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How bridging loans can solve commercial property VAT problems

Buyers set to seal a deal on the purchase of a commercial property have been told they needn’t panic when it comes to securing the short-term funding required to settle the VAT.

Laurence Rutter, who is the CEO of principal lender VATBRIDGE, says help is at hand for borrowers who face a headache as they try to secure a loan for what they might consider “a potentially unfundable problem”.

The VAT in question arises when an opted-in commercial property is sold. VAT is charged on the sale of the property and at completion the buyer is liable to pay VAT on the purchase price. This leaves many borrowers having trouble in securing the short-term funding required to settle the VAT. Every commercial property buyer must plan for a 45- to 120-day delay between payment and recovery of the VAT.

Yet Rutter explains that paying VAT on commercial property need not be a burden. He says: “If you are financing your purchase with debt, it is worth bearing in mind that most commercial mortgage lenders adopt a maximum loan-to-value criteria of 70 per cent-80 per cent leaving the VAT as a potentially unfundable problem.

“More than a year ago, we designed the VATBRIDGE product to provide the solution; short-term secured loans that recognise the inherent security of the VAT recovery from HMRC, rather than being limited by the available equity in the property being acquired.

“A VATBRIDGE loan advanced the VAT less interest and charges. For some this was enough, but we soon realised there were many borrowers that needed more help, a loan that advanced the full amount of the VAT due.”

In response the business developed VATBRIDGE+, a top-up loan used in conjunction with a VATBRIDGE loan to ensure the borrower receives the full amount of VAT due. However, as this loan is not repaid by the VAT recovery, it is only available to borrowers where it can be seen that there is a viable repayment plan that coincides with the recovery of the VAT.

The development has led to huge interest from potential clients, says Rutter, adding: “By the end of the summer, with VATBRIDGE and VATBRIDGE+ products and processes in place, our focus shifted to promoting the business to a wider audience.

“We have seen a significant increase in the number of enquiries and with it the development of an interesting new trend – the borrower with the funds available to pay the VAT but choosing a VATBRIDGE loan.”

Another aspect of the approach is for the business to talk to borrowers to understand their reasons for choosing to borrow, and these fall into various categories, says Rutter.

He adds: “One is to maintain a war chest. Developers with an eye on their next project have cited the need to maintain free cash to take advantage of opportunities arising in the short-term. We lent £120,000 to an expanding developer on the south coast. With cash in the bank, they didn’t need to borrow but were planning to buy another property at auction before the VAT would be recovered and didn’t want to tie up the funds.

“Another is that borrowing is cheaper than the cost of exiting investments. Borrowers with significant invested assets have cited high costs of exiting investments as the reason for taking a loan.

“We previously offered a £2.2million loan to an experienced property developer, where the total cost of the loan was less than 4.5 per cent — they accepted as the cost was lower than they would have faced in liquidating other investments to pay the VAT.”

Also, says Rutter, developers look to increase returns by reducing their dependency on profit share partners. He continued: “Developers are recognising a short term VATBRIDGE loan can be cheaper than taking short term funds from a profit share partner.

“We previously lent £800,000 to an experienced developer, who approached us very close to completion of their latest purchase. The developer had arranged to source the funds for VAT from their profit share partner at a cost of an additional four per cent of the development profits – the loan was less than a quarter of this figure.”

Source: Bridging Directory

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ASTL members up lending by 39% year-on-year

Association of Short Term Lenders firms (ASTL) increased the value of bridging lending by 38.9% in the third quarter of 2017 compared to the same quarter in 2016.

However lending saw a small fall of 2.7% from the second quarter of this year.

Benson Hersch (pictured), chief executive of the ASTL, said: “The figures from our members show that the bridging finance industry is in excellent shape.

“It shows that the industry has remained resilient despite the threat of Brexit and low growth in the economy.

“The figures also demonstrate that bridging loans remain an excellent alternative where traditional financing is not immediately available for customers.

“The bridging sector therefore continues to provide a vital role in the economy by offering customers access to the capital they need in a responsible and sustainable way.”

The value of their loan books stand at £3.5bn after rising by 27.7% from the end of Q3 2016 to Q3 2017.

Source: Mortgage Introducer

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How to fund your development project to maximise profits

There are many options when looking to fund your next property development project. The way in which you structure any borrowings will have a significant impact upon your long-term returns. We have covered some of the more common project development finance routes below with comments and observations.

BANK FUNDING

After the 2007/8 sub-prime mortgage collapse in the US, which spread throughout the world, it can be difficult to obtain affordable bank funding for property projects. Traditionally banks tend to work on a 70% loan to cost (LTC) ratio and may exceed this at a cost. Performance for larger loans is a real issue however. For some developers this can leave a significant shortfall which may need to be filled with relatively expensive additional forms of finance.

While interest rates on property development funding will vary from project to project, if the LTC ratio is less than 70% interest charged is usually sub 5%, 7% – 8% on loans from 70% to 80% LTC and between 10% and 12% on loans where a higher than 80% LTC has been secured.

