Diversify the InterBay way

We continue to see a diversification into commercial and semi-commercial, which is why we’ve invested heavily in this area and are ready to support you and your clients’ changing needs.

With our help, navigating a new sector is simpler than you think
We cut through the jargon and guide you through the journey
Expert team, specialist support and reliable service

With expertise in all things commercial and semi-commercial, see how we could help fund your next case.

What are commercial properties?

Commercial properties are generally classed as those that aren’t used as a residential dwelling. They are intended to generate a profit or be used for business activity. They typically include offices, restaurants, shops, warehouses, and industrial units.

Our commercial criteria is listed on our website, which includes acceptable property types.

What are semi-commercial properties?

Semi-commercial or 'mixed-use' properties comprise both a commercial and residential element. This could be a shop on the ground floor and a self-contained residential flat above. They can present a range of opportunities (and challenges) for investors and landlords.

We don't specify a specific percentage split between commercial and residential to class it as semi-commercial. For example, it could be 99% commercial, with a very small residential element, but would still be classed as semi-commercial.

FRI lease

A full repairing and insuring lease, or FRI lease, is where the tenant is responsible for all the costs of repairs, maintenance and insurance for the property they're renting. However, landlords typically also take out insurance (such as buildings insurance for exterior repairs) to protect their interest. These leases normally range from 5-20 years.

Break clause

A break clause is a common feature of many leases. It allows either the landlord, the tenant (or both) to end a lease early. Usually they have certain conditions attached, such as being up to date with rental payments, ensuring repairs are up to date and meeting other terms of the lease. A minimum notice period will usually apply, and this may need to be provided in a certain format (i.e. in writing).

Opco - PropCo

The OpCo/PropCo structure is a process that separates the property asset from the trading business. The OpCo (operating company) is the entity that runs the business - manages day to day operations and employs the staff. The PropCo owns the physical assets and leases them back to the OpCo. For example, a hotel business could be run with the PropCo owning the real estate and the OpCo leasing the property from the PropCo and paying it rent. There may also be a HoldCo - a holding company which has shares in both companies and raises funds from investors.

EBITDA

EBITDA stands for earnings before the deduction of interest, taxes, depreciation and amortisation. It’s used to measure a company's operating cash flow and compare the profitability of companies with different capital structures and in different tax brackets. Lenders will typically need to know the last two years’ average EBITDA figures when assessing commercial and semi-commercial deals.

Vacant possession

Also known as the “bricks and mortar value”, this is the value of an empty property, which is available for immediate occupation. It’s used to determine the worth of an income-producing property if tenants weren’t present. Its value is usually lower than the market or investment value.

Market value

Market value is the amount the property is worth on the open market. It’s essential when securing financing, determining investment potential, and assessing rental income.

EPC

An energy performance certificate shows a property’s energy use and its impact on the environment. It includes ways in which the impact can be reduced, and is required on the construction, sale and letting of a property.

We have a range of product options available based on EPC rating.

Debenture

A debenture is a medium to long-term written agreement securing a loan against a company's assets, giving lenders protection. It’s registered at Companies House. We only require this for trading companies.

EXAMPLES:

Retail: Standalone shop, clothes store, grocery store, speciality retail space, lock-up shop, hairdressers, fashion and footwear, grocery/convenience stores, barbers, nail salon, tattoo studio, betting shop, coffee shop, café, pharmacy, retail warehouse, shopping centre
Offices: Office, business centre and serviced office
Industrial: Warehouse, logistics, storage, distribution, manufacturing
Licence and leisure: Hotel, restaurant, public house/bar, takeaway, gym, cinema, nightclub, sports facility, golf course, music and concert venue, theatres, casino and bingo hall, destination leisure activity
Education: University/school/college/teaching/campus/language school building and child day nursery
Healthcare: Dentist, doctors/medical practice/clinic
Specialist residential: Purpose built student accommodation, build to rent

Helping clients transition from residential buy to let to commercial
Adrian Moloney - Group Intermediary Director, OSB Group

I think it’s fair to say that residential buy to let landlords over the past couple of years have had the proverbial kitchen sink thrown at them. Stamp duty surcharge on second homes, changes to mortgage underwriting standards, and the ever-reducing mortgage interest tax relief coupled with Bank of England challenges and geopolitical impacts on our sticky economy, it seems there has been a conspiracy to help dampen buy to let purchase activity.

Against such a backdrop, we’re seeing investors diversifying beyond ‘vanilla’ buy to let to maximise profits and spread risk, which includes looking at commercial as an alternative. The reasons for this are understandable. The main attraction of commercial property comes in its exemption from the major tax changes that have hit residential buy to let including the phasing out of mortgage tax relief. Commercial property stamp duty rates are capped at 5% over £250,000, while residential Stamp Duty Land Tax (SDLT) rates can reach 12% (on properties over £1,500,000).

