You ask us often why we do not finance our development projects by mortgages when the interest rates are so low. We want to be maximally transparent, so we are glad to have the opportunity to answer.
Currently, we own 6 different real estates. We have financed three of them as natural persons by mortgages. Two of them were bought in cash. The last one was bought by mortgage from Equal bank a.s. as an artificial person.
However, now we are the company 2M INVEST so we want to buy properties as an artificial person. So, the mortgage for natural persons is completely out of the questions. Moreover, it is virtually impossible to finance by mortgage properties for commercial use such as a house, which we would like to transform to a hotel or hostel, roof space in a block of flats, or purchase of undivided and undeveloped plots of land determined for future development.
Only three options or their combination remain:
- Business loan for specific business intention,
- Money from people.
Simply said – is not unlimited.
2. Business loan
In year 2016, we needed to borrow CZK 22.000.000 for the purchase of block of flats. We decided to use the common business loan. First of all, we started to negotiate with company ARTESA. The appraisal of the property, which composed of 12 apartments and 1 business area cost around CZK 120,000 and probably after 2 weeks we got to know that the appraisal was lower than CZK 22,000,000 CZK so we were not qualified for the loan.
We started to negotiate with Equa bank a.s. Before the approval of the loan we attended numerous meetings with bankers. We had to hand or prepare tens of documents: accounting balancing, proof of solvency, budget of reconstruction, which company would reconstruct the property + history of this company, draft of contract for work which must be approved by bank, who would sell the apartments, how high would be the sale prices, marketing plan of sale + specific marketing budget including individual items, list of next expenditures, who would deal with legal aspects of sale, draft of future purchase contract…
We had to moreover attach following documents to the loan proposal:
- Tax return for the last 2 years
- Annual reports including audit reports
- Copies of financial statements (balance sheet and income statement) for the last two years and for the last quarter
- Consolidated balance sheet and cash flow statement – in monthly breakdown
- Extract from the Cadastre Office
- Ownership structure of the company, property or personal interconnection with other business entities, shares of the aforementioned shareholders in other companies, subsidiaries
- Relationships to other financial institutions – existing loans, type, original amount, balance, maturity date
- The amount of lease payments – the name of the leasing company, the leased assets, the original amount, balance, the amount of monthly payments
- Management – people who decide on the operation and strategy of the company (name, function, firm, professional competence)
- Employees, staff development
- Off-balance sheet and guarantor liabilities of the client
- Trade payables broken down by the deadline, after the deadline (up to 30, 90,180, over 360 days)
- The names of the largest creditors
- The structure of company’s claims broken down by the deadline, after the deadline (up to 30, 90, 180, over 360 days), the names of the debtors
- Main products – services, method of sale
- Main suppliers (in percentage breakdown) – payment and delivery terms
- Main Customers -% Sales, Delivery and Payment Terms
- Market analysis and competition
- Financial investment – description, valuation method, value
- Basic resources – overview of HIM and NHIM, technical level, remaining lifespan of buildings, and technological equipment
- Detailed business plan
- Investment plans for the next period and planned ways of financing them
- Financial plan for years: and the main assumptions on which it is based
- Information on other company activities
- Receivable financing: VAT return for the last 6 months or 2 quarters (according to the submission period of the applicant).
It should be said that when you apply for a business loan approval, including all the necessary attachments, you absolutely have no certainty that your loan will be approved. You will not find it out even within 14 days. After 14 days, the bank will ask you to provide additional documents and clarify some existing ones. I do not even remember how long our credit approval and loan and pledge contracts took us, but it was certainly not a shorter period than 45 days.
Paradoxically, for a business loan, unlike a mortgage, you have to pay for credit approval; in our case it was CZK 130,000, additional fees: a fee for an account of CZK 46,000, and an annual insurance of property of CZK 23,000.
The bank lent us 1M PRIBOR + 3.8% pa.
Consequently, when we add to the interest rate is 3.8% pa. monthly pribor and fees for two appraisals, an account, loan approval, and property insurance (and we do not count our time and wages for our assistant who did nothing but the necessary attachments for the bank for at least 2 months), we borrowed not at 3.8% p.a. but at least at 5.3% p.a.
