subject: Requirements Of Property Investment And Bank Securities [print this page] The requirement of banks to gain security against loans should not be a deterrent to the property investor.
It is important to understand that the lending institution is going to insist on covering its possible losses through the use of various types of security but a refusal to agree with these terms does not mean loss of the deal.
Here are several ways that the property investor can ensure that their assets are not lost in the case of insolvency.
The Hawkins Clause
Assuming you have set up a family trust as a source of securing a real estate investment loan, the trust could be at peril if you declare bankruptcy. Any balance in the trust that is ungifted could be used as part of your assets to repay a loan in default.
There is a way to get around this, referred to as the Hawkins clause. This prevents the Official Assignee (OA) from calling the loan in the case of bankruptcy.
Debt Entrenchment Clause
Similarly, a debt entrenchment clause will also help protect your assets if you are unable to satisfy the terms of a real estate loan. In the case of the loan being called, such a clause (usually added during court of appeal proceedings), allows the bankrupt borrower to keep the loan subject to an eight-year call notice. This allows for sufficient time to reverse the financial situation and keeps the OA from taking further action.
The GRA One-One-One Rule
The GRA one-one-one rule works on the principal of investing through one company (LAQC or trust), with one bank, and a maximum of one million dollars in debt. This applies to investors who create more than one company.
Effectively what this does is keep more than one bank from gaining access to all properties; in effect "ring fencing" various financial institutions. If one company fails, there is only one security to worry about. You will also have the ability to move assets between companies as necessary to prevent them from being attached; losses are minimal.
No Spouse Guarantee
A final way to secure assets from risk is to refuse to allow your spouse to sign a personal guarantee. Refrain from setting up the company structure so that both spouses are named directors. Although it will take some negotiation to remove this requirement from the terms of the loan, it is worth fighting for so that all assets of the married couples are not at risk.
All of the strategies mentioned are perfectly legal, but they are difficult to put in place. Banks are looking out for their own best interests, not yours. Take the time and effort to find a good broker who will work to secure terms such as these which are more favourable to the investor.
by: Paul Easton
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