HBFI and Owners’ Management Companies – a new source of finance?

Home Building Finance Ireland (“HBFI”) was established by law in early December 2018.

We think it offers a potential funding source for OMCs.

The commentary below is based on the information on the HBFI website, our review of Oireachtas debates/PQs, and our interpretation of the legislation.

It should be stated that HBFI is only in its very early stages of establishment, and we have no information over and above that already publicly available.

1.       What is HBFI?

HBFI is a State company established to provide funding on a commercial basis to small and medium size residential development projects (€2m to €35m) on commercial terms.

2.       Can HBFI lend to OMCs?

In principle, yes. In response to Parliamentary Question 50195/18 from Joe Carey T.D., the Minister for Finance Paschal Donohoe T.D. stated-

HBFI is being established as one of a number of measures to address the housing crisis. It will provide a source of funding for small to medium-sized residential developments on a commercial basis. The Home Building Finance Ireland Act passed remaining stages in the Oireachtas two weeks ago and was enacted in the past few days. Much progress has been made in preparing HBFI for launch and it is expected that HBFI will commence receiving funding applications towards the end of January 2019. HBFI will be in a position to consider applications from apartment owners and management companies for such funding at that time.

It is important to emphasise that in order for HBFI’s activities to comply with State aid rules it must operate on a commercial basis. This means, for example, that HBFI will not be in a position to offer cheap or subsidised credit. Any funding provided by HBFI will be backed by appropriate security and normal banking terms and conditions will apply.

It is important to recognise that the funding of remediation works are complex and high risk projects and pose significant issues for lenders in relation to access to appropriate security etc. While HBFI will be open to considering all residential development construction related activity, it is the responsibility of all applicants to ensure that their applications for funding are commercially viable and allow HBFI to remain compliant with State aid rules.

Section 7 of the HBFI Act refers to lending for “residential development”.

Section 2 defines “residential development-

means a development solely or primarily for residential purposes;

and-

“development” has the same meaning as it has in the Planning and Development Act 2000;

Development” in the 2000 Act is very widely defined, and seems it would cover most if not all works by an OMC-

3.—(1) In this Act, “development” means, except where the context otherwise requires, the carrying out of any works on, in, over or under land or the making of any material change in the use of any structures or other land.

3.       How much equity must a borrower provide?

A minimum of 20% equity.  In other words, HBFI will fund up to 80% of the LTC (Loan to Cost) of a project.

4.       What is the maximum term for which HBFI will provide funding?

The maximum term is five years.

5.       How will HBFI operate as a lender?

HBFI is not a bank, however it will operate in a similar way to a bank.  It will charge a commercial rate of interest.  It will take security to support sums loaned.  In the event of a borrower defaulting, HBFI will take all reasonable and legal courses available to it, to recover any outstanding amounts.

6.       What will be the interest rate on the loan?

The rate will depend on the risk profile of the project, the quality of collateral, the creditworthiness of the borrower, and the track record of the borrower in delivery of residential development projects. HBFI will lend on commercial, market-equivalent terms and conditions.

7.       Other important considerations

  • The project must have planning permission, or at a minimum a planning application must be submitted.  The common areas of a multi-unit development are part of the original grant of planning permission for the estate.
  • As security for a loan, HBFI will require a first ranking full fixed and floating charge over the assets of the entity.
  • Funding will be provided to corporate entities only, HBFI will not lend to natural persons.
  • HBFI may apply an entry and exit fee on any facility provided. In addition, any professional fees accrued in providing a facility will be for the account of the borrower.
  • An OMC that does not currently meet all of the criteria as set out should consult with its relevant advisors to establish if it can meet the criteria before making an application.
  • The eligibility criteria are indicative only, and subject to change.  HBFI will assess each transaction on its own merits and any transaction entered into will be subject to terms and conditions.

Where may we find out more?

The HBFI website is www.hbfi.ie.

Disclaimer

The above should not be considered to amount to legal advice, and formal legal counsel or other relevant professional advice should be obtained in relation to individual circumstances. 

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