Commercial, the Missed Opportunity!
By Brian Rubins, Executive Chairman
So many do residential, lenders and brokers alike, but what about loans for commercial property, the missed opportunity?
First, it is important to agree the meaning of commercial. To some it is shops, factories, offices, etc. but others include in their definition residential investments, HMO’s, blocks of flats and buy to let properties. Perhaps it would be easier just to say “everything except owner-occupied residential properties” and unlock a huge, market with a limited number of brokers who focus on commercial loans.
Commercial loans can be made to investors, entrepreneurs and the business community for purchase, refinance and to raise working capital. The bridging market can accommodate loans from a few hundred thousand pounds to £5M or even £10M. It can ease the pressure of completing an auction purchase but equally there is the need for short-term loans to repay expired facilities where the lender does not wish to renew or pending new lettings or planning permissions being negotiated. “High Street” lenders are not relaxing their criteria, indeed our experience is that mainstream underwriters are being more and more demanding and seek to have all the i’s dotted and t’s crossed, and then some more, before parting with the cash. Commercial bridging can satisfy these circumstances until everything is spick and span.
It is best to focus on the positive and to save time by identifying what is not likely to be financed by bridging lenders. Cinemas, trading filling stations, night clubs, football stadia, kennels and equestrian facilities are usually on the “no” list and rather than trying to cajole a lender to change policy, accept that square pegs do not go into round holes and concentrate on the business that can be done! Similarly, it is essential to recognise that maximum loans are 65% to 70% because anything more will present a refinance problem at the end of the term. However, our experience is that this satisfies most applications or that additional security such as a second charge on another asset can often be found to make up the shortfall.
Some bridging lenders are reluctant to make loans in excess of twelve months or do not have a suitable internal funding structure to be able to do so and while they may provide a quick fix, they do not satisfy the borrowers need to have sufficient time to improve the property or to establish the income before seeking long-term refinance. Surrendering to a lesser period than needed is short-sighted and likely to incur the borrower in extra cost by needing to refinance the first bridge before being able to negotiate a long-term loan.
It is important that the lender and borrower each have a clear view of the strategy and where necessary are able to agree a loan for up to 24 months at outset. Lenders with a wider range of products, such as Alternative Bridging, also offer interest-only term loans for periods up to 5 years. Here the lender provides an open-minded approach and includes a built-in funding option to cover the period until the property is self-financing. This is a useful facility for properties such as student accommodation and hotels where the income needs to be stabilised before refinance into the mainstream can occur and this cannot be achieved with a bridging loan.
Flexibility is often touted yet rarely provided, but we believe the Alternative Overdraft does just this. It is secured by first or second charge over under-utilised property assets and allows the borrower to agree a limit and draw against it, time and time again, repaying or reducing the loan in line with funding needs, while only paying interest on the balance outstanding. It works exceedingly well for auction purchases, working capital, seasonal trading demands, funding deposits or improvements, etc.
COVID has caused lifestyle changes and in particular, in the past year staycation assets have become a popular investment, be it just a few flats or holiday cottages or something more substantial such as a “holiday village”. Here we are experiencing the need for purchase or refinance loans with an additional sum for improvements, converting to a term loan on completion of the works.
For property investors and developers, loans can include funding for the purchase or refinance and a facility to pay for improvements. As liquidity for the next project often needs to be addressed, these arrangements can also include a top-up loan on completion of the works, enabling the property owner to extract all or part of the equity, ready to invest in another opportunity before refinancing.
Commercial lending is diverse: recently we have financed a large portfolio of small commercial and residential investments, a group of local supermarkets, and residential development sites. We have also loaned against a large, vacant retail store while it was being fitted out for a new tenant, a pre-let retail park while planning permission was finalised and where we went on to provide the construction finance for it to be built. We have also refinanced a number of hotels including one where the borrower was able to benefit from substantial debt forgiveness if a demanding timescale could be met.
The opportunities are endless and although it may take time to learn the skills to take advantage of this market, forward thinking lenders will work closely with brokers to capture opportunities which will otherwise go unsatisfied.
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Click here to read the article in the June issue of Bridging Introducer.
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