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  • #981363
    PRO
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    I have 2 clients at the moment that are under external administration and them not using separate entities for business premises has cost them a fortune, one example below. I am rather opinionated about this but that has come from having grown men crying in my office because they have lost everything they have built up because of either bad advice or, even worse, they had good advice and ignored it to save a couple of grand on the way in. It is definitely worse for the people who were told and tried to save money as they know a big part of their loss is due directly to their own actions.

    Example
    Client’s successful business owned through Pty Ltd that also owns the premises. Client has never missed a loan payment, (this bank is divesting some of its commercial loan portfolio and is revaluing a lot of properties at present) but bank has revalued the premises and it has decreased and therefore breached the the loan covenants. Bank sends a letter and says you are in breach you have 14 days to refinance the loan or we put you under administration. Premises value is down and can’t refinance in that time (loan on premises is $7m). Administrators sent in. Administrator fees are clocking up fast, Business owner who built this up from nothing is now trying to find external funding to buy just the business (his equity in the premises will be gone through fees) from his own company. He may have to walk away completely and be left with the crumbs after everything is paid off, the bank gets their money, real estate agents fees, administrators fees etc. Had there been separate entities only the premises entity would be under administration and his business would be fine.

    I would NEVER NEVER (unless you are looking at being a listed property trust) use anything but a stand alone entity for each commercial property. Depending on the owner/controlling situation depends on the type of situation. You can cover any sort of arrangement through related party loan agreements etc if structured properly.

    I go further and recommend that you utilise an overall structure, with your equity sequestered in a non trading/non-investing trust or then makes secured loans to other entities. If not set up properly it provides little protection, if setup properly you can go personally bankrupt and still come out the other end.

    Darryl

    #1129795
    AGMBris
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    Wow

    So a loan to equity ratio can create a default to the bank yes? A capital decrease substantial enough was enough to give the bank the right to take action? Even though all loan payments had been made and there was no arrears?

    And is the bank then looking to refinance to get more equity from the client? Or is it an underhand way for the bank to refinance at better interest rates?

    Either way its a terrible situation and to my understanding, no matter how they structured the commercial property finance, the same thing would have happened from the bank yes?

    I guess your point is, they would not have the lost the business income at the same time.

    It is definitely very very good advice re: taking the time to consider structure to protect oneself, at the beginning…and a case of 2 to 3K.

    #1129796
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    Hi Anthony

    I have also seen the same clauses in residential loan contracts, though have never heard of it being used. In commercial it is common.

    This bank has taken a bath during the GFC on its commercial lending portfolio and is trying to reduce losses going forward or divest its loans to other lenders.

    Think of it like a margin call on shares, it is essentially the same thing, either put in more money or be forced to sell, or in this case, as it was owned by a company, receivers and administrators appointed. It only has to dropped by a small percentage to breach the LVR, depends on how it is worded in the loan contract.

    D

    #1129797
    nerdpool
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    That’s an interesting scenario you describe, and I’m curious as to how you would go to prevent it.
    I was thinking about transferring ownership of my company and property to a trust within a few years, but from what you describe I guess my best bet would be to do this, but to also move the property into the control of a company controlled by the trust. Is this correct?
    Can you point me at any resource to read a bit more on this and other potential pitfalls? I will seek legal and/or accounting advice before I make any decision, but I like to understand things in reasonable detail myself beforehand.

    #1129798
    PRO
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    nerdpool, post: 147176 wrote:
    That’s an interesting scenario you describe, and I’m curious as to how you would go to prevent it.
    I was thinking about transferring ownership of my company and property to a trust within a few years, but from what you describe I guess my best bet would be to do this, but to also move the property into the control of a company controlled by the trust. Is this correct?
    Can you point me at any resource to read a bit more on this and other potential pitfalls? I will seek legal and/or accounting advice before I make any decision, but I like to understand things in reasonable detail myself beforehand.

    Hi

    Separate Entities are the Key, Keep trading entities separate from investing entities an make sure that there are only commercial relationships between them that are structured properly.

    You have also got to be careful regarding stamp duty and land tax issues (no land tax concessions for discretionary trusts in NSW).

    Companies are not a good vehicle to hold property as you do not have access to the 50% CGT discount that a trust or individual does

    Entity A owns the business.
    Entity B owns the property

    Entity B rents the property to Entity on terms no different to if Entity A was controlled by someone you have never met, under a formal lease, prepared by a solicitor, at market rates.

    If Business goes under Entity B loses tenant but still holds property assuming it can afford any holding costs

    If call made on property Entity B might go under but Entity A keeps trading and pays lease to who ever ends up owning the property.

    If business and property owned by same entity or not structured properly, and either thing happens to either, both are gone.

    I can’t think of a single resource, you could try googling asset protection strategies. My stuff comes from a mixture of Court cases, legal study and business experience, as well as clients going through liquidation or when you go after other people for a client.

    #1129799
    akagrp
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    So true, business owners should take risk assessments at start of any business venture, as an advisor you do come across clients that believe the only reason we make these recommendations is to collect the setup fees and ongoing costs of running the separate entities, but this is not the case. Advisors make these recommendations based on clients position, risk profile, succession planning and overall asset protection

    It is a shame though that the bank did not support the customer, but it is a warning to other business owners that since the GFC the banks do take those loan conditions very seriously

    Another important factor business owners need to consider is not to cross mortgage assets and entities

    #1129800
    nerdpool
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    Thanks for the reply, very informative. I have heard many people recommend putting your own property into a trust to protect it from any personal lawsuits etc. So can you have a mutli-tiered trust structure?
    eg The scenario I was thinking would be something along the lines of the following:

    Entity A – An individual with owner occupied property
    Entity B – A family trust
    Entity C – Another trust
    Entity D – A company

    where:
    The assets from entity A are transferred to entity B
    Entity B controls entity C and owns D
    Entity C owns commercial property and leases to entity D
    Entity A remains a beneficiary of entity B

    Does that make sense and is that the general gist of how such a scenario should be administered to maximise protection and income distribution?

    #1129801
    PRO
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    Note Quite

    A discretionary trust cannot own another discretionary trust, it can be a beneficiary of another trust though.

    It is also not as simple as transferring to a trust, you are effectively selling it to the trust and the trust is buying it from you so stamp duty and CGT payable.

    One option is to gift all you equity to a trust that never does anything other than lend money to your other entities. It will then lend money, by way of secured loan to a property trust to buy a property (second mortgage) or a business trust secured by some other form of security. These sorts of structures have costs and can cause issues with financiers, but can also be an outstanding form of insurance so to speak.

    But you might be best to use a unit trust in some instances or a company or a partnership of discretionary trusts or a combination of. I have a PDF I use for asset protection diagrams but is too big to link here. PM me your email and I will send it to you.

    I have a client who has gone through liquidation and is personalyl bankrupt but is still a beneficiary of a number of well off trusts. One of these very generous trust s bought his house off him and now rents it back to him at market rates, but at least he didn’t have to move. Another entity nets about $10k a month and this entity may decide to distribute money to him once he comes out of bankruptcy. His son is generously supporting him within the confines of bankruptcy at present and is lending him a car. This client has lost a lot of his wealth and it hurts, but that relates to one entity and his personal guarantees for that entity, the liquidators and his bankruptcy trustee could not touch the assets of the other entities because they are not his, they belong to the other entity and it is up to the director of the corporate trustees of those entities whether or not they distribute money to him.

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