Comment

Dear Delia Alan has owned a manufacturing company for 10 years. He has been trading profitably and requires larger premises. He wishes to buy rather than lease as he does at present.

The premises he has found cost 500,000 plus VAT. He wants commercial finance and does not want to contribute more than 100,000. He is unaware if this is enough and whether the VAT element can be funded prior to being refunded. Delia says: Alan has various options when it comes to accessing the funds he needs. Sally Laker of Mortgage Intelligence, and Claire Jackman of RBS are here to help. Have you got a problem for Delia? Email mortgage.strategy@centaur.co.uk

Intermediary Response
Sally Laker is managing director of Mortgage Intelligence

Alan should not have any problems obtaining finance, the only issue is how much. Generally, maximum lending is in the region of 80% LTV and funding of VAT varies by lender.

The main difference between commercial lending and residential lending is that commercial tends to be more bespoke, with lenders looking at each case individually to assess the creditworthiness of the client and the business and the risks involved.

To obtain the required level of lending Alan’s company will need to have had good and consistently increasing profits and a good credit history as most lenders rely on credit scoring in the decision process.

For example, Skipton would only lend a maximum of 75% LTV and it would not provide funding for the VAT element so Alan would need to fund this himself and then obtain a refund.

There are two lenders that will try to provide Alan with the funding he requires. Royal Bank of Scotland will only lend up to 80% LTV but it would look at the option of topping up a commercial mortgage with a secured loan. The application process is straightforward with two forms to complete and Alan would need to provide accounts and bank statements. The VAT element of could be offered on a short-term (three to six-month) facility interest-only, until it is refunded. Rates will depend on the details but typically Alan could expect a rate of between base rate plus 1.75% and base rate plus 2.75%, with fees between 1% and 1.5% and no early repayment charges.

An alternative lender would be Bank of Scotland. Its maximum lending is normally 75% LTV and the VAT could be funded by way of a temporary overdraft which is then repaid.

But there is another way of raising the finance required which is a little more complicated. Basically, Alan could set up a special purpose vehicle limited company. This company could then lease the property to the manufacturing company with a lease of a minimum of 20 years. Bank of Scotland could then lend between 75% and 90% LTV to the limited company.

The amount it would lend would depend on the strength in terms of profit and the net worth of the manufacturing company that will be leasing the property, as it bases the level of funding on the quality of the tenant an SPV company can attract. But the rental would need to be at 120% at pay rate of the loan, with rates starting at base plus 1.35%.

Alan should seek specialist advice regarding tax liabilities before going ahead with this purchase.

Lender Response
Claire Jackman is senior business development manager at Royal Bank of Scotland

Alan is in the strong position of being an owner-operator of an established firm with experience in his field. His borrowing request is one he should seek tax advice on, as several options for funding the purchase are available to him.

A straightforward purchase of the property by the limited company occupying the premises would be available on the same terms as if he were to choose to purchase in his own name and lease back to the company. Typically, loans to owner-occupiers are offered up to 80% LTV. Given that Alan is looking to deposit 100,000 the option of utilising his pension fund via a self-invested personal pension exists, with RBS offering lending facilities to both. This would need to be routed through a specialist financial adviser and an appropriate pension company.

We have specialist business development managers who have experience in this field. The level of lending in this case would depend on compliance with the respective pension scheme rules and individual pension funds.

All avenues will be explored to ensure the best and most relevant option is taken by Alan and his company. With respect to additional borrowing over the 80% threshold, this may be achieved by retaining the loan as a commercial one but securing a second legal charge over an additional property.

In relation to the VAT element of the purchase, this could be funded on an interest-only loan for a period of three to six months and repaid from the refund in due course. Typically this would be advanced at the same interest rate as the core loan, without penalising Alan. As with a main loan, no early redemption penalties would apply on repayment.

Should Alan find himself in the position of having to make adaptations to his new property at additional cost, the option of a capital holiday will be explored thereby reducing cash flow pressures during the moving and settling in period.

With the backing of a consistent underwriting process each case is looked at individually at RBS so interest rates and fees can be negotiated. This should give flexibility in tailoring a commercial package that suits your client’s needs.

Our application process for finance is straightforward and with a dedicated business development manager to guide Alan through the process from inception to completion, the purchase should go smoothly.