We have various offices around the world, including Ibiza, and are extremely well-informed about local tax regulations which can differ significantly from country to country. Therefore, we are often approached by wealthy individuals looking to acquire property in a highly tax efficient manner. This will involve maximising LTV, minimising upfront payments and using the local tax regulations to best advantage. So, when we were approached by a wealthy individual looking to acquire a €7.5 property in Ibiza we knew this would require a bespoke arrangement.
As with many of our clients, what often looks like a fairly traditional property purchase on the surface turned out to be a relatively complex and multi-layered affair. The client, a senior consultant with a Fortune 500 company, had recently sold their own private business and was looking to acquire their first privately owned property. They were looking to minimise the cash deposit, maximise the LTV ratio and ensure that their net equity in the property was as low as possible. The main reason was the loan amount was tax-deductible although we needed to find a balance between income, assets, LTV and debt.
So, in basic terms the scenario for this case study was as follows:-
Client status: First time buyer
Property value: €7.5 million
Property description: Recently completed six bedroom villa with 700 m² floor space
Accompanying land: 2600 m²
AUM arrangement: €1.5 million
Loan amount: €6 million
LTV required: 80%
In this scenario the LTV ratio was ambitious at 80% as was the fact that the client was only willing to inject €1.5 million cash into the investment (as part of an AUM arrangement). The fact that they had recently sold their business, although subsequently set-up a new one, created further complications.
Issues to address
When comparing and contrasting the required funding against the client’s specific income and assets, a number of issues arose. These included:-
Initial AUM investment: €1.5 million
High LTV required: 80%
Future income: Difficult to prove after sale of business
Existing property assets: Nil
Preferred loan structure: €4.5 million capital repayment, €1.5 million interest only
One of the biggest challenges was supplying a credible forecast of future income to lenders. This was difficult because the client had just sold their business and therefore this was deemed to be “historic” and not current. As with the vast majority of client requests, it was fairly obvious from an early stage that we would require the services of a bespoke lender. This would allow us to create a funding structure sculptured around the client’s preferred scenario, minimising initial investment and maximising the debt element.
When sitting down with the client to gather as much background information as possible, we learnt that the sale of their company for circa £6 million was in the form of deferred stock and cash. The proceeds from the company sale would be available within 2 years. As a consequence, we were able to use this “asset” as a bargaining tool against the €6 million funding requirement. This created significant good faith with the bespoke lender allowing leeway on other issues such as the preferred low-level AUM arrangement.
As a consequence of bringing together historic income, company sale proceeds and projected income going forward, we were able to negotiate an extremely competitive funding arrangement. The structure of the funding dovetailed perfectly with the client’s individual scenario. The solution was as follows:-
Property price: €7.5 million
LTV ratio: 80%
Deposit: €1.5 million (in form of an AUM arrangement)
Total borrowings: €6 million
Blended interest rate: 1.8% fixed for life of the loan
Capital repayment element: €4.5 million (split into annual payments)
Interest only element: €1.5 million
Duration: 15 years
This particular case study brought together a number of very interesting elements which ensured the client was not exposed to local wealth tax penalties. In Ibiza these are applicable to high value properties bought in cash or those with a relatively low LTV ratio. In this instance, we minimised the client’s initial investment, maximised funding with the initial investment of €1.5 million in the form of an AUM arrangement.
To date the performance of the AUM element has been impressive, effectively covering interest payments on the interest only element. As the interest element of the arrangement was self-funding, the client only needed to pay the required amount of principal down once per year.
What can Enness do for you?
Over the years we have been approached by many clients looking to maximise funding while minimising their initial deposit for an array of different reasons. This may be as a consequence of short to medium term cash flow or indeed a means of accommodating what can sometimes be challenging local tax regulations. In this case study the client was looking to maximise funding and minimise their initial investment as a means of mitigating any potential local wealth tax penalties. As a consequence of our independent status we were able to negotiate an extremely competitive bespoke arrangement which fulfilled all of the client’s requirements.
If you find yourself in a similar position to the above client we would welcome the opportunity to discuss your situation in more detail. There are legitimate ways of minimising tax, maximising funding and utilising real and deferred assets/income. Our experience with bespoke funding arrangements ensures that we are able to use all elements of your financial status to your benefit. We also have access to real-time interest rates allowing you to compare and contrast possible solutions to see how these may impact your short, medium and long-term cash flow/returns.