Commercial Bridging Loans: shops, offices, semi-commercial and more

Commercial bridging finance is short term lending secured against commercial property: offices, retail units, industrial buildings, warehouses, leisure premises and mixed use buildings. It funds purchases a commercial mortgage cannot complete in time, buildings a term lender will not touch in their current state, and the gap between buying a building and making it lettable.

Fifty five of the 67 short term lenders we track (our wider panel runs to over 120 lenders across all product types) will lend on commercial property and 59 will take semi-commercial, so availability is not the problem. Three things decide commercial bridging deals, and all three are things most pages skip: which category the building falls into, which valuation basis the lender uses, and VAT. Get any of them wrong and the deal fails at completion rather than at enquiry.

Commercial, semi-commercial and mixed use

The category decides the loan to value, the pricing, and whether the loan is regulated. It is the first question and it is routinely fudged.

Commercial means the whole building is in commercial use. An office, a shop with storage above, a warehouse, a factory, a restaurant. No residential element at all.

Semi-commercial, also called mixed use, means a building with both commercial and residential parts. The classic is a shop with a flat above. So is a pub with living accommodation, an office building with apartments, a surgery with a flat.

The split matters, and lenders measure it differently. Some work on floor area, some on rental value, some on capital value. A shop with a flat above might be 50/50 on floor area and 70/30 commercial on rental value, and the lender's choice of measure moves which category it falls into.

Most lenders apply a cap on the commercial element. One on our index limits its mixed use product to a maximum 30% commercial element. Another is notable for the opposite: it will do semi-commercial at 70% with no commercial or residential split requirement at all, which is unusual and worth knowing when a building sits awkwardly.

The general rule: the more residential the building, the higher the loan to value and the cheaper the money. Semi-commercial prices between residential and commercial, and sits closer to residential the more of it is flats.

The regulation point

This is the part that decides deals and almost nobody states it clearly.

A loan is a regulated mortgage contract where the borrower is an individual or trustees, the loan is secured by a mortgage over UK land, and at least 40% of the property is used, or intended to be used, as a dwelling by the borrower or a close family member.

So a shop with a flat above, bought by an individual who will live in the flat, is a regulated loan if the flat is 40% or more of the property. That takes it from a field of 59 lenders to the 12 who offer regulated bridging, and the whole process changes.

Three practical consequences:

The 40% test is about the dwelling proportion, not about whether the building feels commercial. A property that is mostly a shop can still produce a regulated loan.

Occupation by the borrower or a close family member is what triggers it. The same building bought as an investment and let to a tenant is unregulated.

A limited company borrower takes it outside the regulated regime entirely, because the borrower is not an individual. That is not a workaround for dodging regulation on a property you intend to occupy, and lenders look closely at structures that appear designed to do so.

Loan to value by asset type

Across the lenders on our index that publish a maximum commercial loan to value, the distribution is tighter than you might expect:

The median is 75% and that is also the single most common figure by a wide margin. But read it against the valuation section below, because 75% of what matters far more than the 75%.

By asset type, broad expectations:

Industrial has been the strongest sector for several years and lenders reflect that. Retail is the most cautious, with secondary and tertiary retail attracting the lowest leverage of any mainstream commercial asset.

What lenders will not touch

Appetite varies enormously, and the exclusions are rarely on the headline page. One lender's published exclusion list, applied on an exceptions basis, covers trading cinemas, nightclubs and pubs, petrol stations, farms and agricultural holdings, hotels, restaurants and care homes.

Another lender actively specialises in exactly those: hotels, care homes, holiday lets, industrial, office and retail, with a commercial stabilisation product for assets rebuilding trading performance.

The pattern is worth understanding. Anything with a trading business attached is a specialist case, because the lender is no longer valuing a building, it is valuing a business. Most short term lenders will not. Where they will, expect lower leverage and a restricted valuation basis.

On pricing, commercial bridging typically runs 0.85% to 1.25% per month, with semi-commercial from around 0.80% and pure commercial from around 0.88% at the keenest end of our index. Trading assets price above that. Our page on bridging loan rates covers how the fees and the interest basis change the real cost.

The valuation point, where commercial deals die

On residential bridging the valuation question is simple: open market value, and the lender takes the lower of that and the purchase price. On commercial it is not simple at all, and the gap between valuation bases can be enormous.

Open market value assumes a reasonable marketing period, which for commercial property can mean six to twelve months.

Vacant possession value is what the building is worth empty, with no tenant. On a tenanted commercial investment this can be dramatically lower than the investment value.

Investment value reflects the income stream: the rent, the covenant, the unexpired term, capitalised at a yield. A well let building on a long lease to a strong tenant can be worth multiples of its vacant possession value.

90-day and 180-day values are restricted realisation figures, assuming a forced or accelerated sale. These are commonly 10% to 25% below open market value on commercial, and more on specialised buildings.

Which basis does the lender actually use?

