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Property Surgery

21st April 2021

We have just finished refurbishing 6 flats in NW London.  The aim is to give them to the council to rent out.  The advantage is the tenants we have in mind will probably always be on housing benefit, and thereby they will not have a job to lose in the coming times.  I, for one, am pessimistic regarding the economic future.  The sugar coating of the economy will in time brush off, and then the stark reality will be there for all to see.

If this is the case, it’s best to prepare for this outcome now.  The downstairs is commercial which has planning for residential conversion, however, the estimates have come in a lot higher than I had hoped for.  The conversion cost is at about £300K for 2 four bedroom flats.

Unfortunately, no matter who you hire, it’s your money on the line, and therefore, you have to get a grip on the project to ensure money is not being spent whimsically.

This may take some time to get to grips with and, therefore, you do not want the pressure of high financing costs on one side and time on the other.

It made sense then to refinance the project early, so it will be on a stable BTL term rate, giving breathing space to concentrate both on a cost reduction exercise and to see how we can add further value to the building via planning permission.

As we would be refinancing, the product would be based on a commercial rate, as the downstairs of the building is commercial; albeit, it’s the smaller segment of the building and it has planning for residential.

However, there are only two definitions – commercial or residential.  In the same way when you purchase a property, you pay stamp duty according to whether it’s residential or commercial; irrespective of the size of the commercial element.  There’s a possible stamp duty strategy buried within this criterion, by the way.

The difference in rates between commercial and residential is 1.3% when comparing the 5 year fixed rates.

On a borrowing of £1.575M this equates to £20,750 per annum, or over £100K over the 5 year period.  This is sizable enough to take the time to investigate  how this expense can be reduced.

The property is currently on one freehold title.  The 6 flats occupy the 1st and 2nd floors.  One could cut the 2 floors from the title and issue a long lease on one title, say 999 year lease.  This then would be refinanced on the residential rate, saving £100K over the term of the loan and the freehold would rest unencumbered with the commercial element on the ground floor.

The definition of freehold land, is that one owns the land below to the centre of the earth and all the air right stretching up in to the universe; the definition borders almost on science fiction.

The point here being, if the freehold rests with the ground floor commercial property, the rights to develop the upper floors of the building rest with this title.

The other major advantage is if the whole building was refinanced on a commercial rate, at the time of further development the whole building would need to switch to bridging rates.  This would cost several hundred thousand pounds extra.

Suresh Vagjiani

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