PROPERTY developers across the west have been asked to attend a seminar next week on the new National Asset Management Agency (NAMA ) to hear details of how this will impact upon their current relationships with their banks.
The event, being held in Galway’s Clayton Hotel on Wednesday next April 22 (3pm to 5.30pm ) and co-promoted by Western Homebuilders Skillnet, the Galway Advertiser newspaper group and Mazars Tierney will see more than 200 property developers hear more detail about the proposal to transfer €80bn to €90bn in property based lending (using current book values ) to NAMA from the Irish owned banks i.e. Allied Irish Banks, Bank of Ireland, Permanent TSB, Irish Nationwide and the Educational Building Society. s
The interaction of Anglo Irish Bank with NAMA is unclear as it is already in state ownership so there is no definitive decision as to what to do with Anglo Irish Banks loan book. Ulster Bank and Bank of Scotland are not Irish owned so neither of these will be involved in NAMA.
Property developers who wish to attend should contact John Buckley, Western Homebuilders Skillnet, Office 9, Airport Business Park, Strandhill, Co. Sligo, ([email protected], Tel.: 0719122600 )
Submission of the attendance fee of €50 per participant before the event is necessary to secure registration as attendance will be strictly limited.
In general, the loans to be transferred are all loans in respect of the purchase of land for development and associated works in progress arrangements (both inside and outside Ireland ) and certain property investment loans where associated with the largest borrowers.
The exact assets to be transferred have yet to be decided as has the definition of what is a large borrower. It is very interesting that loans taken out on to build investment properties, which properties are now completed and in some cases already occupied by tenants, may be transferred to NAMA in the case of large developers. This reflects the fact that it is intended that NAMA ends up with good and bad assets with the good compensating for losses on the bad.
The banks will be paid for the loans transferred by the Government issuing bonds to the banks. The theory is that the balance sheets of the banks would be cleansed by transferring property based loans that have serious issues effecting them and replacing them with a much stronger asset, the Government bonds. In theory this should enable cleansed banks to raise and release further capital notwithstanding that the banks will have recognized significant losses on the transfer to NAMA. The Government recapitalization process already announced for Bank of Ireland and Allied Irish Banks will continue as will the guarantee scheme which continues up to September 29 2010.
Loans will be transferred to NAMA at a discount the level of which has yet to be decided. NAMA will operate as an independent commercial entity and will seek to have all loans repaid in full notwithstanding that NAMA may have acquired the loans at a significant discount to the original amount of the loan. The level of discount is to be negotiated. The comments from Government ministers to date is that NAMA will pursue repayments of the loans to the fullest extent possible to maximize the return to taxpayers. In other words, NAMA needs to secure repayments in excess of the discounted value of the loan when transferred to NAMA. When a loan is transferred into NAMA, the security arrangements on the loan transfer in with it. If personal guarantees have been given, then NAMA can pursue those personal guarantees. If other assets have been cross collaterised, then NAMA will pursue those other assets. This is particularly relevant for companies that are in a group with other assets.
It is anticipated that the banks participation will be optional but the legislation creating NAMA will contain legislation that will make sure that the banks co operate. It is not the intention that a borrower can opt out of NAMA,meaning that if a bank and NAMA decide to transfer a loan there is nothing that a borrower can do about it.
Conclusion
The rhetoric after the announcement was that NAMA would pursue developers to the end of the earth to seek repayment, and developers would not get out of repaying loans as NAMA would not be an “easy touch”. The message given was that banks did not have the appetite to deal with developers properly. Property developers have been unfairly demonized and the implication is that they have done something wrong and deserve to be punished for it. This sounds good politically but, in practice, it ignores some basic facts about developers and existing bank relationships as set out below
— Banks have not been pursuing developers for outstanding loans to the furthest degree because to do so would require receivers to be appointed and assets sold in a dysfunctional market thereby not producing sufficient funds to repay the loans. The general view was that better results would be obtained by working with developers to commence asset sales in the medium term. If a developer has negative equity and will have so for the foreseeable future then there is nothing that a banks or NAMA can do to collect the outstanding debt. The analogy of getting blood from a stone applies.
If there was a personal guarantee in place then banks would have pursued that guarantee in the fullness of time if there was value in that personal guarantee. Banks currently do not see value in pursuing personal guarantees so they have not pursued them; it is not a case of developers getting off lightly.
— NAMA is almost certainly going to need developers to help them finish developments. The developers are the people owning the land and who will have the experience and vision to finish off a development. Why would a developer want to get involved in finishing a development where NAMA would insist on the full level of a loan being repaid? If a developer has negative equity of say €10M on a portfolio of development sites and after developing them would be still be left with €2M in negative equity, what is the point of carrying out the development for NAMA? What would work would be an agreement to share development profits giving the developer a basic salary plus a profit share of say 20 per cent (capped at an agreed maximum ) with the other 80 per cent going to NAMA, and for NAMA to agree a debt write down in advance with the developer. If NAMA collects more than the price paid for a transferred loan, taxpayers make a profit.
— It is important to bear in mind that if a development has to be finished to maxmise the land value then bank funding will be required to do it. NAMA probably will not be permitted to borrow funds (under its enabling legislation ) so by definition, it falls back to the developer to do. Why would a bank lend to a developer unless it was confident that a developer would be able and willing to see the development out. Another issue is that if a bank does fund a development, it will require that it stands ahead of NAMA in the priority of repayment from the sales proceeds.
— The creation of NAMA is designed to solve the issue of getting credit flowing from the banks. If NAMA shifts too far away from standard commercial practices used in developing property and focuses only on debt collections then there is a real danger that activity in the property market post NAMA will be severely affected when the time comes to commence developing the sites over which the NAMA loans are secured. It would be a shame if the NAMA concept worked and credit was freed up in the property sector but there were no property developers left willing or able to draw down that credit to do the work.
