- Client: Long-standing commercial property owner
- Property: 130-bed hotel valued at £45m open market value
- Vacant Possession Value: £60m
- Existing Mortgage: Approximately £28m
- Solution: Sale-and-leaseback agreement with a 250-year lease
- Capital Released: £14m+
As the criteria for commercial mortgages continue to tighten, many commercial property owners are facing increasing pressure around debt serviceability and lender covenants. Rising interest rates can make it more difficult for property income to cover existing debt, particularly where borrowing has been structured at a higher loan-to-value. For some owners, this can create the difficult choice of injecting additional equity or selling the property in an unfavourable market.
In certain circumstances, a sale-and-leaseback arrangement can provide an alternative. By selling the freehold interest in a property while retaining a long-term lease, a commercial property owner can release a significant amount of capital without necessarily having to relocate or disrupt the underlying business. The capital released can then be used to reduce outstanding debt and potentially improve the borrower’s position when refinancing.
A recent case demonstrates how this structure can work in practice. A long-standing Enness client approached us regarding the refinancing of a 130-bed hotel that had been owned for many years. The property had a vacant possession value of approximately £60 million and an open market value of £45 million. The client had an outstanding mortgage of around £28 million, with the existing five-year interest-only facility approaching maturity.
Despite having maintained a strong relationship with the existing lender, the client was informed that the lender would not continue with the full facility. Rental income was no longer sufficient to meet the lender’s debt serviceability requirements, while a significant amount of the client’s available capital had already been committed to other investments. Selling the hotel therefore became a possibility, despite this potentially being an unattractive outcome for the client.
Enness explored alternative ways to improve the client’s financing position and identified a sale-and-leaseback structure as a potential solution. We brokered an agreement worth more than £14 million in exchange for a 250-year lease over the property. The capital released was used to repay approximately half of the existing mortgage, significantly reducing the outstanding debt while allowing the client to retain long-term use of the hotel.
Following the transaction, the existing lender was able to offer a new loan of approximately £14 million. However, with the outstanding debt substantially reduced, the client was in a stronger position to approach the wider lending market. Enness was subsequently able to secure a more suitable and ultimately cheaper financing product for the remaining borrowing.
The sale-and-leaseback structure therefore provided the client with a way to unlock substantial equity from the property, reduce their debt exposure and retain operational control through a long-term lease. It also created a stronger platform from which to refinance the remaining debt.
This case illustrates how a bespoke commercial property finance strategy can provide an alternative where conventional refinancing is becoming difficult due to changes in affordability, interest rates or lender requirements. Sale-and-leaseback arrangements are highly bespoke and require careful consideration of the property, existing debt, lease structure and long-term objectives.
If you own a freehold commercial property valued at £5 million or more and are facing refinancing challenges, Enness can assess your circumstances and explore potential funding structures. To discuss your requirements, speak to a mortgage specialist.
Risk Warning:
Sale-and-leaseback arrangements and commercial borrowing carry risks. Selling a freehold interest means giving up ownership of the property, while the terms of the resulting lease will determine your rights to occupy and use the property. Commercial property values and rental income can fall, and failure to meet the terms of any borrowing or lease arrangement may have serious financial consequences. Independent legal and tax advice should be obtained before entering into such an arrangement.
Disclaimer:
This case study is for illustrative purposes only and does not constitute financial, legal or tax advice. Finance is subject to status, underwriting, property assessment and lender criteria. Terms and availability will vary depending on individual circumstances and the proposed transaction.
Information contained in our case studies is for market and illustrative purposes only. In some cases, these may be made up of multiple cases and are for illustrative purposes only.
Some case studies are made up of enquiries that have come into the business, not all business completes, and the posting of a case study does not represent a completed piece of business.
Property values can fall as well as rise, and you may not get back the amount originally invested. Property investments can be illiquid and may take time to sell. Where borrowing is used, your property may be repossessed if you do not keep up repayments on a mortgage or other loan secured against it.
