Mortgage for chef to purchase freehold of Grade II listed pub
We were approached by a broker whose client was looking to purchase the freehold of a public house, after the current owner expressed his intention to sell. The current owner is based offshore, so was looking to focus on new investments abroad.
Client
The client works as the head chef and front of house manager within the pub and has done so for almost five years; because of this he had been offered the pub at a discounted rate. To help fund the deposit, he planned to sell his sole rental property and use the proceeds. However, as this wasn’t not sufficient, he also enlisted help from two acquaintances who are regulars at the pub in question. Together they set up a limited company, where all three have an equal shareholding. The client’s co-directors will have no active involvement in the running of the business and will have their investment paid back with interest over a period of time.
The pub is a Grade II listed, seventieth century detached property in the Essex countryside comprising a restaurant area, traditional bar, private residential accommodation, large garden and children’s play area. The pub has a good turnover with an estimated market value of eight to nine times the adjusted net profits.
The broker had asked for our help as he felt that he did not have the experience required to place the case and negotiate the deal with the most appropriate lender.
Finance
One of the main challenges in securing finance was the lack of accounting information from the vendor – from outset he had said he was unable to provide VAT returns and formal accounts! Fortunately, management accounts suggested the business was very healthy.
Before we took the case to any lender, there was one particular point which needed addressing. Having been involved with many freehold pub acquisitions in the past, we were concerned that the recent valuation of the business of £975,000 was on the low side. We estimated a going concern value of £1.15m. To double check, we sought a professional opinion from Pinders, a specialist, RICS appointed valuation house, and some local agency contacts.
Correct in our assumption, this meant that the requested loan to value would sit at roughly 55%. We updated the proposal with our estimated valuation of the business and were now in a position to take the application to the lending market. We took the case to several high street banks and after some initial discussions, we arranged a meeting with the lender we felt could offer the best terms.
The lender’s business manager took our updated valuation into account and explained the position to the credit committee (which has the power to agree loans). The lending request was sanctioned within 10 days and a valuation was instructed. Unfortunately, lender’s valuer was only prepared to value the trading business at the purchase price – not the going concern value. This meant that the loan to value was now 65% and outside of bank’s criteria!
To counter the down-valuation, It was agreed that as well as first charge being taken over the pub, a first charge would be taken over one of the co-director’s investment properties. The bank agreed to cover the cost of this valuation! The lending was supported by a mortgage debenture over the newly formed trading limited company and low-level, unsupported, personal guarantees were taken from all three directors.
The lender agreed that the business and applicants were a good risk and that there was significant scope to increase the profitability of the pub with future events and functions outlined in the business plan.
Property Details
The following terms were offered:
Pub value (freehold and business): £975,000
Loan amount: £633,750
LTV: 65%
Rate: 3.84% fixed for 5 years
Term: 15 year amortisation profile
Mortgage payment: £4,736 pcm
Consultant: Andy Elley, 01732 471644
If you would like to talk through the finance options for you, I can be contacted directly on 01732 471644 or andye@mortgagesforbusiness, or call the main line on 0345 345 6788.
9th November 2017