Even so, investing in commercial property is not risk-free and potential investors should do their homework. The commercial property market is all about valuing the income stream, its certainty, regularity and security.

The checklist for anyone looking to invest

Estimating the value of a commercial property is harder than in buy to let because of the greater range of factors that can affect it. A valuation is therefore a little more complicated than a residential property, which should affect both the investor’s decision-making, and that of a lender. The following three considerations will help decide whether a property is a sensible investment.

Firstly, investors should look at physical aspects such as location, size, condition, how the property is configured, and whether it has parking, or is close to good transport links. Make sure that your client has a reputable, independent surveyor to call upon to ensure that the necessary checks have been done. Equally, encourage them to do their own due diligence – spend time in the area, ask questions and read up as much as they can.

Secondly, there are legal concerns such as the nature of the lease, its length, break clauses, opportunity for rent reviews and business rates liability.

Finally, there are economic factors to consider such as occupancy rates elsewhere along the street. This includes anything from how long other places are staying on the market to whether it’s an affluent area. This also applies to the tenants they accept – it’s better to have a stronger covenant that’s more likely to remain in place even after a difficult phase of business.

What do prospective investors and brokers need to know?

For those thinking about making the move over to commercial buy to let from residential, there are a number of differences between the leases that landlords should be aware of.

In general, business tenants tend to sign up for longer leases – some of which can be decades long. However, break clauses are common, with tenants often needing to adapt to rapid expansion or decline.

There are additional responsibilities for health and safety that would not apply to a residential property. Fire, electricity, gas, fixtures and fittings, and asbestos all have different regulations that a commercial landlord should consider. The Code for Leasing Business Premises in England and Wales was published in 2007 outlining the responsibilities of commercial landlords and tenants. While not a legal requirement, it’s worth knowing about to see what tenants may expect of their landlord, and what competitors might be offering.

In short, there are a range of hoops that face a client looking to take a leap into commercial buy to let, but there are good reasons to do so. These decisions are only made more complex by the current economic environment. However, this emphasises the valuable role of the broker in these circumstances, helping inform clients, and navigate through the myriad of decisions they have to make. For brokers looking to diversify into commercial, not only will this additional expertise be a value add for current clients, but as more landlords look into this route it could also be an alternative source for new business going forward.

How InterBay can help landlords looking to diversify into semi-commercial
Marc Callaghan, Head of Commercial Lending, InterBay

Whether it’s looking for the best return on your hard-earned savings, or putting your money into stocks and shares, spreading your investment - and therefore reducing your risk - is the sensible strategy.

It’s the same when it comes to investing money in property. Following years of regulatory and tax changes, the days of the ‘casual’ landlord with a single let rental to top up their pension pot appears to be a thing of the past, instead replaced by a more professional type of investor with a portfolio of properties.

This new breed of landlord seems more prepared to adopt different investment strategies and explore other property asset classes. Take their growing interest in semi-commercial properties, for example. Interest in semi-commercial has increased in recent years as canny investors look to maximise their rental yields.

If you’re not familiar with semi-commercial properties, or mixed-use properties as they’re also known, they’re simply rental properties that combine residential properties with an element of commercial use. They can include, for example, flats above shops, restaurants or offices; guest houses with accommodation for the owners; public houses with self-contained accommodation; or buildings with both self-contained flats and offices.

In my opinion diversifying into semi-commercial is a smart move.
Not only do semi-commercial properties have the potential to earn higher rental yields compared with a standard buy to let, they also avoid the additional 3% Stamp Duty surcharge which is normally levied on investment properties.

Landlords can also mitigate their risk as if they experience problems with one of their properties, the performance of the other properties in their portfolio can help to limit the damage and make up for any rental shortfall. Of course, as with any investment, there are things which landlords need to take into careful consideration before making the move into semi-commercial. The initial outlay and running costs can be higher compared to a standard buy to let, and a vacant commercial space will still incur business rates.

Another problem landlords may encounter is finding a mortgage with a lender experienced in dealing with semi-commercial cases and who’s able to provide the support they need. Semi-commercial can be complex as they fall into the middle ground between commercial and residential borrowing.

At InterBay, we pride ourselves on offering personal service to all our intermediaries. When it comes to placing a case with us, we want to make things as straightforward and easy as possible. Our website includes all the information needed to get started. Simply visit our new submission page and follow our quick, five-step plan on how to submit your cases to us.

If you'd like to discuss a case or you're looking for more information before exploring new area please get in touch. A member of our team will be happy to help.

≡ Diversify Meet the team Jargon buster Scenarios Case studies Articles Contact us