# Commercial property loan call in?



## Captain G (23 March 2010)

I was told that a bank can call in a loan on a commercial  property at anytime. It came from a story I was told about a fellow who 6 years ago borrowed $800k from one of the 4 big banks for the purchase of a $1 Mill commercial property. It was leased out for long term and all repayments were being fully meet.

Then mid last year he was notified that the bank said they were calling in the whole loan. He couldn't do it, the tenant was thrown out, the fellow lost the property and was then sold off as a $700k firesale. Can this really happen?? Isn't a loan a locked in contract on both parties, for so many years, with certain repayment etc ?? 

I suppose it's like a margin call on property. I was also told that this was very common practise by the banks during the late 80's/ early 90's recession, during the commercial property bust.


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## tech/a (23 March 2010)

Captain G said:


> I was told that a bank can call in a loan on a commercial  property at anytime. It came from a story I was told about a fellow who 6 years ago borrowed $800k from one of the 4 big banks for the purchase of a $1 Mill commercial property. It was leased out for long term and all repayments were being fully meet.
> 
> Then mid last year he was notified that the bank said they were calling in the whole loan. He couldn't do it, the tenant was thrown out, the fellow lost the property and was then sold off as a $700k firesale. Can this really happen?? Isn't a loan a locked in contract on both parties, for so many years, with certain repayment etc ??
> 
> I suppose it's like a margin call on property. I was also told that this was very common practise by the banks during the late 80's/ early 90's recession, during the commercial property bust.





Happened to me in the 80s
Was fair enough I couldnt cash flow the massive loans I had.
Tennents were going broke interest was at 18% + 6% penalty if you missed a payment.

Avoided bankruptcy.
If you maintain payments within the terms of the contract then you wont be for closed.
*What can happen *is on an interest only loan at the end of the period(3-5 yrs) the bank could re value the property and say in your friends case the 1 mill becomes 800K which the bank will only loan 560K in which case if he didnt have the equity short fall---Ooops!


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## Bushman (23 March 2010)

Captain G said:


> I was told that a bank can call in a loan on a commercial  property at anytime.




That is correct. There is also covenant testing on most commercial loans which can lead to a 'review' of the loan. 

These include Loan to Value Ratio and Interest Coverage Ratio. 

Banks view the ICR the most seriously as it shows that the mortgagee might be having difficulty meeting its interest committments. LVRs (or Loan to Value) have been breached across the sector due to devaluations. The breaching of these have often resulted in 'refianncing' of the loans and ratcheting up the interest rates. 

Best advice is the read the fine print of the loan document and understand all the covenants/clauses. Then you will be prepared. DYOR


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## WaveSurfer (23 March 2010)

tech/a said:


> ....*What can happen *is on an interest only loan at the end of the period(3-5 yrs) the bank could re value the property and say in your friends case the 1 mill becomes 800K which the bank will only loan 560K in which case if he didnt have the equity short fall---Ooops!




Yep tech. Make sure you always read the fine print!


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## kincella (23 March 2010)

sorry, but there is something wrong with the original story....
if the loan committments were being met....the bank would not call in the loan....

there must have been a trigger....
where was the tenants lease ? you cannot just break a lease and toss the tenant out....

The bank would be aware of the lease committments......
Of course a property will sell for less if it has no tenant

I believe the committments were either not being met, or there was a problem with the lease, or the rental income was not covering the interest cost etc....

The story just does not gel with me
Most banks will lend up to 75% of the rental/lease income per annum
did the rent not rise, or in fact fall, therefore not covering the interest cost....
ask your mate for more details

there is  more to that story....


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## mattzigs (23 March 2010)

Just as an aside, I am interested in how the same situation as above might apply to residential property; in particular, if residential property owners are keeping up with payments but their LVR drops as a result of lower property prices/valuations, what action can the banks legally take? Are residential owners protected by some sort of legislation?

Cheers Mattzigs


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## Investor82 (23 March 2010)

Commercial loans can be called in at almost any time. In every case there is a review period on a commercial loan, often the borrower is not even aware that the loan is being reviewed. At review period the bank is within its rights to amend any of the terms and conditions of the loan. The borrower of coarse is under no obligation to accept them, however, the bank will just pull the loan if you dont. 
At times the banks will conduct a risk review and decide that they are overexposed in certain areas/industries. Depending on the severity they may call in some loans, or alternatively just stop lending in those areas. Happens the most in regional/rural areas. Its not nice for anyone involved. 

Residential mortgages are covered by the consumer act, and so a loan can only be called in if covenants are not met.


