We were approached by a broker who was looking for help in negotiating property development finance for his clients to refurbish a 1960’s office block located in a popular north eastern seaside town.
The clients: A married couple based in the South West of England who own two buy to let properties in their personal names and operate a holiday letting and B&B business from the farm on which they live. They also have a commercial investment business which owns the commercial property as its sole investment asset.
The property: A large three-storey end-of-terrace commercial building with offices on the upper floors and five retail units at street level which the clients had purchased in late 2001 with the help of an inheritance and a commercial mortgage from a high street bank.
The tenants: The office space (c. 12,800 sq. ft.) had been recently vacated by a local firm of solicitors, who had offered £100,000 towards the cost of restoration because of the condition in which they had left it.
At the time of application, three of the ground-floor retail units were let on relatively short leases for a total value of £59k pa. The remaining three units were vacant.
Post refurbish the clients had agreed to let the offices and one of the retail units to the local council for £120k pa.
The refurbishment: The planned works are extensive and it is anticipated it will take c29 weeks to complete. In addition to total internal restructuring and Asbestos removal, the roof will be repaired and fitted with a safety cable system and a lift fitted to service the building. All windows and external doors will also be removed and replaced, and new mechanical, electrical and plumbing installations commissioned. The building will also be redecorated across all three floors, including brand new fixtures and fittings.
It is estimated that, upon completion of the works, the property’s investment value will more than double to £3m.
The finance: The clients intend to repay their current mortgage, which has an outstanding balance of £300,000, through the sale of a holiday home abroad. To fund the refurbishment works, they have requested a development loan of £1,556,171 which, along with the £100,000 offered by the previous tenants, should cover all applicable costs plus a 5% contingency margin.
The challenge: The difficulty in placing this case was the proposed development loan exit strategy - a refinance onto a commercial investment mortgage because, despite an agreement to let the majority of the building to the local council, the let retail units all have short leases in place. This gave several major lenders concerns as to the clients’ ability to adequately service the loan should the retail tenants vacate in the short term.
The solution: We contacted a challenger bank with more flexible commercial tenancy policies. Although this bank does not normally provide commercial development finance, following a comprehensive valuation, the underwriters determined that the strength of the proposal and the opportunity to provide the exit finance as well convinced them to make an exception.
Here are the details of the deal:
Property value: £3,000,000 (Gross Development Value)
Loan amount: £1,566,522
Rate: 7% over lender’s LIBOR = 7.38% variable
Term: 12 months
Mortgage payment: Nil (Interest rolled up at end of term)
Lender arrangement fee: 2% (£31,120)
Exit fee: £22,807
Rental income: £230,000 once all units let
Gross yield: 9.2% pa
Proc fee: (33% of arrangement fee) £10,269
Consultant: Andy Elley, 01732 471644
27th June 2017