Distressed Development Site: Debt Trade or Market Sale?

The Newpoint Advisory Partners have managed over 50 distressed property assets valued at over $1B across all asset classes and locations in Australia. We are often asked for advice on realisation strategies for distressed property assets, particularly partially completed development sites to maximise value and impact for stakeholders. This article discusses the issues affecting the trading of debt in Australia.

Debt trading in Australia is less active than more established capital markets such as the US, Europe and Asia. However, it’s a powerful tool to obtain a fast outcome and to maximise loan recovery with distressed development sites.

Section 420A of the Corporation Act governs how receivers realise assets of an entity, an extract of which is provided below:
“The EA (or MIP) must take all reasonable care to sell the property for:

• if it has a market value, not less than market value; or
• the best price that is reasonably obtainable having regard to the circumstances existing when the property is sold.”

The chart below highlights how a debt trade operates within a distressed development loan structure:

Comparing the traditional realisation process to a debt trade highlights some interesting opportunities:

	s420A Asset Sale	Debt Trade
Sale Process	Agents Appointed Information Memorandum Open market campaign	Mortgagee and purchaser negotiate directly Becomes the lender and can develop land through receivership or negotiate with borrower
Time period	3-6 months	Can be agreed and finalised within a week
Caveats or Encumbrances	Mortgagee in possession can sell through encumbrances	Remain on title until debt purchaser exercises power of sale
Post Completion Obligations	N/A	Ongoing. Must account for surplus or shortfall
Benefits	Cleaner process that quarantines borrower and encumbrances	Quick, avoids an open market sale Savings on stamp duty Possible to retain GST Margin Scheme Possible to protect presales Confidential for financier / developer
Limitations	Time and cost	Difficult to finance

 

If you would like further information about this article or would like to learn more about how Newpoint Advisory can assist, please contact Costa Nicodemou or Brett Lennane.