As a property valuation team, we undertake valuations for a variety of purposes including asset management, pension fund accounting, company accounting, probate and secured lending, with each valuation purpose has different reporting requirements. In this month’s blog, Rob Greenwood looks in more detail at the valuation and lending requirements that many of our client’s consider when a lending decision is being made against a commercial property.
Many lenders in the marketplace have varying lending requirements but amongst all financial institutions, there are a number of core requirements that remain constant. Some of these factors include property type, tenure, property condition, environmental ground conditions, property size and property value. However, one key component that is often overlooked, is the occupational status of the asset.
Many property investors consider commercial assets that are “let” to represent a secure investment and an attractive proposition for a Lender to secure against. In most cases, this is correct however, there are certain occupational pitfalls that can impact upon a lending decision.
Our approach
Parkinson Real Estate recently advised on the re-finance of an industrial estate in Lancashire. The estate comprised 20 individual commercial units, all of which were occupied at the date of valuation. On the surface, an investment of this nature appears to be a “solid” investment, with many of the existing tenants having been in situ for some time however, occupation of each unit was by way of informal licence agreement, with each tenant able to vacate their unit at 1-months’ notice. Occupational agreements of this nature are problematic for lender’s as, although unlikely, a 100% rental void could be a possible scenario within 1 month of a lending decision being made, which would severely impact upon the value of the property. This can therefore have a knock-on effect, adversely impacting the Loan to Value ratio for the loan and the lender’s security.
As a result of this, Parkinson Real Estate had little option but to advise the lender that the existing tenancies represented a risk from a lending perspective. However, it is important to note that with appropriate asset management of the estate, the borrower could very easily “add value”, which we also reported to our client.
Consequently, the loan was completed under the condition that the occupational agreements for each unit would be formalised into more traditional leases. Parkinsons’ Lease Advisory team were subsequently instructed, by the borrower to negotiate new leases with the estate’s tenants.
Benefits
12-months on from our original valuation, we were instructed to undertake a valuation review. 3 and 5-year leases were in place for every tenant, which represented stronger income security for the investor with most prospective investors at this point would be willing to pay a premium for the tenancies. As a result, this had a positive impact upon our reported Market Value, improving the security position for our client and enabling their borrower to secure a lower interest rate.
This case highlights the importance of formal occupational agreements and their potential impact upon Market Value and a lending decision.
If you are seeking valuation advice throughout the Lancashire region, please contact Rob Greenwood on 07960 612765 or email rob.greenwood@parkinsonre.com
Rob Greenwood MSc MRICS
RICS Registered Valuer
Associate Director – Valuation Advisory
M: 07960 612765
E: rob.greenwood@parkinsonre.com
