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Specialised matters such as legal, insurance and financing often have an effect on the architect's duty to the client but they are areas of expertise normally beyond the detailed knowledge of the architect. The architect should be aware of and have some understanding of the implications of such matters and how they affect their work, but must not pretend to be an expert unless they have special qualifications in addition to architectural qualifications and has been engaged by the client to provide this advice. The client should be advised to seek appropriate advice from experts in the fields relevant to the project requirements.
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The Institute's Client and Architect Agreement places the obligation on the client to provide the specialised information which the architect requires for the proper fulfilment of their responsibilities, this includes relevant information relating to finance for a project.
The method of financing a building can affect the:
- project time schedule
- choice of building contract (for example, fixed sum versus sum subject to fluctuations)
- progress timing of fees payments
- phasing of a project built in stages.
The particular type of financing of any project will usually be related to the objectives of the client. For example, a building to be developed for resale may be financed in a different way than a building for long term occupation by the owner.
Definitions
A mortgage is an agreement whereby money is lent on the security of land or other property.
A mortgagee is a person who lends money on mortgage.
A mortgagor is a person who borrows money on mortgage.
Finance availability in terms of time scale
Short-term or 'bridging' finance
This usually refers to temporary finance generally required to fund a development or a building project prior to sale or prior to arrangements for long-term finance. Bridging finance is generally available at a fairly high interest rate, and usually involves the borrower in the periodic payments of interest only, the principal being repaid to the lender in a lump sum.
Medium-term finance
This is usually available by loan for up to around five years. It may be advanced by the lender in staged payments as construction proceeds, and it can be repaid the same way as short-term finance, ie the principal being paid during the term of the loan.
Long-term finance
Long-term finance is usually obtained by long-term borrowing such as on mortgages for up to 25 to 30 years. Long-term finance may be repaid by payment of both interest and principal throughout the loan period.
Sources of finance
Sources of finance naturally depend on the type of building project and the status of the prospective borrower. For example, different funding arrangements would be needed for:
- single houses
- rental flats
- commercial properties, such as offices, factories, warehouses
- government projects, state and federal
- local-government projects.
Amounts or limits of borrowing
The proportion of borrowed finance to the value of cost of a project depends on such factors as the source of finance, type of project, nature of the security and combinations of these things. Normally, the mortgagees or lenders take into account:
- the security of the mortgagors or borrowers, ie their ability to meet the conditions and terms of payment and repayment
- the security and value of the property or project against which the money is advanced.
It is usual that money lent is secured against the personal covenants of the borrower and registered as a charge against the real estate. This may, as a last resort, enable the lender to exercise powers of sale under a mortgage and enable them to sell a property if this is the only way money can be recovered if the borrower defaults.
Some sources of financing are subject to statutory limitations on the proportion of total value. For example, a trustee may be limited to lending up to two-thirds of the value of the security. Other sources are subject to limits imposed as a matter of policy or business, such as those imposed by banks and building societies.
As a general rule, the risk of the loan is related to such matters as the loan period, interest rate, terms of repayment and proportion of the loan value to the value of the security. The percentage of advance against security can vary from 50% up to 100% in some cases. The advance may represent a percentage of the estimated value of a building, or of a building plus professional fees, and value, holding charges, rates, taxes etc.
Types of finance arrangements
First mortgage: eg for usual house loans.
Second mortgage: where the first mortgage is insufficient to meet the borrower's needs – an additional amount is borrowed from a second financial source.
Bank overdraft: can be obtained for second-mortgage purposes.
Sale and lease back: usually applies to commercial property where owner or developer sells to an investor-purchaser for a capital sum sale price paid by the purchaser – the original owner becomes a tenant paying rent to the purchaser.
Bridging or short-term finance: generally used to fund activities prior to sale or prior to arrangements for long-term finance.
Insured mortgage through a mortgage-guarantee company: where the lender increases the amount of loan (from, say, 65% to 90% of value) on condition that the borrower takes out an insurance policy which guarantees repayment in the event of the borrower's default.
Access to sources of finance
Access to different sources of finance depends on such factors as the type of project, the needs of the borrower and the sums involved. A prospective borrower may make an approach:
- directly to the source of funds, for example, to a bank, or insurance company
- through agencies such as a solicitor, mortgage broker, real estate agent or accountant who may have funds available on behalf of their clients
- by retaining the services of a specialist to make an approach on their behalf.
Access to the above sources can vary according to economic circumstances and time.
Cost of borrowing
The cost of borrowing is normally met by the borrower. The cost can include:
- procurement fees – where a borrower retains a specialist to secure funds on their behalf, the fee is usually a single lump-sum fee expressed as a percentage of the amount borrowed
- legal fees – for preparation of mortgage documents and registration fees
- valuation costs – a valuer's charges for inspecting and/or valuing the proposed security property
- stamp duty – payable on the amount borrowed
- general costs – such as bank charges, broker's costs and establishment fees.
Other considerations
- Lenders sometimes require the borrower to provide a form of guarantee (such as a guarantee by a third party acceptable to the lender) of repayment.
- A seller may become the financier who, after receipt of a deposit, allows the purchaser to pay off the balance of the price secured either by a contract of sale or a mortgage.
- A group such as a syndicate or partnership may be formed in which each party makes a contribution to a common fund for mortgage or purchase.
Disclaimer
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