In accordance with the regulations, Lenders are advised of Assetz Exchange's role in the origination and on-going adminstration of Loans on the platform.
Nature & Extent of Due Diligence in Respect of Borrowers
Assetz Exchange undertakes extensive due diligence on the Limited companies that we lend to, the properties that they invest in and the relevant related parties to those companies such as, for example, letting agents. This due diligence at the time of origination includes:
1. Appointing an independent and indemnified RICS Surveyor from our panel of appropriate firms to undertake and provide a valuation. This valuation is publicly available to Lenders.
2. Reviewing public data about property prices and trends, rental yields and trends and other demographics and data for the relevant area surrounding the property.
3. Considering the rental demand and sales demand for a property appropriate to its short-term investment purpose.
4. Legal title to the property, planning permissions, management company, building warranty, service charge, searches and any freehold/leasehold property related matters are reviewed by the solicitor employed by Assetz Exchange to carry out the conveyancing of the property purchase.
5. The borrower is a special purpose Limited company set up under the instructions of Assetz Exchange for the sole purpose of the transaction and due diligence is not required on those borrowers therefore as they are controlled by a known party and all decisions are made by the lenders to that company.
6. The proceeds of the loan are used by the borrower to purchase the property and pay all associated costs and fees for the purchase, as well as typically leave a cash balance within the borrower for a repairs and renewals contingency. The funds from the loan are only drawn down at the end of the purchase process, after the solicitor acting for the Lender has completed the process and Assetz Exchange is satisfied with the due diligence carried out.
Loan Risk Assessment
1. Properties acquired by borrowers are principally intended to produce rental income to pay interest on the loan. The rental potential for the property is therefore a principal consideration when considering loan risk and is assessed by Assetz Exchange using market data and also via the instructed valuer. Properties must be in a good location and be assessed to have a healthy rental demand in that location considering their type in order to reasonably deliver and continue to deliver indicated rental levels. Any existing tenancies are also reviewed and rental void insurance considered.
2. Properties acquired by borrowers are also intended to be able to repay the loan capital when the loan is repaid and ideally to also produce capital growth. The capital security and capital growth potential for the property are therefore a principal consideration when considering loan risk and is assessed by Assetz Exchange using market data and also via the instructed valuer.
3. Loans to borrowers who are acquiring properties with discounts to market value (in the opinion of the independent RICS valuer) are preferred in order for the borrower to mitigate acquisition costs as all Assetz Exchange loans are for 100% of property and acquisition costs and therefore reliant upon future capital growth and/or acquisition discount to repay the loan in full. Consideration is also given to the fact that lenders receive the potential benefit of capital growth in return for the risk of loan losses.
4. There must be a clear exit strategy through which to return the principal of the Loan.
5. The property must be of a good quality and not likely to require unplanned investment or repairs throughout the Term of the Loan.
6. The property must be completed and in a good habitable state.
7. The lettings and management company must be suitably experienced for the property type.
8. Loans have no minimum term but will typically be from 5 years to 35 years and will be interest only.
9. All loans will be secured by a first charge over the property unless any future vote by lenders supported an alternative first charge loan in which case Assetz Exchange lenders would move to second charge.
10. Appropriate buildings insurance must be in place.
Pricing of the Loan
All Loans are sufficient to cover the cost of the purchase of the underlying property by the borrower and the associated purchase costs and repairs fund. The purchase price of the property is compared to an independent RICS valuation and must in all cases be less than or equal to the value established by the valuer.
Rents earned for the letting of a property are entirely passed on to lenders, net of costs and fees, and are not set by Assetz Exchange and Lenders make their own decision as to whether to invest in the Loan at the indicated interest rate created by the net rental income. Loan transactions on the Secondary Market are priced by mutual negotiation between seller and buyer of the loan parts (Lots) and pricing is not set by Assetz Capital (see Secondary Market section below). Assetz Capital does however provide updated valuations for properties from time to time and publishes these on the property records and in between formal valuations provides property market indexing for the region in which the property is located. This is intended to provide guidance to Lenders of the underlying value of the property held by the borrower and help them when the set selling offers or buying bids on the Secondary Market.
Procedures For Late Payment or Default of Interest Payments
In the event that a tenant of a property is late in paying the rent due, the platform will take the following action:
1. The properties are fully managed by a professional Property Management firm.
2. The Property Manager will inform the borrower and hence Assetz Exchange of the late payment.
3. Assetz Exchange will determine with the borrower and Property Manager the potential remedial measures to be taken and present these to Lenders for a voting decision as to the preferred course of action. Day to day chasing of late rental payments is necessarily delegated to the letting agent.
4. In the event that rental insurance has been taken out for the property, the borrower will trigger the Rent Default Insurance.
5. In the event that late rental income is not recovered and there is no rental shortfall payment from a Rent Default Insurance the Lender will not be paid interest, in the same way as if there is a rental void between tenancies and this is an acceptable situation as per the loan agreement between Assetz Exchange and the borrower.
6. Lenders are advised that net rent may not be paid to them as interest if there are repairs or similar to fund from those rental receipts and there is not sufficient cash balance in the Repairs and Renewals account for that property.
When a loan is approaching its redemption date a valuation will be carried out on the property owned by the borrower. If the estimated net sales proceeds from a sale of the property is not expected to repay the Lenders in full then the Lenders will be asked to vote on either an extension to the loan or to ask the borrower to sell the properties instead. The borrowers do not have additional security beyond the property itself and will be unable to repay the loan in full if there is a shortfall between net sales proceeds and the loan capital value.
How the Secondary Market Works
Each Loan can be traded upon the Secondary Market unless it is suspended. The Secondary Market is activated from the moment that the Loan is drawn. The Secondary Market enables Lenders on Assetz Exchange to potentially buy or sell their Loan Parts (referred to as Lots). Lenders can set the price at which they wish to buy or sell Loan Parts and transactions will only take place if a willing buyer and a willing seller exist at the same price.
There is therefore no guarantee that a loan may be exited before it is repaid by the borrower and early exit from a loan is dependent upon willing buyers offering to purchase your Lots at an acceptable price to yourself. You may need to wait until the loan is repaid in order to receive back your Loan capital and will continue to earn interest until that time.
How Tax Liability is Calculated
The tax calculations vary by two types of loan and each property will have its taxation position identified clearly. Assetz Exchange provides no direct tax advice but instead has provided the following information with the aid of its tax advisers.
1. Borrowers with property whose rents vary according to market demand may have variable loan income. This income is paid as interest to Lenders but is taxable as a distribution by the borrower and attracts dividend tax rates and dividend allowances. The income will be net of current corporation tax rates upon the borrower, even in the case of IFISA Lenders.
2. Borrowers with property whose rents are fixed by way of lease or contract will have fixed interest payable to Lenders. This income is paid as interest to Lenders and is taxable under income tax regime and with income tax allowances. This income will have no corporation tax deductions within the borrower.
In both cases capital gains on property owned by the borrower, net of sales costs and fees, is intended to be passed on to Lenders, subject to any annual growth cap identified on each property. These capital gains, if such sums are available to be distributed upon the sale of a property, are expected to be taxable in the hands of the Lenders under the Capital Gains Tax regime and its allowances.
Tax Law and tax rates are subject to change, as always.