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## nioka (23 March 2010)

In the 80s it was common for commercial loans to be made in the form of bank bills that were rolled over each 3 months. It was common for banks to use the rollover clauses to get out of loans to unpopular types of businesses. A business needed to keep on showing that their business was capable of continuing to pay its way regardless of the past record. Local bank managers were at that time being "relieved" of the authority to approve loans and the approval authority was transferred to a "loans" officer at the head office.

So, yes, I know of quite a few businesses that suddenly found what they had thought to be long term loans were actually very short term loans. I also personally know two bank managers, one from NAB and another fron WPB that resigned because of that change of policy.


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## Investor82 (24 March 2010)

nioka said:


> In the 80s it was common for commercial loans to be made in the form of bank bills that were rolled over each 3 months. It was common for banks to use the rollover clauses to get out of loans to unpopular types of businesses. A business needed to keep on showing that their business was capable of continuing to pay its way regardless of the past record. Local bank managers were at that time being "relieved" of the authority to approve loans and the approval authority was transferred to a "loans" officer at the head office.
> 
> So, yes, I know of quite a few businesses that suddenly found what they had thought to be long term loans were actually very short term loans. I also personally know two bank managers, one from NAB and another fron WPB that resigned because of that change of policy.




Not just in the 80's - probably 70-80% of commercial loans now are on bills. 
I resigned from corporate banking 12 months ago for similar reasons.


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## ChilliBlue (24 March 2010)

mattzigs said:


> Just as an aside, I am interested in how the same situation as above might apply to residential property; in particular, if residential property owners are keeping up with payments but their LVR drops as a result of lower property prices/valuations, what action can the banks legally take? Are residential owners protected by some sort of legislation?
> 
> Cheers Mattzigs




It is no different what the loan is for.

If the asset has depreciated in value and the bank believes that there is a risk to their loan amount, they can call it in.

If you do meet their requirements for the reduced value, then essentially a "trigger" is pulled and the security seized.

Several loan companies routinuely review those residential properties wherein the mortgagee has a loan 90%+.


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## kincella (24 March 2010)

can we discuss the commercial property loans...as per the original post....supported against commercial property...

as different and distinct from a business loan...in running a cafe business etc


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## nioka (24 March 2010)

kincella said:


> can we discuss the commercial property loans...as per the original post....supported against commercial property...
> 
> as different and distinct from a business loan...in running a cafe business etc




My earlier post actually referred to loans for commercial property. Applicants for a loan for a business would find that they had to either support the loan with property mortgage of some sort, often the family home and even then the finance offered would probably have been via bank bills. My experience was "commercial loans meant bank bills" and the interest rate on commercial loans was always higher than the home loan rate.


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## kincella (25 March 2010)

my experience and knowledge for past 30 years is....if you are buying a commercial property, the loan is secured against that property.....no residential loans, no commercial bills...involved...simple and straight forward...
the business is purely that of a lessor or landlord...

the banks use two criteria, the funding required against the MV...usually around the LVR 70% mark, or the loan repayments do not exceed 75% of the commercial rent received....

whereas with business finance....this is secured against the residential property together with commercial bills....with various other products tossed in, as leasing finance, debtor finance etc
as in the business of running a cafe, motor repair, retailer etc

distinct to being a landlord, generating income from leasing the commercial property


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## nioka (25 March 2010)

kincella said:


> my experience and knowledge for past 30 years is....if you are buying a commercial property, the loan is secured against that property.....no residential loans, no commercial bills...involved...simple and straight forward...
> the business is purely that of a lessor or landlord...
> 
> the banks use two criteria, the funding required against the MV...usually around the LVR 70% mark, or the loan repayments do not exceed 75% of the commercial rent received....




I have had commercial loans from 3 different banks where the property was leased out to businesses. The LVR was around 50% and the interest was covered by the rents 2 to 1. Rents twice the interest payments. In several of these loans over quite a few years I WAS NEVER OFFERED ANYTHING BUT BANK BILLS.

I gave up working for the banks a few years ago and only do a development now that I can fund myself.


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## kincella (26 March 2010)

what was the suburb....I know the banks have lower LVR on the location...ie based on population...some banks just will not lend outside the city or very large regional cities...
you really have to shop around for the best deal...
no way would I take on a commercial facility against a long term investment

look at this group...they say they specialise in commercial loans...but the rate quoted to me recently at 8.5 was a bit high... they lend to 80%

http://www.chocolatefinance.com.au/Commercial-Loans.html

Suncorp ...I have a commercial loan, fixed for a year at 7.00%..they lend to 15 years....it was 70% lvr at the time
I was paying 7.5-8% first 5 years, but negotiated it down last year

find a commercial broker...for a long term loan at better rates...and the 75% of income was quoted to me mid last year by a broker...
not a resi loan broker...they are useless


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