Brian Lenihan: concerned with some of the land Nama may inherit

"As regards borrowers, I want to make it clear that Nama's mandate is not to be in the business of liquidation, but to achieve workout on the loans acquired over time''

Brendan McDonagh, Nama interim managing director, 26 May

WITH these words, property developers across Ireland breathed a momentary sigh of relief. One month on, the sector is not so sure. As ACC, Investec, Anglo Irish and Irish Nationwide start pursuing borrowers through the courts, property developers fret not about the amount of patience mainstream banks are prepared to show them, but about what Nama has in store for them later this year when it inherits up to €90bn of loans.

Those involved in the creation of Nama tell the Sunday Tribune that criteria will have to be developed to assess the long-term sustainability of certain property development companies and certain property developers. But so far the criteria for distinguishing between the "hopelessly insolvent'' (the government's memorable phrase) and the solvent and sustainable is not clear.

Some general principles are becoming clear. The first is that developers who own income-producing assets, even if the income is not covering the full monthly interest burden, have a strong chance of working co-operatively with Nama and may even find their loan terms being eased significantly. However those sitting on development land with no income coming in are likely to run into the more unyielding side of Nama.

"In some cases the assets of some developers will never return to their original purchased value and at some point that has to be faced up to," a senior Nama planner told this newspaper last week.

The government is particularly concerned about pockets of land on the western seaboard and in the midlands which realistically can only be returned to agricultural use.

Some of this land has been developed for residential purposes, but nobody is prepared to buy the properties due to oversupply in the local towns. As long as this overhang lingers, it could to depress prices for years in these localities, possibly turning some areas into ghost towns.

"Ideally we would be able to bulldoze some of this stuff," a government representative said last week.

But before Nama gets its hands on any assets, it has to decide what to do with the owners of the assets. A raft of personal guarantees, secured properties and even life assurance policies are set to tumble Nama's way in September when it starts officially taking on some of the bank's biggest loan exposures. Like the banks, it will, in most cases, have recourse to these securities.

In many cases the securities listed above will be totally inadequate to cover the full value of the loan if it goes into default. But that doesn't necessarily mean Nama will head to the courts to wind up the company. If income is coming in, there should be no reason to opt for wind-up.

The case where the issue becomes more pressing is when the development land is the only security and its value is hugely reduced compared to the value of the loan used to buy it. A property development company with a preponderance of assets such as these could be facing a painful endgame.

The key thing Nama will be assessing is whether the owner of the assets is being realistic. In some cases Nama will seek to force the developer to sell off assets, even at fire sale prices, so that income is generated and offset against the loan value.

The essence of Nama is that it can keep land banks for years until their value recovers to a level where the value of the loan at least is paid off and discharged.

But if Nama takes this approach it could be sitting on land in some parts of the country for decades. It will have to decide whether to do this, or simply accept agricultural prices now and take the write-downs up front.

Any resistance by the property developer/owner to either option is likely to incur the displeasure of Nama units set up in all the main banks. In that case personal guarantees could be called into play, but the net worth of most developers, though not all, has ebbed away in the past two years and that leaves the guarantees well below the loan values. If guarantees are inadequate, Nama is going to be doing a lot of sitting on land waiting for the market to recover.

The other option is to try and extract extra value from the land via planning permissions or developments. In that case Nama may decide to wind up the current owners of the asset, who may have no other collateral to offer, and bring in another developer to build the project, thereby enhancing its value.

But a key problem for Nama is that many of the loans it inherits are already in default and many of them come with rolled-up interest. The problem with rolled-up interest is that, once you allow the borrower this leeway for even two years, the size of the loan can balloon and this happens at a time when the value of the property attaching to the loan is moving in the other direction. This can lead to a serious problem. The vital step to take in this case is restart some kind of income flow from that parcel of land, even if it's just leased to a local farmer.

The other consideration is the equity attaching to a particular loan. Many developers bought land opportunistically several years ago and the equity in some development land remains intact, even if buyers are scarce at present. Nama has the advantage of waiting for the market to stabilise and this equity can recover at least somewhat from today's valuations.

But working against that is that certain developers may not be meeting their obligations and that means the loan is deteriorating faster than any recovery in the equity.

Once again, it's all about income, and that consideration of income-bearing assets versus non-income-bearing assets is likely to be at the heart of how Nama handles individual developers and their assets later this year.