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Can I Leverage a Freehold property with leasehold tenants?


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Hello

 

Genuine question here, does anyone have any knowledge around being able to mortgage or obtain finance against a freehold property that split into leasehold flats.

To dig a bit deeper, I am in the early stage on conveyancing of a commercial property which I aim to convert into x3 residential flats of which I will split the title and keep the freehold.

I intend to re-finance the leasehold units, I wondered If it were possible to also re-finance the freehold of the building after the title has been split.

It's my first time taking on a project of this ilk, so forgive me If this seems a silly question to sum.

My property background extends to x3 BTL'S via BRR.

 

Thanks in advance to any of your replies.

 

 

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The freehold wont be worth anything. All the value lies in the leaseholds. The freehold only gets, i presume, a peppercorn ground rent, which is what determines its value.

As for the leaseholds, the most annoying thing you are likley to encounter is the fact that no one lender will do all three. They have rules about exposure, generally aimed at larger buildings, but limiting it to one or two out of the three. You will need multiple lenders.

Otherwise they are considered three seperate units and you should be able to mortgage them the same as any other flats, subject to valuation, legal and criteria factors.

043_logo_final_03.png.0cdf828351f81e6097208048ac2d018d.pngStuart Phillips

Independent, Whole of Market Mortgage Broker

AALTO Mortgages Ltd

Web  www.aaltomortgages.com

Email  sales@aaltomortgages.com

Call  020 7183 1101

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I'm answering a different question to what Stuart answered but....

You can obtain bridging finance on the freehold block.

This will give you funds, if required to do the conversion(s) and any works in the property.

You can also then create the Leasehold Titles, the bridging finance will work with your conveyancer to ensure that the charge is also put on the Leasehold Units to protect themselves.

Then you can either Sell or Refinance.

When you sell or refinance, it will a act like a normal mortgage. They will release there charge(s) when the funds are repaid from the sale.

I hope this helps.

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On 2/24/2021 at 11:12 AM, Stuart Phillips said:

The freehold wont be worth anything. All the value lies in the leaseholds. The freehold only gets, i presume, a peppercorn ground rent, which is what determines its value.

As for the leaseholds, the most annoying thing you are likley to encounter is the fact that no one lender will do all three. They have rules about exposure, generally aimed at larger buildings, but limiting it to one or two out of the three. You will need multiple lenders.

Otherwise they are considered three seperate units and you should be able to mortgage them the same as any other flats, subject to valuation, legal and criteria factors.

Hi Stewart 

 

Thank you for taking the time to reply. 
 

Your first paragraph pretty much answers my question.

My exit strategy is to re-finance the leasehold units, however I was not aware of the lenders restrictions regarding mortgaging more than 2 units as a concentration risk.

Great tip, It’s something I’ll take into consideration.

All the best 

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On 2/24/2021 at 12:20 PM, Adam Hosker said:

I'm answering a different question to what Stuart answered but....

You can obtain bridging finance on the freehold block.

This will give you funds, if required to do the conversion(s) and any works in the property.

You can also then create the Leasehold Titles, the bridging finance will work with your conveyancer to ensure that the charge is also put on the Leasehold Units to protect themselves.

Then you can either Sell or Refinance.

When you sell or refinance, it will a act like a normal mortgage. They will release there charge(s) when the funds are repaid from the sale.

I hope this helps.

Hi Adam

 

This is also useful, thanks and I appreciate you taking the time to reply.

All the best 

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I'm going to disagree with the above - in particular "The freehold won't be worth anything". You are taking a freehold building and creating leases. Those lease can have a ground rent - there's no current need for that to be "a peppercorn" (i.e. £zero) so the freehold can have income. Income has a capital value.

Just make sure the lease creation is done in the right way (hint).

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Hi Bernie Wales

 

Reading in between the lines here.

 

I may consider creating the new leases with a ground rent included as this will give the Freehold value.

 

Would you say this seems fairly accurate?

 

Kind Regards 

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