Equity on a commercial property

Please read the body text - Commercial property in a company and taking out Equity on it

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I have a 2 clients (partners - in a business and personal sense) who are 50/50 shareholders in a Medium sized company. They have £250K cash persoanlly and they have the following situation.

They need to finish a build of a commercial property in the company name which will cost the full £250K and will take 6 months to build. They also need to build a house personally, which will also cost them £250K and will take 12 months to build. I have been asked to come up with the best way to allow them to do both in the shortest time frame. I know. This sounds like an exam question...

My thoughts on it are to put a capital injection into the company of £250K to finsih the commercial building. Once finished, it will have a NBV of around £1M. After the completion i am then thinking about them approaching the bank and taking out equity on the property up to the value of £250K and using this to repay the capital injection amount. This can then be used to build the house.

My question is, does anyone know of any pitfalls with this or have any other suggestions? 

Replies (7)

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By WhichTyler
18th Aug 2020 11:50

REally hard to tell without the full picture (and understanding their risk appetite other assets, business cashflow etc), but a couple of questions to start

Can the business afford the loan repayments on the rebuilt property?

Will the bank lend against the existing business assets (land etc) or release funding against the building as it progresses?

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Replying to WhichTyler:
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By M J K
18th Aug 2020 12:10

Thanks for your response. Sorry i wasn't sure how much info to put down. This will be their only asset anywhere close to the value needed.

So, the company will be able to afford the repayments comfortably on the loan.

This partial building is currently their only asset they could get £250K equity in,
however the bank releasing funding against the building as it progresses is very interesting, i had not considered this. It would definitely bring forward completion times. thanks for that one. I will contact the bank and ask if this is something they would be willing to do.

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paddle steamer
By DJKL
18th Aug 2020 12:10

Banks more and more look at cashflow re property funding rather than mere LTV, so state of play re income stream re the commercial property is key; are they planning to let to either one tenant or lots of tenants, what prognosis re future demand?

Given the current fragility in certain parts of the commercial property market, what type of commercial property may well also be key, certain sectors are likely to be very soft over next few years (Retail/leisure/offices)

It is also not unknown for banks to insist that Director/shareholder loans become postponed so no guarantee getting cash back out when you want it.

Given there is a time element to the play I might see if I could get the funding to complete the property from the banks at outset now rather than injecting the cash in hand I did have in the hope that the market will "permit" its removal later; commercial property is going to be fluid and cash is king.

(Though if your commercial development/investment property is Edinburgh we might be interested in buying it at a distressed price over the next year or two, for certain sectors I am anticipating the banks getting spooked again (Revisit the post 2008 commercial market freeze) and limited cash chasing more and more distressed properties; the over leveraged again suffering)

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Replying to DJKL:
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By M J K
18th Aug 2020 12:22

Thanks for your reply.

the building will be let out to the local counsel and used for waste disposal. It will be over a long lease term and hopefully very stable which should help strengthen the loan application?

Thanks for the recommendation to take out the equity in advance to finish the property. I had considered this but didnt make the connection it would be easier to secure than waiting on the property to complete first.

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Replying to M J K:
paddle steamer
By DJKL
18th Aug 2020 12:30

A long term pre-let to a council ought to make loan funding pretty simple- sort the legals on the lease so it is firm and the banks ought to be happy to lend.

p.s. ensure your client considers ground contamination remediation at the end of the lease

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Replying to DJKL:
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By tom123
11th Apr 2021 20:39

Some banks have no appetite for lending to a landlord who is then renting to a tenant.

So you may need to look at the whole relationship as well.

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Replying to tom123:
paddle steamer
By DJKL
12th Apr 2021 09:48

Yes, some I believe totally left the lending market re commercial property, Nationwide being one such. (They were our previous lender, we moved elsewhere in 2016)

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