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3.6 LOAN ALLOCATION

Loans relating to property portfolios which provide for redemption of the loan through the sale of individual properties will allocate the debt to individual properties in an Allocated Loan Amount (ALA) table. This allocation is fundamental since, if the borrower sells one of the properties, but no provision has been made for the transfer of the debt to the buyer, the seller will be required to repay an amount equal to a percentage (which is generally greater than 100% and is defined as the release factor or release price) of the debt allocated to the property mortgaged which has been sold as stated in a table agreed upon between the parties and appended to the agreement.

This mechanism is used in order to reduce the risk for the lender since the reduction in the debt is more than proportional to the reduction in the value of properties provided as collateral: in this way, even if the “best properties”[1] are the first to be sold, the bank's effective exposure will be reduced by a proportion in excess of the properties sold (in order to avoid a situation in which the bank has a residual loan with the same LTV, but which is guaranteed by properties which are vacant and/or difficult to market). A simple example is presented to explain ALA.

EXAMPLE 3.3

A lender finances a portfolio made up of 10 properties of identical value totalling €1,000 with a loan of €600 (LTV 60%); an ALA of €60 will be allocated to each individual property with a release factor of, for example, 135%. This means that, upon each sale, the bank will have to be repaid 135% of €60, e.g. €81.

It will therefore be necessary to sell eight properties in order to entirely repay the loan, which means that with each sale, the LTV ratio (representing the risk of the deal for the lender) falls faster than the value of unsold properties. In this case after five properties have been sold, €405 will have been repaid, leaving an outstanding debt of €195 against a residual value of €500, thus reducing LTV to 39%. Figure 3.5 shows the Allocated Loan Amount and the release factor effect on the loan.

Properties

10

Single property

€100

value

Portfolio value

€1.000

LTV

60%

Portfolio

€600

financed amount

ALA per

€60

property

Release

135%

factor %

Release factor

€81

Allocated Loan Amount (ALA) table

FIGURE 3.5 Allocated Loan Amount (ALA) table

  • [1] There are no good or bad properties, there are only properties correctly priced or not. "Best properties" are usually those undervalued, so easier to sell compared to "Worst properties'" whose estimated value could be higher than the correct OMV.
 
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