The world’s most expensive property is on sale for $1.1billion, and it’s got us thinking; how can we help our clients secure a €1billion mortgage on a property like this?
Securing a €1billion mortgage would be—by far—the biggest real estate transaction in history, outstripping the sale of a 210,000-hectare ranch in Texas, which went on the market in 2015.
The concept of taking out a €1billion mortgage on a property probably seems a bit alien. Surely someone who can afford such a property shouldn’t have to take out finance to purchase it? However, taking out a mortgage, rather than paying in cash, makes perfect financial sense as it protects an investors’ liquidity.
So, how would you go about securing a mortgage on such a high value asset? Firstly, you will need a mortgage broker who has relationships with the most senior people at private banks, and who can negotiate on your behalf for the most favourable rates.
Private banks—particularly French private banks—will ask for a certain amount of assets under management (AUM). Logically, you might be tempted to suppose the bank would ask for relatively low levels of AUM (i.e. 20% AUM on 100% financing), since, although €200m may be a low loan amount in relative terms, €200m is a huge amount of assets of which to take custody in absolute terms.
However, such properties on the Cote d’Azur are notoriously illiquid. Purchasers tend to hold onto trophy assets for long periods as they’re viewed as having long-term appeal and acting as a safe store of value—so forced sales are rare, and there is no mechanism for prices to significantly drop. For this reason, the bank is likely to be heavily apprehensive of the resale value should the borrower default, and demand high levels of AUM (which also act as collateral)— to the tune of at least 50% of the overall loan value.
As the bank can’t rely on reselling the property as a repayment vehicle, only an extraordinarily wealthy client, or a client expecting a gargantuan injection of liquidity, would be able to convince the bank to provide the loan in an interest only capacity. If the loan was on capital repayment, then the more of the loan that is paid off, the higher the wealth tax liability—which for a loan amount of this size would be crippling.
To entice the client, the bank is unlikely to be aggressive with the collateral, but they could be extremely aggressive on the interest rate – at a rate of 1.5% or below on a residential transaction. On a commercial transaction the rate is likely to be higher.
If we look at the following terms for example:
- Loan amount: €1billion
- Tenor: Five-years, interest only
- Rate: 1.5% fixed for the life of the loan
Then the interest would cost the following:
- €15,000,000 per annum
- €5,000,000 per quarter
- €1,250,000 per month
Other Potential Fees to bear in mind
The fees for a transaction of this size and a €1billion mortgage would be colossal, and would have to be borne in mind before considering a bank loan. Please see the main four fees below (amongst others i.e. valuation etc.):
- Estate Agency Fees: usually around 3%-5% of purchase value
- Notaire Fees and Taxes: anything from 3%-7.5% of purchase value
- Bank Arrangement Fees: 0.5%-1% of loan amount
Brokerage Fees: around 1% of loan amount.