It varies by lender and it is frequently not on the headline page. From our index:

• One lender publishes 65% of market value, or 80% of the 90-day vacant possession value, on one product, and 70% of the 180-day value on a larger one
• Another assesses loan to value on 180-day vacant possession value with no new-build premium, and restricts leverage further on trading assets
• Another states that it lends against open market value, not the 180-day figure, and treats that as a selling point
• Another lends on a specific asset class at 70% of bricks and mortar valuation, not investment value
• One will consider 180-day and investment value on referral, meaning the default is neither
• And on one record our own note reads that it is unclear whether the published 65% is measured against open market value, the 90-day figure, or the lower of price and value, because the lender does not say

This is the single most important question to ask on a commercial enquiry, and it matters more than the headline percentage.

Why it matters, with numbers

A tenanted retail unit. Investment value £1,000,000 on a ten year lease. Vacant possession value £600,000, because the unit would be hard to re-let.

The lender quoting 80% advances £170,000 less than the lender quoting 65%. Between the open market route and the 180-day route the gap reaches 40%.

VAT: the biggest cash flow trap in commercial

This catches more commercial buyers than everything else on this page combined, and it arrives at completion, when it is too late to solve.

When VAT is payable

Commercial property is generally exempt from VAT, with two main exceptions.

New buildings, meaning less than three years old, where VAT is mandatory at the standard rate.

Where the seller has opted to tax, which is a choice the owner makes to charge VAT on the property so they can recover VAT on their own costs. They notify HMRC, the option generally lasts 20 years and usually cannot be revoked, and it does not pass to a buyer on sale.

So on a £1,000,000 purchase where the seller has opted to tax, you need £1,200,000 on completion day. The extra £200,000 is VAT, it is payable to the seller, and you reclaim it from HMRC afterwards.

Can a bridge fund it?

Most lenders will not. The VAT element is not part of the property value, so it falls outside the loan to value calculation entirely. A lender advancing 70% of £1,000,000 is advancing £700,000, and the £200,000 of VAT is your problem.

Only 2 of the 67 lenders we track offer a VAT product. One provides unsecured VAT bridging funding 100% of the VAT on commercial purchases, with no second charge required, funding in around 48 hours, from 1.25% a month. The other offers a combined commercial purchase and VAT loan package.

That scarcity is the point. VAT bridging exists and it works, but there are almost no providers, so it has to be arranged deliberately and early rather than discovered at exchange.

How long is the reclaim?

Realistically three to six months, and sometimes longer.

The mechanics: you must be VAT registered and, if the property will be let, you normally need to opt to tax it yourself to recover the input VAT. The reclaim goes on your next VAT return. If you complete at the start of a quarter you wait nearly three months before the return is even due, and then HMRC processes it.

Large property reclaims are routinely queried. HMRC frequently raises enquiries on substantial VAT recovery claims relating to property, which can add months. A VAT bridge taken on a three month term against a reclaim that takes five is an extension and a fee.

Take a six month term on a VAT bridge, not three.

TOGC: the way to avoid it entirely

Where a tenanted commercial property is sold as a transfer of a going concern, no VAT is chargeable. The conditions are specific and both parties have to get them right: broadly, the buyer takes on the property as a continuing letting business, is VAT registered, and has opted to tax by the relevant date and notified the seller.

This is a conveyancing and tax question rather than a finance one, and it is worth asking early, because a transaction that could have been structured as a TOGC and was not has created a £200,000 cash requirement that need not have existed. Your solicitor and your accountant decide it, not your broker, but the broker should be the one asking whether it has been considered.

Tenants and leases

Does the income help, or do lenders just look at the bricks?

On bridging, mostly the bricks. A short term lender is underwriting the exit, not the income stream, because the loan is repaid by a sale or a refinance rather than out of rent. That is why so many lenders fall back on vacant possession value: they are asking what the building is worth if they have to sell it, not what it yields.

But the lease matters in four specific ways.

Covenant strength. Who the tenant is and whether they will still be paying in two years. A national multiple on a long lease is a different proposition to a local business with two years of filed accounts. On an exit to a commercial investment mortgage the term lender will scrutinise this heavily, so the bridging lender cares about it as a proxy for the exit.

Unexpired term. A lease with twelve years to run supports an investment valuation. A lease with eighteen months to run does not, because the building is effectively being valued as if vacant. Break clauses are treated as the lease end by most valuers, so a fifteen year lease with a break at year five is a five year lease for valuation purposes.

Whether the lease is inside or outside the Landlord and Tenant Act 1954 security of tenure provisions. A tenant with security of tenure has a statutory right to renew, which affects both value and your ability to obtain vacant possession for a conversion. For a buyer planning to convert the building, a protected tenant is a serious obstacle.

Rent against market rent. A building let above market rent has an investment value that will fall at review or expiry. Valuers discount for this and lenders follow.

