Commercial investment mortgage within a pension fund

The Cotswold Distillery is the brainchild of Daniel Szor. What started as a weekend love affair with a beautiful region soon turned into a passion, so much so that Dan and his family decided to leave London and live full-time in the Cotswolds. Dan was looking for a way out of his 30-year career in finance, to create something with his own hands and make a difference in the community. He’d been a whisky-lover for over 20 years, and looking out of his window one day her saw a field of golden barley waving in the breeze – and that was how the idea of the Cotswolds Distillery was born.

In November 2013 Dan and his wife purchased the proposed distillery premises within their respective Self Invested Personal Pensions (SIPPs) for £450k. The site compromised 4.5 acres including two incomplete buildings that would become the distillery. They then spent much time, effort, research and funds developing the property but still required a further £225k to finish the works.

The principle challenge that this presented was that the property was owned within their SIPPs and so the loan had to be in the SIPPs’ name – it could not be in either the couple’s personal names or in that of the distillery company. Also there are two categories of restriction on loan limits to a SIPP.

First of all there is a statutory limit which restricts the borrowing within a SIPP to 50% of the net assets of the SIPP. For example. If a SIPP has net assets of £200k, its borrowing is restricted to £100k and (ignoring costs, SDLT etc.) the maximum value of property that could be purchased within the SIPP is £300,000 i.e. £200k + £100k (with no other assets in the fund).

The second restriction is that imposed by the Trustees to the SIPP. All SIPPs are run by Trustees and any borrowing for the benefit of a SIPP is actually taken on as a liability of the Trustees who then have to be able to recover the costs of servicing the loan out of the income of the SIPP. As a result most Trustees are not prepared to be associated with any borrowing – and if they do countenance borrowing, they will seek to minimise their exposure through restricting the borrowing taken on by them against the assets of the SIPP through ensuring that the SIPP has adequate cash to make repayments. The Trustees to our clients’ SIPPs imposed a requirement that mortgage payments needed to be covered to the extent of 130% by rental income on the property (this would have been 110% if the client had taken out a fixed rate product). As a result of these additional complexities, most lenders will not consider loan applications on behalf of SIPPs.

In order to raise the funds required, in January this year, Dan and his wife presented us with a loan proposal for the SIPPs complete with a valuation of the property and a comprehensive business plan. By the end of January we had obtained indicative terms from Norwich and Peterborough.

As this was an unusual loan application, in mid-February a lending manager from the building society visited Dan and his wife at the distillery in order to get to know them and understand at first-hand the business. The manager was impressed with the couple, the premises and their plans, and even though the distillery is not due to open its doors until the autumn, the lender made a formal, joint loan offer to both SIPPs. The deal completed in May.

Property Value: £850,000 (following building works)

Total Loan amount: £225,000

LTV: 26%

Rate: Bank Rate + 4%

Term: 10 years, capital & interest

Arrangement fee: 1.75%

Completion Date: May 2014

This is just one example of how we have helped a client secure a commercial mortgage. To see more of our case studies please visit either Gareth's or Popy's profile page. And if you have any funding requirements, please do not hesitate to contact either of us. Our direct line and email addresses can be found below.

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