How Zenith Secured Financing for a Trading Trust’s Residential Property Purchase

The Client’s Situation

James and Emily, co-owners of a successful chain of retail stores operating through a trading trust, approached Zenith for assistance in obtaining financing to purchase a residential property. Their retail business had been operating under the trust structure for five years, and they now wanted to invest in a $750,000 house as part of their long-term wealth strategy. The property was to be purchased in the name of the trading trust.

The Challenge

The clients faced several significant hurdles in their quest to secure financing:

• Most lenders are hesitant to provide residential property loans to trading trusts, significantly limiting the pool of available lenders
• The purpose of the loan (residential property) didn’t align with the primary business activity of the trust (operating retail stores)
• Many lenders have policies against lending to trading trusts due to the higher risks involved
• The trust’s financial statements required careful presentation to demonstrate loan serviceability

Our Approach

We began by:

1. Comprehensive Trust Assessment: We conducted a thorough review of the trading trust structure, including:
   • Analysing the trust deed to ensure property investment was permitted
   • Reviewing the trustee company’s constitution
   • Examining the roles and responsibilities of the trust beneficiaries
2. Financial Analysis: We prepared a detailed financial assessment, including:
   • Trust financial statements for the past two years
   • Rental income projections for the proposed property
   • Personal financial statements of James and Emily as potential guarantors
3. Lender Identification: We leveraged our network to identify lenders who might consider this unique scenario, focusing on:
   • First-tier banks being the preferred choice
   • Specialist non-bank lenders
   • Second-tier banks with more flexible lending criteria for trust structures

The Process

Our process involved several key steps:

1. Documentation Preparation: We compiled a comprehensive loan application package, including:
   • A clear explanation of the trading trust structure and its intention to invest in property
   • Detailed financial reports demonstrating the trust’s strong cash flow and net profit 
   • A statement outlining the investment strategy and how it aligns with the trust’s overall objectives
2. Lender Negotiations: We approached selected lenders, highlighting:
   • The strong financial performance of the retail business
   • The potential rental income from the property
   • The experience and track record of James and Emily in managing their business finances
3. Structuring the Loan: We worked with the chosen lender to structure the loan appropriately, ensuring:
   • Compliance with the trust deed and lender requirements
   • Optimal terms for the clients’ investment needs

Overcoming Obstacles

During the process, we encountered and overcame several challenges:

1. Extremely Limited Lender Options: The vast majority of lenders did not consider the application due to the combination of a trading trust structure and residential property purpose. We widened our search, focusing on lenders willing to assess the application on its merits.
2. Complex Income Assessment: The lender required a detailed analysis of the trust’s income, separating business income from potential rental income. We worked closely with the client’s accountants to present this information clearly and effectively.
3. Higher Risk Classification: The lender initially classified the loan as higher risk, which would have resulted in a significantly higher interest rate. We successfully argued for a lower risk classification based on the trust’s strong financials and the clients’ excellent credit history, as well as borrowing a lower value against the valuation of the property (lower LVR).

The Outcome

After an intensive process, we successfully:

• Secured a $600,000 loan for the trading trust to purchase the $750,000 residential property
• Obtained approval from a first-tier lender experienced with complex trust structures
• Negotiated an interest rate with no premium to standard residential investment loan rates
• Structured the loan with a 30-year term to ensure manageable repayments

James and Emily were able to proceed with their property investment plans with a clear understanding of their loan obligations and how they aligned with their trading trust structure.

Conclusion

This case study highlights the importance of working with a broker who understands complex trust structures and has strong relationships with lenders of all types. At Zenith, we pride ourselves on our ability to navigate challenging financing scenarios and secure favourable outcomes for our clients. If you’re operating a business through a trading trust and need financing for property investment, contact us to explore your options.