Navigating the endless lending options available can be a daunting challenge for any business. With so many variables between tourist parks, that challenge can be compounded. So, where to start? We’ve prepared a summary of the key lending jargon and considerations:
Types of finance
The types of finance on offer for Tourist Parks are almost endless, but are heavily dictated by business needs. From acquisition of a new park, property purchase, capital expenditure, to hire purchase – the list of potential requirements goes on.
A newly released option, by one lender, will certainly open up new opportunities for some, with an extended maximum loan term of up to 30 years, when secured to a suitable commercial property (previously 15 year maximum). While the total cost of an extended loan term will be higher than a shorter term, the potential benefits may help businesses to:
- Review existing facilities and restructure to support cash flow, resulting in a greater capacity to manage expenditure.
- The flexibility to reduce existing loan repayments, to help run or grow the business, without restricting to the option to increase repayments when preferred.
Loan to value ratio (LVR)
An often-used term in the lending industry, but what does LVR actually mean, and what are the associated requirements for tourist parks?
Simply put, LVR is a restriction set by lenders that determines the maximum loan in proportion to the value of a certain asset. This is used to provide business owners and lenders a fall-back position, should the business be negatively impacted and find themselves no longer able to maintain the required loan repayments. In that case, the secured asset can be sold (by the client or lender) with confidence that the market value will at least repay the outstanding debt.
As a guide, lenders will generally allow a maximum LVR of 35-50% on a leasehold tourist park, and a slightly higher LVR of 50-65% on a freehold park, subject to terms and conditions.
Lenders will require a formal valuation for all new clients and generally existing clients, depending on the time passed since the original valuation and new lending request.
Breaking down interest rates
Unlike home loans or personal loans, interest rates for Tourist Parks are determined by lenders using several different elements. Generally, the approach from Lenders is to quote the current Bank Bill Swap Rate (i.e. BBSY) + Customer margin + Line Fee, which is then tallied into a final all up interest rate.
Understanding what that actually means though is another challenge.
The BBSY is an Australian benchmark interest rate, quoted publicly used as base rate by each lender. This makes up the basis of the all up interest rate. Generally, the BBSY rate is set for a 90-day period and charged on the outstanding balance of the loan.
The customer margin is determined by the Lender on a case by case basis. The individual characteristics of a business are compiled to determine a risk rating, which is expressed as a percentage. When determining this figure, some considerations include (but are not limited to) whether the business is leasehold or freehold, trading history, location, occupancy reports (historical and forecast), cash flow, seasonality, experience of the operators and LVR. The customer margin is generally set for the term of the loan and is charged on the outstanding balance of the loan.
Similar to the customer margin, the line fee is again determined by the lender but is charged on the limit of the facility, rather than the outstanding balance.
Other terms used by lenders to determine the end interest rate and charges for a client are a reset fee or rollover fee, generally both charged per 90-day period when the BBSY rate is reset.
Each lender may vary how they charge and what they label each element of the interest rate/fees.
While the BBSY will be the same for each client, the customer margin, line fee and other fees could differ dramatically – so one lender quoting on any two tourist parks is never the same.
Finance brokers have the ability to advocate for their clients, negotiating with multiple lenders the customer margin, line fee and other fees to gain the optimal outcome for each.
While ‘COVID-19 fatigue’ is setting in for many, we can’t ignore its impact in any discussion about financial matters. The reality is that the Tourist Park industry has undoubtedly been impacted, some states and locations more than others. In saying that, it certainly does not mean that the prospect of increasing existing lending or refinancing to another lender is out of the question at this time.
The current situation certainly presents new challenges, but a finance broker is able to help mitigate those factors in discussions with lenders. By working in partnership with your accountant, we can clearly depict and articulate the nature of the impacts on the business, length of impact (i.e. forced closure dates), particular council requirements during this time and current trading terms moving out of this time.
Disclaimer: This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact the BDO member firms in Australia to discuss these matters in the context of your particular circumstances. BDO Australia Ltd and each BDO member firm in Australia, their partners and/or directors, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.