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NAMA – ‘A Work Out Vehicle – Not a Liquidation Vehicle’

Our industry is accustomed to good old fashioned property bubbles- but this is different. We got hit by an international tsunami as well as a local bubble. I look back and wonder how we got from being the most adventurous and independent property market in Europe to being the most controlled one. The answer is that we built too much, borrowed too much, bought too much, and did all this too quickly and without appropriate checks and balances in place. In past property bubbles, the bankers, Regulators and Government eventually rationed the availability and the price of money and called a halt to property excesses before too much damage was done. This did not happen this time; no one shouted stop! The instincts of the speculators, developers and investors turned into a feeding frenzy. In the process property prices at least doubled from what I would regard as a stable position and they have now come crashing back down. They are unlikely to get back to 2007 levels for a very very long time.

In the circumstances the Government had little choice but to set up NAMA. It was the only viable way to save the banks, who are even more critical to the overall economy than the property industry. As a result NAMA is now the main banker to our industry and all key decisions will emanate from NAMA for several years. So we are where we are, but how do we get out of here? Hopefully NAMA will have a relatively short life and our industry will return to normal territory soon. Fortunately its semi-nationalisation is not ideologically driven – only the 80% land-tax element is (see box).

Having resolved the banks’ balance sheet problems in practical terms, NAMA’s job is threefold, as follows:

1. To effectively warehouse the oversupply of houses, offices, development sites etc, and feed them out as the economy requires.
2. To restore an operational property and construction industry in Ireland.
3. To repay- over time- its Bonds with the funds realized from the sale of warehoused property assets.

The key to the capacity of NAMA to do this work is the almost free line of credit given to it via the massive €54bn ECB supported Bonds issued to the Banks and currently costing1.5% p.a.

The modus operandi selected by NAMA is to require all its significant borrowers to prepare Business Plans showing how they intend to work out their portfolios and repay their borrowings over time. As NAMA’s CEO Brendan McDonagh said at a recent conference, NAMA is not a liquidation vehicle: it’s a work-out vehicle. NAMA wants its borrowers to produce plans showing how they will survive (and hopefully prosper), and thereby repay their borrowings. The last thing that the management of NAMA will want is to take direct control over millions of square feet of empty buildings and acres of development sites. It will want developers and borrowers who know every detail of their schemes to stay in control, to add value, and to work in collaboration with NAMA to achieve a satisfactory outcome for both parties. But, while NAMA will not want to take possession of land and buildings, it will have the powers to do – so don’t mess with it!

The key to survival will be the quality of the Business Plan presented to NAMA. The calibre of these Business Plans prepared by borrowers/ developers will impact on their contractors, subcontractors and suppliers, and on their professional advisors such as architects and QSs. So the big issue is how to go about preparing a robust Business Plan that will get the support of NAMA’s Management and Board.

NAMA in its own Business Plan gives some help in this regard. It wants the following to be included by each borrower:

• Current situation
• Level of indebtedness
• Full list of assets and liabilities
• Short, medium and long-term objectives
• A list, in order of priority, of assets to be disposed of and assets which require additional investment etc
• Funding requirements.

The essential part of any Business Plan will be the cash-flow statement. This will show the projected movement of assets and resulting funds over a realistic time span, whether it be 3, 5 or even 10 years (the circumstances, including the size and nature of the portfolio, will dictate the time frame). The content of the cash-flow statement will be based on various assumptions made in respect of each asset, including:

• Interest payments being made or accruing
• Cash from disposals and rents
• Payments to creditors and from debtors
• Further expenditure required before an asset can be sold
• Further equity input or borrowings and sources of these.

The most critical element of the Business Plan will relate to assumptions about sales or lettings of properties and their price levels. Most Business Plans will have to assume some improvement in market conditions from those currently prevailing, or else the plan will not stand up. The first must be a recovery in the economy, which is critical for us all, but we need to know from NAMA the assumption it will consider reasonable – a 3% p.a. recovery in values, say, or 5% perhaps? NAMA itself has projected its own break-even on a basis of 1% growth, but this is very conservative in my view.

