Financing, tax and sector-specific considerations of commercial property investments

In the final part of our three-part investment series, we focus on financing and tax, which are two of the most influential factors in any commercial property investment transaction. Add to that the nuances of sector-specific challenges, and it is clear why expert legal advice is essential.  

Here, we will explore how these elements shape deals and what you need to know before signing on the dotted line.

What is the impact of loan security and financing?

These days, most commercial property investment acquisitions involve some form of property finance.  Loan security is not just about interest rates; the security documents impose obligations that can affect the entire transaction and the way in which you deal with your investment in the future.  Key considerations include:

• Conditions precedent: This is a list of the lender’s requirements that must be satisfied before funds are released.  The conditions can include satisfactory valuation reports or environmental surveys, depending on the nature of the property being acquired
• Financial covenants: Ongoing obligations like keeping the property in good repair and condition, keeping it insured to a particular value and maintaining a minimum loan-to-value ratio
• Default provisions: These describe what happens if you breach the terms of your security documents, which could ultimately lead to you losing the asset.

What are the requirements of the lender?

Lenders need certainty that they can recover their money if things go wrong. Common security arrangements include:

• Legal charges over property: These security documents would be registered at the Land Registry (and at Companies House, if the buyer is a company), to secure the bank’s loan
• Debentures over company assets: This would apply to corporate buyers, including SPVs
• Personal guarantees: These are often required for smaller businesses or high-risk deals and are usually given by the company directors. The lender may seek additional security by way of legal charges over the directors’ personal homes.

Solicitors play a key role in ensuring these security interests are properly documented and enforceable.

Are there different considerations depending on what type of property you’re buying?

Different property types come with unique challenges:

• Living (build-to-rent, student accommodation, senior living): regulatory compliance is vital, and these transactions can include complex management agreements, service charge provisions and long-term maintenance obligations
• Retail: Exposure to tenant insolvency and turnover-based rents, which is seen as riskier from an investment perspective
• Industrial: Compliance with environmental regulations and the use of hazardous materials
• Office: Impact of flexible working trends on occupancy and valuation
• Leisure: Licensing requirements and seasonal income fluctuations

Tailoring your due diligence depending on the property you’re buying is essential for accurate risk assessment.

What are the tax considerations?

Tax can significantly impact the net return on a commercial property transaction. You should consider:

• Stamp Duty Land Tax (SDLT): Rates vary depending on property type and structure
• VAT: Is the property opted to tax? Are the Transfer of a Going Concern (TOGC) rules applicable?
• Capital Gains Tax: For individuals and certain corporate structures.

Early tax advice from a specialist tax lawyer, accountant or financial adviser can prevent costly surprises and ensure you are informed well in advance.

When should you seek legal advice during a commercial property transaction?

The short answer? Early and often. It is always better to be on the front foot, and early legal input is essential in the process:

• Before heads of terms: To enable you to consider potential risks and for us to assist you in optimising the structure of the deal
• During due diligence: Our role is to identify and mitigate issues that may arise
• At completion: To ensure compliance with registration requirements.

Waiting until problems arise to speak to a legal expert will be far more expensive than proactively seeking advice early on in the process.

What you need to know

Financing, tax, and sector-specific considerations can transform a straightforward transaction into a complex negotiation.  By understanding these factors and working with experienced legal and financial advisors, you can protect your investment and achieve your commercial objectives.

Next steps

This article forms part of our series on investment transactions:

• Part 1:  An introduction to commercial property investment transactions
• Part 2:  Navigating complex investment transactions
• Part 3:  Financing, tax, and sector-specific considerations