Commercial bridging finance is available to individuals, partnerships, UK limited companies, limited liability partnerships and some offshore borrowing entities. Borrowing can be available as either a first or second charge on a property and loans provide a flexible funding solution that can enable a business or an investor to finance their plans in the short-term.
There are three distinct ways of thinking about commercial bridging finance. In this guide we will cover all three, with a case study for each to demonstrate how commercial bridging finance works in real life scenarios.
As with all elements of bridging finance it is important that there is a well-defined rationale for the loan and a robust exit strategy in place to redeem the borrowing in the future. If these two things are in place, there are may ways that commercial bridging can provide a useful and flexible source of finance.
The first and most obvious use of commercial bridging finance is lending on commercial property, such as office buildings, retail units, shopping centres or industrial premises.
1) Lending on commercial property
Lending on commercial property can include:
Businesses that want to purchase or refinance their own premises
If your clients currently rent the property from which they operate their business, have they ever thought about buying it? Commercial mortgages are available for trading businesses that want to purchase or refinance their own premises, but often a business might not have an adequate track record to meet the requirements of the commercial mortgage lender, or it could be the case that the business has an opportunity to increase its profitably, which will put it in a stronger position to secure a term mortgage in the future.
As an example, at Alternative Bridging Corporation, we worked with an experienced restauranteur to purchase the freehold of a redundant public house and create an Italian casual dining restaurant that served the local community. The business was already established, but this purchase gave it an opportunity to stabilise its income. As such, we were able to provide a two-year loan that enabled the business owner sufficient time for the profitability of the business to be proven prior to refinance by way of a term loan.
Investors who want to purchase or refinance properties that are let to businesses for rental return and capital gain
With the right property, investors in commercial property can earn a good yield on a full repairing lease, with tenants generally tied in for longer periods than a standard AST, which can make a commercial property investment an attractive choice for committed investors.
There are clearly many considerations with an investment in commercial property, particularly in the current environment, and the strength of a lease is one such important consideration. Often an investor may want to renovate or even develop a property so that is fit for purpose and has a better chance of attracting stronger returns. A commercial bridging loan can provide the funding that enables this work to take place, and this was the case on a loan we provided at Alternative Bridging Corporation.
We worked with an offshore investor who had identified an office investment with the opportunity to add value by renegotiating the lettings and converting part of the building back to residential use, providing a facility that funded the purchase of the property and enabled time for the improvements to be carried out.
2) Lending on residential property and mixed portfolios
As well as lending on commercial property, commercial bridging finance can also be used by residential property investors who want to purchase or refinance larger or more complex residential properties. These might typically include any type of multi-unit residential property such as apartment blocks, HMOs or student lets. Commercial bridging can also be used to finance mixed-use properties and portfolios that include both residential and commercial assets.
As an example, at Alternative Bridging Corporation, we worked with a North of England property investor who required an urgent bridging loan to repay a historic banking relationship, prior to longer-term finance being secured across the portfolio. The security comprised more than 70 properties located across the North-East, including offices, shops, residential, land and hotel properties.
This was clearly a challenging case as it involved such a large and mixed portfolio, but following a meeting with the borrower and broker to fully understand the proposal, we were able to move quickly by accepting a refresh of the valuation of the commercial portfolio and working closely with its valuer for the residential assets. By utilising a mixture of title insurance and standard legal due diligence, it was possible to finance this large and complex portfolio within a tight timeframe.
3) Releasing working capital
Bridging finance can also provide a source of working capital for businesses and property investors. This capital could be used for a range of purposes, including property improvement, expansion plans, equity for a property purchase, investing in equipment, or even paying a tax bill.
This was the case for Alternative Bridging Corporation when we worked with a UK resident businessman from the Middle East, who had a liability to HMRC for a significant tax charge. On this occasion the client had borrowed against his home, which was an attractive apartment on a garden square near to Hyde Park, in order meet part of the liability. The property was on the market for sale but the facility had expired. We were able refinance this original loan with a second charge bridging loan, secured on the residential property, to be repaid from the proceeds of the sale of the apartment.
In this example, the loan was secured on a residential property, but bridging finance can be used to release capital on commercial assets as well as residential.
As mentioned previously, it is important that there is a clearly defined rationale for the loan and a robust exit strategy, but where these elements are in place, commercial bridging finance can provide a fast and flexible way for businesses and investors to access working capital.
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GLOSSARY
Here is a list of terms that are frequently used in commercial property transactions:
Break clause
An agreement made between the person leasing the premises and the vendor to bring the lease to an early end.
Business rates
The tax payable on a commercial property to the local authority in which the building is located.
Change of use
Change of use refers to altering the way in which the premises are used. Some changes of use will require consent by the local authority.
Equity
The difference between the market value of a property and the amount that is owed on any finance secured on the property.
Fit Out Costs
The costs that are usually incurred by a lessee prior to being able to occupy any new premises in order to make them fit for purpose
Full Repairing and Insuring (FRI)
This means that the tenant will be responsible for all repairs to the property (both internally and externally) and also to refund to the landlord the cost of insuring the building.
Ground lease
This is usually a long lease, granted at a ground rent but subject to an initial premium payment.
Internal repairing lease (IRL)
Here, a tenant will have a narrower liability for maintenance, decorations, repairs and insurance confined to the internal parts of the property.
Net yield
The profits generated from purchasing or renting a property, minus the costs involved.
Repair Covenant
Covenants in a lease are the terms of the contract between the landlord and the tenant and they specify responsibility for matters arising out of the lease. A lease will usually make provision for which parts of the property need to be maintained and repaired by which party.
Restrictive Covenant
This is part of a lease which restricts certain actions, such as original features being removed or trees being cut down.
Return of capital (ROC)
Principal payments back to capital owners that shrink their equity share.
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