Apart from the need for an overall recovery in the economy so as to restore demand for buildings, much will depend on the local market and the level of oversupply, and on other developers’ plans for supplying product into a given market or sub-market. One of the issues causing concern is to what extent NAMA will seek to control supply in each sub-market. Will it leave it to market forces or will it actually try to control supply? For example, if all the developers intent on providing new office blocks in Sandyford were to get funding and support from NAMA, this would exacerbate an already bad situation. But if NAMA were to favour one developer at the expense of another, this would lead to its own problems. We don’t know how NAMA will address issues such as these, and some indication would be helpful in preparing Business Plans.

When NAMA gets a Business Plan, it will assess it to evaluate whether it is sensible, logical and realistic, and will meet with each of the major borrowers to give a response. If agreement can be reached on a work-out plan, NAMA will work constructively with the borrowers to achieve the optimal outcome. However, if no agreement can be reached and/or the borrower does not wish to cooperate he will be asked to repay his debt in full. If this does not happen or is not feasible, NAMA will take enforcement action against the borrower. NAMA will have the choice of taking possession of the assets or appointing liquidators or statutory receivers. The latter will effectively act as Asset Manager in possession, reporting to NAMA. For those unfortunate enough to have their assets taken over by NAMA, the debt will not be wiped out. Indeed one of the tough provisions in the legislation is that if NAMA takes possession then the property will be valued and only that valuation amount will be credited to the debt. If the property is sold later by NAMA and they receive more for it than the valuation then none of the extra is credited to the borrower’s debt.

So the alternative to coming up with a sound Business Plan is not very attractive, and borrowers would be best to set their minds on becoming a ‘NAMA man’ and producing a robust Business Plan.

My definition of a NAMA man is as follows:

• Trust-worthy
• Technically competent
• Good market/industry knowledge
• Good attitude towards NAMA
• Realistic expectations
• Resourced to walk the talk
• In it for the long haul
• Focused on debt repayment.

So what does all this mean to you as architect, surveyor, builder or supplier associated with developers with borrowings from NAMA? You will need:

• Firstly, to support your client in preparing a good Business Plan, one that gets the support of NAMA. Don’t accept hairbrained ideas based on unrealistic outcomes. NAMA will not support this.

• Second, to look at your own cost inputs. If cost is too high it could jeopardise the whole Business Plan. NAMA will not tolerate excessive costs.

• Third, to recognise your and your client’s weaknesses and try to find solutions to any deficiencies in leadership, management or skilled resources. NAMA will want an ‘institutional’ attitude and performance from its ‘client’ and will not tolerate incompetence.

For you personally, if NAMA decides to run with your client’s Business Plan then your prosperity will depend on its being rolled out successfully. NAMA will need you as a professional or contractor if the plan is to meet its objectives. This is your opportunity. NAMA will not want to get involved in selecting new professionals for projects that already have competent suppliers, contractors or professionals.

As to NAMA’s administrative procedures, we have been told that it will directly control the top hundred borrowers who make up 50 % of borrowings. The other 50 % will be administered by one of the participating banks. Thus, if outside the top hundred, your bank may not appear to change – but that bank will be supervised by a NAMA official who will be calling the shots: forget good old-fashioned relationship banking of the golf club variety!

One of the big concerns that I have about the NAMA project is the amount of time required to carry out due diligence and to transfer each of the loans across to NAMA. This was all planned to be completed by mid 2010, but NAMA have already admitted to time slippages in transferring the big loans, and this does not auger well for the smaller ones. As we all know, the commercial property market has been in a sort of limbo for the past twelve months or more, with no decisions forthcoming from banks on how to go forward. All have been waiting for NAMA. If the delay extends past the middle of next year I believe that NAMA must put in place some interim procedures that allow decisions to be taken by the banks administering these loans. How such an interim procedure might work would need to be worked out, but it would be totally unfair to allow interest to accrue and projects to be frozen simply because NAMA can’t get around to processing what are their new clients.

So 2010 will be the year of NAMA for us all. Those who survive will be NAMA men. We are all on a learning curve – including NAMA. Hopefully by this time next year we will all be in harmonious partnership with our new main banker.

