on a loan account in order for any tax benefits to be claimed. ii) Where the deposits only is being advanced its still necessary to access the complete transaction incase problems arise. iii) Written confirmation must be obtained from the borrower’s lawyer that contract for both sale and purchase have been obtained. iv) Lawyer undertaking or oath should be obtained in respects of monies due or deeds to come. Consideration to be given to take formal charges over the property especially if the bridge is open ended. v) Where the source of repayment is a mortgage from another lender confirmation are required of the amount and when it’s due together with an undertaking to send money to the bank. If part of borrower’s contribution is to come from other sources similar considerations may apply. vi) If the loan is being provided to be to build properly ensure:- a) Builders are reliable b) The contract is either fixed price or reasonable terms. c) Advances are only made against architect’s certificates at pre-determined stages of development. vii) Realistic valuation should place in property viii) Full insurance cover is essential as soon as contracts are exchanged. ix) Status enquiry is necessary for lawyers unknown to the bank.

TOPIC TWO PRINCIPLES OF GOOD LENDING (CONTINUATION) APPLICATION EXAMPLE 1 Jeremy has maintained an account at your branch for many years. You have very little  detailed information on file regarding him but you are aware he has business interests in the city. He is a director of three companies and from time to time sits up board of enquiry set by government. No regular credits are seen in the account but over the past three years credits totaling Ksh 250,000 have been received including six dividends warrant amounting Kshs75, 000. Nine months ago you wrote to him suggesting that the dividends should be mandated but there was no response to his letter. Over 2 years ago Jeremy wrote to you regarding the prestige card issued by your bankcard company. Subsequently a formal application was made and a card was issued. As part of this facility an unsecured overdraft limit of 75,000 has been recorded on his account. Today you receive a letter from Jeremy enclosing a cheque of Kshs200, 000 in his favour by a firm of Nairobi lawyers and three share certificates all in his name with a current market value of 800,000. He explains that he is involved in a small syndicate of investors they are about to complete the purchase of a significant investment in the US but at this time he can give no details. He is therefore likely to issue a cheque over the next week for Kshs 1,000,000 and asks you to increase his overdraft by 750,000. Set out in detail you reply to Jeremy. Solution Apply CAMPARI in your analysis Character connection and capital initial reaction This is a relatively a long standing customer who has presumably operated the account satisfactory. You would therefore wish to help if at all it’s possible especially because of the customers standing. Furthermore you do not have any advanced information about him. As a director of three companies and sitting on government board of enquiry shows that he is a person with vast business operations and of high integrity. There is evidence of capital from share certificate of Kshs.800, 000 and annual dividends of Kshs.75, 000. He has also been issued a prestige card facilities unsecured. As far as connections are concerned they exists (evidence by board of directorship in three companies and sitting on government board of enquiries and the investment syndicate group). However you must not let this description influence your judgment. Ability Jeremy has satisfactory serviced his Kshs 75,000 prestige card facility. As the same time Jeremy could be having other account in other financial institutions. The bank needs to get clarification from him, what other bank account he holds, other securities and commitments and liabilities in order to evaluate his ability to repay the loan. Further more the source of repayment could also be from realizing investment from which the bank is being asked to finance. This required to be clarified. Margin This is a speculative venture as Jeremy and his group want o engage in overseas investment which he doesn’t have full information and even if he had all information the bank cannot adequately ascertain its accuracy as the investment is to be undertaken faraway in the USA. The bank should charge interest at a premium adequate enough to cover this high risk. Purpose This is not fully given and it’s presumably a speculative investment you need much information as to the investment and the payback period. Amount The bank is being asked to provide additional borrowing of Kshs 750,000 making the bank total exposure of 825,000 be fully utilized assuming he keeps the original limit of Kshs 75,000 overdraft. However you need to check this information. Repayment The source of repayment is not given however if it is o come from realization of investor he must provide cashflow projections which must be by the bank. It’s possible that Jeremy is multi-bank and the bank must not have seen some of his income, its important to find out from him which other bank account he hold and facilities he is enjoying at the moment. The bank also needs to find out the duration of the loan (how long loan is required.) Insurance / security This proposal seem to be a speculative venture therefore the risk is high the bank therefore needs to be fully secured and although the share certificate current market value of 800,000 a margin of 20% is required giving security value of 640,000 which may not be enough to cover the borrowing. Conclusion / decision Despite Jeremy excellent credentials, the bank does not have sufficient information to assess the risk attached to the proposal. A top businessman Jeremy should appreciate the need for further information if he really wants the bank to assist him. The proposal is declined at the moment as it is.