And we are still waiting for additional charges to the bank and the Cadastre Office for early repayment of the loan, the fee for the deletion of the lien on each apartment (× 15), and the costs of legal service.
In addition, the bank is constantly talking about how the contracts should look like, how much CZK is the minimum selling price per m² (if lower, we have to pay the bank sanctions), and so I could continue…
If you compare the two options: borrow money from you at 7% p.a., or re-enter the “suffering” when negotiating with the bank at 5.3% pa. We do not hesitate for a second and we want to borrow from you in the form of real estate bonds!!!
3. Money from people
It is obvious that this way is tempting also for big real estate players. In the corporate world and also in the state sector of all well-developed countries and companies, the issuance of bonds is completely normal and often used as a form for obtaining financial means for business intentions.
total issue: 201 000 000 CZK
nominal value of a bond CZK: 3 000 000 CZK
interest: 3,75% p.a.
due date: 4 years
more information available here: issuance of bonds FINEP
The most famous project: NOVÁ HARFA, Prague – Vysočany
CZECH PROPERTY INVESTMENTS, A.S., with its CEO Radovan Vítek
total issue: 1 000 000 000 CZK
nominal value of a bond : 1 CZK
interest: from 3,75% p.a. to 5,80% p.a.
due date: 4 years
more information available here: issuance of bonds CPI
The most famous project: QUADRIO, Národní třída in Prague
total issue : 100 000 000 CZK
nominal value of a bond: 1 CZK
interest: 9,5% p.a.
due date: 15 years
more information available here: issuance of bonds
The most famous project: ECO CITY MALEŠICE, Prague 10 – Malešice
total issue: 100 000 000 CZK
nominal value of a bond: 1 CZK
interest: 6,5% p.a.
due date: 6 years
more information available here: issuance of bonds Římská 1222/33
The most famous project: REZIDENCE NIKOLY TESLY 8, Prague – Dejvice
J&T REAL ESTATE, a. s.
total issue: 1 395 000 000 CZK
nominal value of a bond: 30 000 CZK
interests: 5,25% p.a.
due date: 5 years
more information available here: issuance of bonds Rustonka
The most famous project: RUSTONKA, Prague – Karlín
Money from people are used also by people and companies from completely different branches:
There are bonds totalling up to 85 trillion USD (one-million, billion) in the world, source here. So it is nothing unusual that also we issue bonds.
The next reason for purchase financing of properties by bonds is novelty brought into the Czech Republic by statute Nr. 89/2012, Civil Code. Section 1761 states that it is possible to establish prohibition of sale and prohibition of encumbrance as an easement which unlike the previous regulation makes management of mortgage financed investment property more complicated.
Earlier was this bank safeguard regulated by obligation of contractual parties. Signature of buyer validated that he or she would not sell or otherwise encumber property and if he or she did so than the obligation to pay a monetary penalty emerged. It was all about the contractual regulation between a buyer and a bank (inter partes) which lead up to the impossibility to influence to any extent the management of property itself. Contemporary legal regulation in easement form is however in force against all (erga omnes).
At the first glance only a little distinction has quite a serious impact on the sale process though. Simply said, the previous variant of obligation enabled a seller to sell a mortgage financed property even without the financing bank consent. The sale of such property was valid and legally binding so the new owner was then simply recorder into the relevant Cadastre Office. This process resulted in seller’s duty to pay monetary penalty to the financing bank for premature loan redemption. Nothing more, nothing less.
Current legal regulation requires to register each and every easement, eq. prohibition of sale and prohibition of encumbrance, into relevant Cadastre Office. Consequence is that you are forced to obtain written consent of the financing bank to any modification of these easements. If the financing bank will not grant you its written consent you cannot sell the property.
This state definitely increase the security of the financing bank, but on the other hand makes our situation more demanding because the sale of the property can be blocked and can also took up more time. We have many times encountered the unwillingness of the banks which have been aware of the fact that after sale of the property we would repay the whole premature loan and therefore they would lose a significant portion of interest.