Roof Cave-Ins and Broken Water Pipes – How Best To Avoid These Perilous Situations During Winter

Each season brings with it its own benefits and challenges. Yard work and home maintenance is typically thought of as a spring chore. There are several aspects of yard work and property maintenance that, if left untended, can cost a pretty penny in the midst of winter months, however. With the onset of the fall and winter seasons fast approaching these tasks often go overlooked by home owners.

The complacency of a home owner can cost thousands of dollars or more with regards to tree maintenance and home maintenance. Every year each winter seems to deal a harsher blow to the private citizen and business owner alike than the previous winter in the form of damage to the roof, buildings and vehicles.

Freezing temperatures and heavy snow lining overhanging tree branches can easily pierce through a roof or fall onto a car causing massive damage to occur when the limb does snap off from the trunk. What is worse is if a tree should injure the home owner and their family or neighbor. Winter weather can slow or even obstruct any emergency response personnel from providing necessary medical care in the event of an emergency.

One key preventative measure is to walk around the home with a critical eye towards safety. Overhanging branches, as well as older trees, should bear close inspection. Low hanging branches are less likely to cause damage to a roof, but can easily destroy rain gutters and vehicles and interrupt power due to a downed power line. Trees which have been weakened by prior seasons may begin to lean or may not show any evidence at all.

Being proactive by calling a lawn care and maintenance company can save much grief on the part of the home owner. Surprisingly other companies offering seemingly unrelated services such as irrigation and fertilizing, will often handle tree trimming during the winter due to less demand for lawn mowing and irrigation.

Cracked water pipes are another major concern. Fall blowouts for existing sprinkler systems are another service which needs to be performed. Freezing temperatures are notorious for causing cracked water pipes, both underground and in the interior of homes. With regards to water supply lines located within a home, it is important to shut off the water supply valve to pipes extending through an exterior basement wall to the outside. Some homes may not have an interior shut off valve for outside spigots.

Will My Home Buildings Insurance Cover Extras Like My Holiday Home and Car?

Buildings insurance and its inclusions and exclusions can be a bit of a challenge to understand at times. It is important to be clear about what is covered and what is not and whether or not one needs additional coverage or a package of options to be assured that should a problem arise one will not have a large monetary loss. Typically when one has buildings insurance it covers their existing home that is occupied by themselves, not a holiday home that is empty a good deal of the time or is used by others, not contents, not a vehicle and not property that is let out or used by others. There are, however, ways to obtain coverage for all sorts of instances by purchasing a package or bundle of plans all at once.

What Buildings Insurance Covers

These plans generally cover the rebuilding of the structure of one’s home from the walls to the roof if there is a loss from fire, storms or floods, crimes against the property, vehicle collision into the building and subsidence or sinking into the ground. Most have a maximum payout that can be upgraded for a fee. This coverage can have inclusions added to it to cover home contents, lost keys, accidental damage, such as your making a hole in the ceiling when trying to walk in the attic, the need for accommodations during repair periods up to a specific limit, underground and glass structures, and outbuildings like a storage shed. Even increased water meter fees can be covered up to the limits set forth in the policy should pipes burst due to a weather or other emergency. Your holiday home, vehicles, rented out properties and any specifically excluded by the policy is not covered.

Extra Coverage that can be added

Extra coverage for items such as a holiday home can sometimes be added to an existing insurance package. Other times a separate holiday home policy must be purchased. Taking this policy together with the policy that covers one’s home may afford one a discount. Taking contents coverage along with buildings coverage can also get one a bundled discount and more complete coverage. Often one can get separate policies for a holiday home, landlord properties, or vehicles all from the same company and many times these will be offered at a discount because more than one policy is being written through the same company. These are sometimes featured as bundled policies and it is often the most affordable way to insure multiple properties.

While your buildings insurance on your home will generally not cover a holiday home or car, there are still ways to get that important coverage in order to protect against large losses and cash payouts in the event of an emergency, disaster and many other types of losses. The best thing to do is to sit down with an insurance agent who can offer a package or bundle of various policies all for one discounted premium.