Guest Post – Case Study: Central Coast Development Work Out

Guest Post – Case Study: Central Coast Development Work Out

BACKGROUND

We were engaged as Receivers and Managers of a company by a major property investment fund to assist in the repayment of a $18 million facility that was in default.

The loan was in relation to a 42-apartment development on the central coast that had been recently completed. At the time of the appointment, 8 units had been sold, 4 contracts had exchanged but not yet settled and there were an additional 8 properties subject to lease agreements.

The prospective strata managers, who also happened to be owners of one of the units, notified us that there was some major flooding that continued to occur in the carpark of the building any time there was a slight amount of rain.

This issue was affecting the ongoing sales in the building and was a major cause of concern for the building’s residents and current owners.

 

THE KEY ISSUES

  • At the time of the appointment, appetite for apartments in the market was not sufficient to payout the loan facility. This, coupled with a number of substantial building defects, had effectively led to the default under the mortgage facility and to our appointment;
  • Legally, what was required to complete the 4 contracts that had been exchanged prior to our appointment and how to go about obtaining vacant possession of the leased properties;
  • What rectification works may be required and the costs and time to complete those. This was to assist us in putting a proposal to the client as part of the work out process; and
  • The building had not yet properly formed a strata committee or appointed a strata manager and there was no way of addressing any of the building rectification issues until such a committee was formed.

 

POTENTIAL RETURN POSITION

Based on a valuation of the property on both an “in one line” and a “per apartment basis”, the anticipated potential return to our client in each scenario was as follows:

Amount ($) – In One LineAmount ($) – per apartment
Gross Sale/Rental Proceeds          8,000,000          10,000,000
Less: Sales Commission (est)100,000120,000
          Marketing Costs (est)              30,000              55,000
          Legal Costs (est)              25,000              150,000
          Other Costs (est)500,000500,000
Net Proceeds7,345,000 9,175,000
          Receivers Costs50,000250,000
Net Return to Client           7,295,000           8,925,000

In a best-case scenario, if the building was sold on an as is where is basis, the estimated return would result in a more than 50% write down on our client’s loan facility over a 6 to 8 month period which was a scenario we were looking to avoid.

 

THE SOLUTION

  • Immediately recommended to the client that a building inspector be commissioned to finalise a report to identify any structural issues with the building, the options, and costs to rectify those issues.
  • Based on the building report, formulated a proposal that would see the following occur:
    • A further contribution of $1,250,000 by the client to fund the rectification recommendations provided by the building inspector. This was contingent on the forming of a strata committee and the acceptance of the committee of a special levy being raised proportionate to each unit owner.
    • A sales process that would be completed over a 6 to 8-month period. This would ensure that properties could be drip fed to the market so that the value in the building could be maximised;
    • A vacation schedule of the 8 leased apartments progressively over the 8-month period. This allowed us to maximise the rental returns over the sales process but would also allow for units to progressively enter the market after being painted and cleaned;

Based on our scenario analysis, the value of the units could be increased by appropriately 20% overall and would also likely lead to a more efficient and effective sale process.

Once the proposal agreed to by the client, we undertook the following:

  • Took the requisite steps to form the strata committee;
  • Obtained quotes from several contractors to complete the required rectification works;
  • Successfully raised a special levy via the strata committee and facilitated the clients levy contribution to the required rectification works;
  • Engaged, oversaw and project managed the successful contractor whilst the rectification works were completed over the 8-month period;
  • Negotiated additional concessions for the buyers of the 4 units that had exchanged but not settled prior to our appointment to ensure they completed;
  • Negotiated the vacation of the tenanted apartments and a refresh of their interiors over progressively over the 8-month period;
  • Tendered and engaged a sales agency to market each of the remaining 28 units progressively over the 6 to 8-month period.
  • Managed and oversaw the sales process. All units were successfully sold over the same 8-month period the rectification works were completed.

 

THE RESULTS

Amount ($)
Gross Sale/Rental Proceeds14,755,000
Less: Sales Commission221,325
          Marketing Costs              55,000
          Legal Costs285,000
          Other Costs (Rectification works/concessions/strata fees)1,350,000
Net Proceeds12,943,675
          Receivers Costs512,000
Net Return to Client 12,331,675

Whilst there remained a shortfall of just over 30% on the balance of the client’s facility, we were able to substantially increase the overall return to them through the work out process.

 

Andrew Blundell is a Partner at Worrells. Development Finance Partners partner with Worrells to assist any clients with financial work-outs.  If you are interested in hearing more about their approach, please contact Andrew Blundell via email or directly on 0447 712 774.

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