And where income genuinely helps: serviced interest. A tenanted commercial building produces rent that can service the bridge monthly, which preserves the net advance rather than having a year of interest deducted up front. On a commercial bridge that is worth asking about specifically, because the uplift in net proceeds can be substantial.

MEES and EPCs

The energy efficiency rules on commercial property have changed direction, and a lot of published guidance is now out of date.

The current position: EPC E is the minimum. It is unlawful to let a non-domestic property rated below E unless a valid exemption has been registered, with penalties running up to £150,000 for the most serious breaches.

The proposed interim EPC C by 2027 has been dropped. A great deal of material written in 2023 and 2024 assumed it was coming. The government has confirmed it will not be taken forward.

What is coming instead is EPC B from 2031, for privately rented non-domestic buildings over 1,000 square metres, where cost effective. That is the government's stated direction in its interim response, and it takes effect only once secondary legislation passes, so the detail is not yet final. Buildings under 1,000 square metres stay at EPC E with no set deadline for anything stricter.

The exemptions remain, including the seven year payback test, which means improvements are only required where they pay for themselves within seven years, plus the consent, devaluation and temporary exemptions. The existing framework stays in force until the legislation passes, and a fuller government response is expected to follow.

What this means for a bridge

An F or G rated building cannot lawfully be let, which removes the investment exit and often the investment valuation with it. That makes the building a refurbishment project, and a bridge funding the improvement works to get it to E or above is a perfectly ordinary transaction.

Are lenders pricing for it? Barely, and that is the honest answer. A small number offer EPC linked rate discounts or rebates, and one has a product specifically aimed at EPC uplift works. The great majority do not differentiate on rating at all, and very few publish a minimum EPC for commercial security.

What lenders do care about is lettability, and an F or G rating affects that directly. So the rating shows up in the valuation and the exit assessment rather than in the pricing.

The practical point for a buyer: the 2031 standard applies only to larger buildings and only where cost effective, so the cliff edge many expected has softened considerably. But a building below E today is unlettable today, and that is a present problem rather than a future one.

Class E and conversion to residential

A large proportion of commercial bridging is bought with conversion in mind, and the permitted development route has become considerably more generous.

Use Class E covers most commercial, business and service uses: shops, offices, restaurants and cafes, gyms, clinics, nurseries, light industrial. Movement between uses within Class E does not require planning permission at all, which gives a building far more flexibility than it had before the 2020 reforms.

Class MA is the permitted development right converting Class E to residential. From 5 March 2024 in England, two major restrictions were removed:

• The 1,500 square metre floorspace cap is gone. A building of any size can now use the right
• The three month vacancy requirement is gone. The building can still be occupied when the prior approval application is made

Those two changes transformed the product, and a good deal of guidance still in circulation has not caught up.

What still applies:

• The building must have been in Class E use, or a predecessor use, for at least two years before the prior approval application
• Prior approval is required, with the council assessing transport and highways, contamination, flooding, natural light in all habitable rooms, the impact of commercial noise on future occupants, the loss of a registered nursery or health centre, and in conservation areas the impact of changing a ground floor use
• Determination is 56 days
• Development must be completed within three years of prior approval
• Excluded: listed buildings and their curtilage, scheduled monuments, sites of special scientific interest, safety hazard and military explosives areas, and land in flood zone 3
• Article 4 Directions can remove the right in defined areas, and councils continue to make them. Always check for one before buying
• Design and external appearance are not assessed, except in conservation areas

For a bridge the sequence is straightforward: buy the building, obtain prior approval, carry out the conversion, exit to a residential refinance or sale. Where prior approval is not yet in place the lender is taking planning risk, which narrows the panel, and our pre-planning bridging page covers that.

We have funded exactly this route: a shop and flat converted into four flats, which is worth reading alongside this section because it shows the sequence and the numbers on a real building rather than in the abstract.

The exit

Three routes, and each tests something different.

A commercial investment mortgage. The term lender will look at the rent, the covenant, the unexpired lease term and the interest cover. Expect a required cover ratio typically between 125% and 150% depending on the asset and the lender, assessed against a stressed interest rate rather than the pay rate. A building let at a thin rent to a weak tenant will not refinance however good the valuation is.

An owner-occupier commercial mortgage. Where you will trade from the building. The lender assesses your business accounts and affordability rather than rental income, and leverage is often higher than on an investment loan. The test is your trading performance, so a business with two years of accounts is in a different position to a new one.

A sale. The simplest exit and the one most commercial bridges actually use. The test is marketability, which on commercial property means a realistic marketing period. A specialised building in a weak location may take a year to sell, and the bridge term has to reflect that rather than hope.

Where the plan is conversion, the exit becomes a residential one: individual unit sales or a buy to let refinance on the finished flats, which is usually both easier and quicker than any commercial exit.

And the exit assessment is why the valuation basis matters so much. A bridging lender working from vacant possession value is implicitly telling you it does not believe the investment exit, and it is worth understanding why before you accept the terms.

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