Commercial Bridging: empty units, and what to do with them

Walk down your local high street. How many banks have closed? How many coffee shops have popped up in the last couple of years? That churn is the opportunity.

What counts as commercial

Start with the obvious. Walking down a high street, that’s all commercial. The shops, the bank, the estate agents, the coffee places, all of it.

But commercial is bigger than the high street. It’s an office block, whether you’re buying it to let out or you’re an owner occupier with your own business in there. It’s hotels, restaurants, spas, bars. It’s a cinema. You’re probably getting the gist.

If there’s a trading business in there, yours or somebody else’s, it’s commercial.

Why the loan to values are lower

Commercial bridging lends less than a buy to let or a regulated bridge. You’re looking at 70% gross, maybe 65% gross, and there’s a good reason for it.

Walk down that high street again. There’s a lot of empty commercial property.

That’s a risk to the lender. If you weren’t converting it, or you didn’t get the planning to convert it, and you ended up with an empty commercial unit that nobody would rent from you, what happens? The lender has to repossess it, and then it has to sell it on. And it’s going to struggle to sell it, for exactly the same reason you struggled to let it. Round and round it goes.

So they lend less.

And remember that’s a gross figure. If you’ve read the piece on gross and net you’ll know what happens next. As a rough shape, 70% gross nets down to around 60%, and 65% nets down to around 55%. Give or take, and depending on the term and the fees.

Twelve months minimum, and I’d say that anyway

You don’t want to go shorter than a twelve month term on a commercial deal.

It’s harder to get a commercial tenant in than a residential one, and if you’re refurbishing it as well then there’s more work to do. Twelve months is the standard and on commercial it’s the sensible minimum, not something to negotiate down.

A real one: from one commercial unit to four flats

A client came to me a couple of years ago with a commercial unit and one flat above it. Semi-commercial, so half of it commercial and half of it residential, give or take.

The commercial downstairs was completely empty, and the flat upstairs was empty too. So we’re talking vacant possession, and the valuation of the commercial part would be done on that basis. To be honest that’s what lenders do most of the time anyway.

His plan was a conversion. The flat upstairs was big enough to split into two. Downstairs was near enough the same shape, a square rectangle, so he’d split that title and turn it into two as well.

Four flats. And not four flats under one freehold either, four individual flats on separate titles.

There’s one detail that made this work, and it’s the bit worth remembering. The property was down a residential street. You know the sort, a residential road that has a little bit of commercial in the middle of it and then goes back to being residential.

If you tried this on a proper high street, where it’s all commercial with flats above, converting the downstairs into flats is a lot harder. Not impossible, and it depends on your local authority and what they’re trying to do with the area. But be mindful of it.

The exit

Anyone who knows me knows that all I really care about is the exit strategy.

Here it was a residential remortgage. Once the works were done and there were four flats on four titles, each one could be remortgaged individually at 75% loan to value.

The flats were worth around £175,000 each, so about £700,000 in total.

And then he’s got individual rents coming in from four separate properties rather than one commercial unit he couldn’t let.

It worked well for him. He looked at an empty shop with a flat over it, got his crystal ball out, and saw four flats. There’s a full write-up of that deal if you want the detail.

The tip that’s worth the whole article

Here’s something to look for.

If you’re driving down a street and you see a shop that looks like it used to be a house, you’ll know exactly what I mean. It’s a house shape. Downstairs is a corner shop and upstairs is a flat.

If it used to be a house, and it’s on a residential street next to other houses, that’s a very good indication.

I’m not telling you you’ll get planning to turn it back. Nobody can tell you that. But if it was once a house and it’s sitting next to houses, the local authority is more likely to be comfortable with it going back to being one. That’s the sort of thing worth checking in their recent decisions before you offer.

It doesn’t have to be a conversion

Plenty of my clients aren’t converting anything. They find a commercial property that’s been run down and needs a lot of work.

And because it needs a lot of work, the people selling it want it gone quickly. Now why do they want it gone quickly? Maybe they’re struggling to let it. That’s for you to find out, and that’s your due diligence.

We’ve bridged a hotel that was in bad condition where the owner wanted out. A private investor came in on a bridge, did the works, got the property back up to a workable commercial proposition, and then flipped it to a company that was buying hotels at the time.

And if you want to go further up the scale, go to Liverpool and drive along the docks. All those empty warehouses turning into blocks of flats. That’s more development finance than commercial bridging, but the concept is identical. Find a commercial building, turn it into something people want.

Buying below market value, and why speed is the same as cash

Here’s a situation that comes up constantly.

A property is on the market at one price. The vendor wants it gone quickly, so they’ll take considerably less for a cash purchase. Cash is cash, but what they’re actually buying with that discount is speed.

So if you haven’t got the cash, what’s the next best thing they’ll accept? Bridging. We’ve completed a bridge in four days before now. You can go back to a vendor and say you can’t do cash, but you can guarantee completion in a fortnight, and for a lot of sellers that does the job.

One of the people who taught me this industry told me something I’ve never forgotten. You make money when you purchase the property. If you buy it below market value, you’ve already made money on day one.

There’s a mechanic worth knowing here too. Some lenders will work from the purchase price, and some will look at the open market value as well. If a lender will lend against the open market value rather than what you’re paying, that changes how much you need to put in. It varies by lender, and picking the right one is most of the job.

Two things to be careful of. Bridging isn’t cheap, so the discount isn’t all profit once you’ve run the fees. And a refinance at 75% of open market value won’t always repay a bridge in full, so check the exit actually covers the debt before you commit.

Work the exit at the same time as the bridge

On a deal like that I’d be working on the exit from the start, not at the end.

While the bridge is going through, I’ll be talking to the refinance lenders, telling them the client bought with a bridge because they got a discount for buying quickly. That’s standard. Every lender sees it and every lender understands it. Then the remortgage application goes in within a day or two of completion.

Some lenders find it odd when the open market value comes in higher than the purchase price. That’s a broker’s job to deal with, and it’s exactly the kind of thing that decides whether a deal works.

So what can you do with commercial?

More than most people think. Empty units, tired hotels, offices where you occupy one floor and sublet the rest, shops that used to be houses, warehouses that could be flats.

The loan to values are lower and the exit gets more scrutiny, because an empty commercial building is a genuinely harder thing for a lender to sell if it all goes wrong. But the opportunities are there, and there are more of them every year.

There are so many different options that it’s honestly quicker to talk it through than read about it. Give us a call on 0330 133 4442 and tell me what you’re looking at.

Figures relate to the circumstances and the lending terms available at the time of that transaction, and the terms available to somebody else may be different. Bridging finance is short-term secured borrowing and it can be expensive. If a secured loan is not repaid in line with its terms, the lender may take enforcement action against the property or any other security provided. This is general information, not personalised advice.