What is a mixed use property?
HM Revenue & Customs (“HMRC”) define a mixed use property as, “one that has both residential and non-residential elements”. An example of this may be where you own a commercial unit with a flat above it or where there is a blend of offices and retail units, or a mix of residential and office components. Mixed use properties are sometimes also referred to as being ‘semi-commercial’.
The effect of the 3% Stamp Duty Surcharge
The buy-to-let market has undergone significant tax overhauls since 2016, and as a result, the property investment market has seen some downturn. The 3% stamp duty surcharge introduced on second homes and residential investment properties in April 2016 was an attempt to slow up buy-to-let investment which has taken its toll on many landlords. This legislation, coupled with the stress and affordability test and the buy-to-let tax relief changes, both implemented in 2017, are leading many to reconsider their options.
Due to the 3% stamp duty surcharge for residential property, some landlords are investing in commercial property with a view to obtaining planning permission to convert to residential use. This is a high-risk strategy; if they do not obtain their desired planning permission they will be left with a commercial property. Investors have also begun to explore commercial and semi-commercial (or mixed use) property, which are both exempt from the 3% surcharge and has lesser tax implications. This has a real impact on the upfront costs associated with investing whilst remaining, in part, within the residential property market.
The effect of the Mortgage Tax Relief (April 2017 changes)
Previously, landlords of residential buy to let properties were able to claim tax relief on their mortgage payments, which allowed them to offset mortgage interest against rental income. The mortgage tax relief changes of April 2017 aim to have residential landlords paying higher rates of tax by 2020, if they are already higher rate tax payers and they have buy-to-let mortgages.
These changes were aimed at residential landlords therefore, all commercial property and mixed-use property (subject to commercial mortgages) were not affected. Mixed use and commercial property landlords are still entitled to claim tax relief for loan finance costs that relate to the commercial aspect of their property. Extra care should be taken when apportioning loan finance costs between commercial and residential areas of a development as the legislation surrounding this process is not clear. Professional advice should be sought, as the legislation in this area still remains relatively untested .
The yield seen in mixed use properties contributes to their appeal . Compared to standard buy to let properties yields of 5.5%, mixed use properties generated gross yields of 7.8% on average. The yield coupled with the SDLT savings and arguably favourable tax position, makes mixed use lending a more exciting prospect for many investors.
Banks attitude to lending
When lenders consider mixed use financing, they usually base their decision on the property’s income structure (rental income). Some properties may be “full income” with all spaces generating revenue through leases, where other properties may be “partial income” when they include some owner occupied commercial or residential space, and some properties may be categorised as “non-income” if they are entirely owner occupied. Different situations will produce different risks, which can make lenders wary.
A semi commercial mortgage is designed for properties where there is a business unit and a residential dwelling in the same building, e.g. a shop with a flat above, which typically fall outside the Mortgage Code of Business (“MCB”) and therefore preclude traditional residential or Buy to Let mortgage facilities, due to the commercial element. Typically, a semi commercial mortgage has lower upfront costs compared to a commercial mortgage: both in margin and fees.
The property will be the asset of the lender until it has been paid for thus, suitable and comprehensive insurance can often be very helpful in acquiring the best rates for loans and mortgages. Although the fixtures and fittings in commercial and residential property are very different, in a mixed-use property they are also linked, so suitable insurance that protects the property does need to be considered .
With mixed use properties there are often competing factors, but the sector offers the ability to secure long term, and often indexed, income from the commercial element and capital growth from the residential element. However, the duality of the mixed-use areas in the valuation can make finding suitable financing difficult and they can carry higher rates and potentially higher fees. Most banks have separate commercial and residential teams and as they both use different analysation techniques to assess the lending risk, they require a unique taskforce in order to appreciate mixed use projects .
Naturally, the more experienced a landlord becomes, the better the lending rates which will be offered to them as the bank can be more certain that their investment is going to succeed. Also, ownership of buy-to-let properties for more than two years can earn you an advantage when applying for loans. Many banks advertise that they are able to help new or first-time investors, although they often require provable external income and additional property and they are likely to offer higher rates. Despite this, lending for mixed use properties can be incredibly favourable, with many banks lending up to 75% of the purchase price/value and some lenders considering equity in other property as additional security and lending up to 100% of the purchase price/value .
What is the outlook for lending to mixed use property landlords in the future?
Banks are experiencing a large upwards shift in enquiries relating to mixed use property and many of these enquiries have led to completion, which indicates to banks that landlords are now looking to add diversity to their portfolios . This is certainly good news for mixed use landlords, who can begin to feel more confident that banks are not shying away from lending on mixed use properties provided that the risks associated with mixed use lending are addressed.
As always, it is advisable to seek specialist tax and legal advice when considering any investment and Ellisons Solicitors are able to assist with investment purchases; commercial leases; residential assured shorthold tenancies; and investment advice.
- Lisa Wilson, 2017. Commercial and mixed use properties – tax advantages? [online] Available at: https://www.cowgills.co.uk/news/commercial-and-mixed-use-properties-tax-advantages/ [Accessed 10 December 2018]
- Andy Elley, 2018. Investment Decisions – mixed use, commercial property or buy to let? [online] Available at: https://www.mortgagesforbusiness.co.uk/news-insight/2017/november/investment-decisions-mixed-use-commercial-buy-to-let/ [Accessed 10 December 2018]
- Direct Line, 2015. What insurance do you need for a mixed commercial and residential property? [online] Available at: https://www.directlineforbusiness.co.uk/landlord-insurance/knowledge-centre/insurance/what-insurance-do-you-need-for-a-mixed-property [Accessed 10 December 2018]
- Nicole Bennett, 1998 Mixed-use development: Through the lenders’ looking glass. [online] Available at: https://www.minneapolisfed.org/publications/community-dividend/mixeduse-development-through-the-lenders-looking-glass [Accessed 10 December 2018]
- Ascot Mortgages, n.d. Semi Commercial Mortgages. [online] Available at: https://ascotmortgages.co.uk/mortgages/commercial-mortgages/semi-commercial-mortgages/ [Accessed 10 December 2018]
- Roma Finance, 2017. Roma Finance’s lending on mixed use property soars as landlords diversify. [online] Available at: https://www.romafinance.co.uk/roma-finances-lending-on-mixed-use-property-soars-as-landlords-diversify/ [Accessed 10 December 2018]