Commercial tenant purchases freehold of mixed use property using SPV

We were approached by a married couple who were looking for finance to help them buy the freehold of a mixed use property in a popular market town in Shropshire.

The wife’s business, a hair salon, leases the ground floor shop of the building. Above, there is a 3-bed flat on the first and a 1-bed flat on the second.

The husband has a full-time job working as a handyman.

The freeholder, who needed to raise funds, had offered to sell the freehold to the couple for £250k which was 15% less than the open market value.

The couple’s 32% deposit was made up from the sale of their home plus a gift of £20k from a family member.

Their plan was for the wife to continue to run the salon from the shop, move into the larger, first floor flat themselves and rent out the flat on the top floor for £550 pcm.

There were a number of challenges sourcing a lender for this couple:

  •  Many lenders feel uncomfortable lending on below market value sales.

  •  More than 40% of the floor space is residential, so the transaction would be regulated if the couple made the purchase in their personal names.

  •  Some lenders won’t allow gifted deposits or transactions where the freeholder and leaseholder are linked.

After some research and subsequent negotiation we found a high street bank which was willing to lend if the couple made the purchase through a Special Purpose Vehicle (SPV) limited company – keeping the transaction purely commercial, rather than regulated.

So, the couple set up an SPV to purchase and hold the property.

The wife’s experience and trading figures, and the husband’s secure employment status also helped to give the lender piece of mind.

Here are the details of the terms agreed:

Purchase price: £250,000

Property value: £295,000

Loan amount: £200,000

LTV: 68%

Rate: Bank Rate + 4.75% (5.25% variable) commercial mortgage

Term: 20 years capital and interest

Lender arrangement fee: 1.25% (£2,500)

Mortgage payment: £1,348 pcm

Rental income: £550 pcm (from the 1-bed flat)

Gross yield: 2.2% pa

Consultant: Andy Elley, 01732 471644