Construction and Development Loan Request–A Case Study

QUESTION 1

Identify at least three positives and three negatives about the Garda loan request (present these points in the form of bullet statements or phrases)

Positives:

1. The loan request of Garda Investment Associates Ltd which is a private equity investment firm is looking for financing its development and construction of the Strip Shopping Center in the region of Romania as it presently owns. It wants to lease around 33,211 square feet of the leasable area consisting of the retailer center and restaurant building. The tenant firm’s information and the lease rates for almost 86% of the rentable property have been provided by the loan provider. It is a positive point of the loan request as the company income information is legitimate and based on genuine grounds. It shows that almost 86% of the income from operations is dependable and confirmed.
2. Garda Investment Associates Ltd is a private equity firm which is well equipped in real estate investment and the development sector and is proficient in this type of business. The majority stakeholder of the investment company, Sorin Nelersa has a 40% equity stake in the firm and is responsible for the major interest of the firm. The other three private members have 20% of the equity stake.
3. Another positive thing about this loan request is that the Debt Service Coverage Ratio for this project is 1.53 times, which is greater than the required 1.05 to 1.5 times.

Negatives:

1. The first negative thing about this project is that there is no collateral provided with the loan request which makes it highly risky.
2. The second negative thing is that the loan borrower’s income is not shown and provided with the request which also makes it highly risky.
3. Another negative aspect of this loan request is that the creditworthiness of the borrowers is not confirmed.

QUESTION 2

Address the major issues associated with the loan request

The major issues of the loan request of the Garda Investment Company involve the issue of the creditworthiness of the borrowers which has not been provided by the firm in the loan request. Furthermore, the investment company has not provided with any collateral to support its creditworthiness. Other than this, as the construction projects are considered highly riskier because of its dependency on future cash flows, the providing of stronger financial collaterals and creditworthiness of the borrowers is needed. Even though the provided income and expense statement and the rental rates are enough to cover the debt service, it is based on the tenants of about $100,000 vacant amount which has been added in the annual rental revenue which if deducted from the net operating income would show a negative balance.

QUESTION 3

Determine whether or not the bank should make the loan and discuss the reasoning behind your recommendation (select only one of the two alternatives below)

• If you decide in favor of the loan, clarify whether it would cover both the construction and development phase and the mini perm financing upon completion of the project. Further, describe any terms or conditions you deem appropriate to safeguard the bank’s claim and identify the office where to book the loan given the bank’s structure of international operations.

• If, on the other hand, you decide against the loan, on what grounds would you turn down the request?

The bank should not make the loan to the Garda Investment Company as its creditworthiness is not known by the bank. Moreover, the bank is also not provided with any financial or property collateral as well to reduce its risk. I show that the loan providing to the Garda Investment Company would be highly risky. The high risk of the nature of the real estate business does not allow the bank to venture into a business which is dependent on the rental cash flows from vacant spaces of the rental lease which is not a confirmed source of cash flow. It makes the loan request riskier and hence unacceptable for the bank to be approved to grant the loan. In case the loan is granted, it is not sure that the cash flows from the tenants will be confirmed as well. Other than this, even though a majority of the tenants are high profile companies with good credit profiles, the vacant space cannot be confirmed for any cash flow stream making this project to be not acceptable for loan grant.