A guide to commercial bridging loans

By Brian Rubins -

Commercial Bridging Loans

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.

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.

 

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.

 

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.

 

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.

 

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.

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.

 

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.