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Categories: Case study | bridging loans | commercial mortgages
The client in this case was buying an office building and converting it into a single dwelling residential property. They had completed a similar project previously and knew that there was a significant profit to be made.
The client approached us for help raising a commercial bridging loan to fund both the purchase and the works.
Over the last few years, more landlords and developers have become interested in converting commercial property into residential homes.
With the downturn of retail on the high street, and the ongoing housing crisis, it makes practical sense for developers to look into these opportunities, however, they are complex and need careful planning to be profitable.
Many purpose-built commercial properties do not have the right infrastructure to support human habitation. It’s no simple makeover – top-to-bottom refurbishment works are required for any conversion project like this.
These large-scale conversions also come with unique risks to mortgage lenders, so working with a broker to find the right funding solution can make a lot of sense and save time and money.
The case
Investment route: This investment was made via a Special Purpose Vehicle (SPV) limited company that had been set up for the client’s other property investments.
The existing portfolio: Two other properties, one similar to the case we helped secure funding for.
The tenancy arrangement: Office premises.
The borrowing requirement
The client wanted to raise funds to cover the cost of the purchase and the works involved to renovate the property.
The loan required had to be based on the revised value of the property with planning permission agreed, rather than the purchase price.
The challenges we overcame
The key challenge to this case was finding a lender who would offer a higher day one loan based on the anticipated increased value of the property with planning permission agreed, prior to completion.
Many lenders are not prepared to do this, instead they will base the day one loan on the purchase price.
The anticipated value of the property, with planning in place, was expected to increase significantly from £262,500 to £350,000.
Given the £87,500 difference in these two values, had we not been able to find a lender comfortable with the planning-agreed valuation, there would have been a significant impact on the loan we could have achieved.
Fortunately the vendor had already applied for planning permission, which was expected to be granted prior to completion.
With this in play, happily we were able to find a lender prepared to lend on an anticipated valuation of £350,000.
A further £85,000 was need to complete the works, which the lender was happy to accommodate.
With the works complete, the property value will be £650,000, so the motivation to undertake this project was strong.
The client’s experience with a similar conversion project favoured the application, as it showed the lender the plans were realistic.
With any case of this kind, a lender expects the project to be sensibly planned, budgeted and all works completed to a high standard. They have a financial stake in making sure that the property they invested in achieves its expected value on completion.
If an office-turned-residential home is deemed unfit for purpose or cannot attract buyers due to a bad job being done on the conversion, it impacts both the applicant and the lender, and both parties could be left at a major loss.
Having only had to put down 22% of the purchase price, the client ended up with an attractive financial outcome in a property worth £650,000. Upon sale of the property, which was the exit path for the loan, the client would be walking away with a very healthy profit.
The solution
Property value: £262,500 – to increase £350,000 after planning permission granted.
Loan amount: £329,000
Loan to value: 70%
Gross development value: £650,000
Rate: 7.99%
Term: 9 months
Payment basis: Interest only
Lender arrangement fee: 2% of gross loan
Do you need help securing a commercial bridging loan?
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