MEZZANINE LOANS

As we touched on above, other forms of property development finance may need to be used in conjunction with traditional bank funding to fill any shortfall. One popular option is mezzanine finance which is traditionally in the region of between 10% and 15% of LTC. Mezzanine finance is less expensive than equity finance as it is normally a fixed rate and is ahead of equity in case of losses and allows the developer to retain their equity share.

The obvious problem with mezzanine finance will occur if a project incurs delays or is unfinished. Whatever the situation, the developer will still need to pay back the mezzanine finance and in situations of default this can be converted into an equity stake in the development. On the surface mezzanine finance is more affordable than equity-based finance but default terms can be prohibitive.

EQUITY FUNDING

There are pros and cons to equity funding with investors sharing both the risks and the rewards. Where little or no funding is required the equity returns can be relatively high for the developer. However, where an additional equity investment is required the profits may be split on a 50/50 or pro rata basis, depending upon the details of the agreement. This can have a significant impact upon the returns for a developer although, as we mentioned above, both parties will also share the risk.

In theory equity funding is one of the more expensive options but done correctly it can allow a developer to significantly leverage and increase the size and quality of schemes they undertake. Over the last few years we have seen crowdfunding become more popular and there are also various networks of high net worth individuals willing to invest in property developments. As ever, it is a case of balancing the risk/reward ratio against the profits which you are “giving away” to other equity investors.

Source: Property Forum

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Bridging loan volume dips in Q3

Bridging volumes fell by 4.9% in Q3 but remain some 2% higher than last year, data from Bridging Trends has shown.

The firms that contribute to Bridging Trends reported that gross lending had dropped to £142.75m

The split between first charge and second charge lending stood at 82% and 18% respectively indicating consistent investment in residential properties-to-let.

And Joshua Elash, director at MTF, said in regards to unregulated bridging continuing to dominate the landscape: “The implementation of the Prudential Regulatory Authority’s rules relating to the treatment of portfolio landlords means this upward trend is likely to continue for the foreseeable future.

“Increasingly larger number of professional property investors will consider bridging finance when purchasing a new property which they otherwise intend to refurbish and sell.”

Chris Whitney, head of specialist lending at Enness Private Clients, added: “I think when you keep in mind the fact that this was over the summer holiday, a drop of only about 5% in lending volumes compared to the last quarter is actually quite impressive.

“I was surprised the average interest rate hadn’t fallen further than it has. We have seen pricing under quite a bit of downward pressure as certain lenders fight to increase market share and protect what they already have from new entrants.”

Additionally the data found that mortgage delays were the most popular reason for taking a bridging loan and the average duration of a loan stood at 12 months.

Average LTV levels reached almost 50% with the average monthly interest rate across first and second charge lending decreasing to 0.82% from 0.84%.

Source: Mortgage Introducer

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Bridging in probate

Bridging loans are incredibly flexible and may be put to a variety of uses including resolving probate issues when concluding a will.

When a will is presented between various parties, it can throw up financial hurdles. There are numerous benefits to be gained by fast tracking the settlement process and using a short-term finance solution to meet resolution.

Annual bridging lending grows for third consecutive quarter

By using bridging, beneficiaries of a will are able to pay legal fees and inheritance tax straight away, releasing 70% of the value of the property immediately without making any interest payments which are covered by the loan facility.

This ultimately allows the beneficiary to market the property for a longer period of time to maximise its value which will be far greater than the interest payments on a bridging loan, rather than discounting the property for a quick sale or through auction.

Resolving debts

Carrying out someone’s will is not always as straightforward as we might like. Although the ownership of their various assets might be easy enough to resolve, the average person will take on a network of debts and credits which must be resolved in their will.

Bridging finance offers a person’s family some breathing space and they can use the loan to pay off debts instead of being forced to sell assets as quickly as possible. Bridging lenders are also highly flexible and quick to put solutions in place. There’s no red tape and it’s possible to create a loan structure that’s perfectly suited to individual circumstances

In many ways, a bridging loan for probate finance is very similar to a standard bridging loan. The loan will generally be for a short fixed term, commonly less than 12 months (though longer terms are available), and can be of any value from tens of thousands to tens of millions of pounds.

Inheritance tax

When concluding a will, beneficiaries will inevitably face tax implications which must be factored into the overall process. Again bridging can help streamline and manage this inevitable challenge by providing a quick fix solution.

Many estates in the UK become liable for inheritance tax, which must be paid within six months and typically a 40% share of the estate upon liquidation. Again, this financial pressure can be eased through the use of bridging finance, as it enables the will’s executors to restructure and refinance to meet the cost of inheritance tax.

Conclusion

Without bridging finance it would be very difficult to resolve the financial affairs that can be brought about in a deceased person’s will.

The time pressures that quickly become apparent would require that many estates be quickly broken down and sold, rather than being realised at their full value. Bridging loans are therefore a helpful tool that enables individuals to pass on their wealth through generations, and allows inheritors to benefit more from their parent’s estates.

Source: Mortgage Introducer