While growth in the use of limited recourse borrowing arrangements (LRBAs) within self-managed super funds (SMSFs) has been strong, alongside the presence of spruikers, this is not a reason to shut down the avenue of borrowing, according to commercial property lender, Thinktank.
LRBAs have become an “essential part of the mortgage landscape for small-scale, non-residential property,” said Jonathan Street, CEO of Thinktank.
“In this sector of the market, LRBAs play a vital role, especially for small to medium-sized businesses (SMEs) where owners are looking to ‘marry’ their business objectives with their long-term retirement savings goals,” he said.
“It’s a proven win-win situation for SMEs, and, as such, it’s to be hoped that the current review of LRBAs by the Council of Financial Regulators gives this form of debt full and objective consideration.”
Street said Thinktank has financed 265 LRBAs since December 2013, with the current loan balance currently standing at $134.9 million at an average loan size of $548,000, and with the repayment type positively split between interest only at 21.5 per cent and principal and interest at 78.5 per cent.
Street said critics of LRBAs often cite the activities of residential property spruikers to cast a cloud over this lending instrument more broadly.
“We fully support ASIC’s tough line on property spruikers who prey on the vulnerable by encouraging an unsupportable SMSF and corresponding LRBA. But to ban LRBAs entirely, thus denying many SMEs and self-employed owners the opportunity to meet their commercial and superannuation ambitions, would simply be throwing the baby out with the bath water,” he said.
“In our experience, supported by proper rigour and prudent lending as the numbers cited above highlight, SME owners who are motivated to take out an LRBA are only doing so after getting specialist advice to ensure it’s the right wealth management strategy for them.”
Street acknowledged that LRBAs have been growing apace, with Australian Taxation Office numbers showing this asset class jumped 68 per cent compared with 18 per cent for all SMSF assets between 2014-16. At 30 June 2016, LRBAs made up 4 per cent of all SMSF assets.
“Certainly, the growth has been strong. But that’s not an argument to arbitrarily shut down this borrowing avenue, especially in the non-residential sector where it has an excellent track record both for commercial and superannuation goals,” Street said.
“The goals of small business and government here are aligned – self-funded retirement with less or no dependence on welfare.”