5 reasons why you need Bridging Vat in your funding mix
Updated: Jun 10, 2019
Reason 1. Enhanced Deal Capacity
By using Bridging Vat, rather than own funds or JV partners’ funds to pay the VAT bill upon completion, Developers are able to retain capital that would otherwise be tied up with HMRC for potentially between 3 and 9 months.
We recently had a client who missed out on a very lucrative site as at the time when a deposit was required, they had £1.5 million tied up at HMRC. This retention of capital enhances Developers cash flow and increases the ability for them to acquire additional sites within a short timeframe.
Reason 2 . Down Valuations
Receiving a down valuation is very common in today’s commercial marketplace, as senior debt providers are always looking to minimise their risk. Very few surveyors will value on the open Market Value (OMV), instead preferring either 90 or 180 day sale value. This leaves the buyer a number of options including increasing the initial equity to cover the shortfall of the senior debt or renegotiating with the seller.
We have also seen situations where the teaser rate promoted by a senior debt provider is only available if substantially more equity is contributed by the client. This can have a major effect on the capital reserves held by the client if they want to proceed. A Bridging Vat loan provides an essential piece of funding in this scenario, where a down valuation or rate hike has created a funding gap.
Reason 3. No LTV%
No LTV% Caps deposit requirements for commercial property mortgages. Both owner
occupier and Developer, are often higher than for residential loans and usually range between 25-40%. This means that most Senior debt providers are only looking to lend between 60% and 75% Loan to Value (LTV). Bridging Vat recognises the inherent security of the VAT recovery from HMRC, and as such we lend 100% of the VAT requirement without an LTV% Cap unlike many traditional debt providers.
An example of how beneficial this can be to a client was highlighted on a recent transaction. Our Developer client was purchasing a site for £1.2m, with a 75% LTV commercial mortgage arranged. The site was optioned to tax so an additional £240,000 had to be paid on completion with the senior debt provider unwilling to lend any more. With a Bridging Vat loan in place, the client had actually been able to gear 95% of the property value. Because of this a bridging Vat loan can become an essential piece of funding when producing financial models.
Reason 4. Capital Deployment
Upon practical completion there are always lots of costs that need to be covered, from professional fees to sub-contractor payments. Retained capital can be immediately deployed which can also help accelerate the build program and successful completion of the project. Using Bridging Vat keeps your capital contingency liquid, and able to be deployed immediately. Start sooner, finish quicker.
Reason 5 – Fully Managed Recovery
Immediately after completion of your commercial property, there are always multiple jobs, tasks and actions to take to get your project started. Adding in the prospect of having to daily chase HMRC for VAT recovery payments, then this can be a real drain on time, resources and capital liquidity.
As well as advancing loans, we provide a fully managed recovery process, overseen by Chartered Accountants. This provides a completely hands-off solution with an average recovery period of just 45 days. Bridging Vat clients benefit from having a VAT expert working on their behalf, meaning that they can focus on their new project.
Bridging Vat is a specialist lender advancing short term loans for the VAT due on commercial property purchases. For your free Developers Guide to Bridging Vat please click here.
For further information on how Bridging Vat can help fund your next commercial property purchase, please contact us on email at firstname.lastname@example.org or by telephone on 01206 645 050.