Vinu: Hey Manu, I’ve got a client who’s planning to purchase a commercial property in the future. They haven’t finalized anything yet but have budgeted the amount. They’ll be funding 75% of it through a loan. What should we keep in mind while setting up this funding?

Manu: That’s a good question, Vinu. Since the property isn’t finalized yet, there are several conditions you’ll need to consider to safeguard the funding.

Vinu: What would be the first step?

Manu: Start with pre-approval and due diligence. You need to thoroughly assess the client’s creditworthiness to make sure they can repay the loan. You should also request comprehensive financial documentation, like income statements, balance sheets, and cash flow projections. Make sure the funds are strictly used for purchasing the property.

Vinu: What if the client is still deciding on the property? How do we handle that?

Manu: You should set property selection criteria. Make an approved list of properties based on location, zoning, and intended use. Once the client chooses a property, it must be independently valued to ensure it aligns with the budgeted amount.

Vinu: How should the loan be disbursed if the property hasn’t been purchased yet?

Manu: I recommend a staged disbursement approach. Release the funds in stages, tied to specific milestones like the deposit, contract signing, and final purchase. You could also use an escrow account to hold the funds until the purchase agreements are finalized.

Vinu: What about collateral? The client has other facilities where collateral is already mortgaged.

Manu: In that case, you should secure additional collateral if possible, until the property is finalized. Once they purchase the property, it should be mortgaged with a first charge in favor of the lender.

Vinu: How do we structure the loan terms, especially since the property isn’t secured yet?

Manu: Define whether interest accrues immediately or only after the property is purchased. Make sure the repayment terms are clear, including interest rates, loan tenure, and any prepayment penalties.

Vinu: Should we include any specific covenants?

Manu: Absolutely. You should require regular reporting from the client on their progress in selecting and purchasing the property. Also, include a non-diversion clause to prevent the funds from being used for other purposes.

Vinu: And what about legal and regulatory checks?

Manu: Make sure the purchase complies with all legal and regulatory requirements. A thorough title search is crucial to ensure the property is free from encumbrances and that the title can be transferred without any issues.

Vinu: What if the property purchase doesn’t go through or the client defaults?

Manu: You need to have an exit strategy in place. This could involve liquidating the collateral if the purchase fails or if the client defaults.

Vinu: That makes sense. Thanks, Manu, this really helps in setting up the right conditions for the funding.

Manu: Anytime, Vinu. Just make sure all these conditions are clearly communicated to the client upfront.