How to purchase the freehold - how to fund the purchase
The normal way of funding a freehold purchase is for the leaseholders to individually raise their share of the cost of the freehold purchase, then club together.
There is a better way!
With Regents Court Financial, a highly regarded firm of Independent Financial Advisers, we have developed a financial package that allows the company that has been constituted to purchase the freehold to raise the capital.
Basically you follow these steps:
- You get sufficient of your fellow leaseholders together to agree to purchase the freehold.
- You must form a company to own the freehold - this is necessary whichever way you have decided to purchase the freehold
- You contact us and we can advise you on raising the finances to fund the purchase - its very similar to taking out a mortgage.
The freehold represents the appreciating asset held by the company against which the loan is taken so it represents a good and improving risk for the lender.
The freehold owners / company shareholders are responsible for paying for the interest, normally in the form of the ground rent.
Considering the manner in which the cost of the freehold is normally calculated, as long as there is more than 80 years on the lease, the ground rent is almost certain to be close to the interest payments.
The overall deal is going to be virtually cost neutral, the transaction sees the freehold being bought by the new company set up by the leaseholders. The leaseholders continue to pay ground rent which in turn pays the interest on the loan which has been taken out by the company to purchase the freehold! |
Why not just increase the lease years?
Enfranchisement is virtually cost neutral - when using our method.
Individually purchasing additional lease years can vary from £3,000 for the average flat with more than 80 years lease, to over £10,000 with less than 80 years. The total can be significantly more if you have a bad freeholder and need to sell in a hurry!
Calculating the cost of the Freehold
As part of the process of establishing the cost of the freehold, a surveyor with experience in freehold purchase valuations will be needed to value the property.
When the cost of the freehold is calculated by the surveyor, a great many factors are taken into account, however key amongst these is the ground rent, effectively the certain return on investment that the freehold owner would normally expect.
The cost of the freehold is therefore largely defined as being an amount that, if invested, will yield the same return as the freehold that is being handed over.
So, if the ground rents total £10,000 per year, the freeholder should expect a limp sum that will pay him £10,000 based on an agreed interest rate. The higher the agreed interest rate, the lower the lump sum.
There is currently an argument over appropriate interest rates which is to be decided in the appeal court in September 2007. The view of the majority of surveyors is that the interest rate used by the LVT should be 7% while currently it is set at 5%.
So, to provide an income of £10,000 (an example ground rent) with an interest rate of 7% we need a lump sum of £143,000. At 5% the lump sum needs to be £200,000
(Why 5% - see recent Sportelli decision )
Lets sidetrack and see what that means when servicing the loan to buy the freehold
The interest (BofE base rate at 5.5%) on a loan of £143,000 is in the region of £7,865. On £200,000 it is £11,000.
At most the cost of servicing a company loan - which now owns the freehold - will be no more than 10% more than paying the ground rent!
Of course interest rates can go up and down! |
So, with the freehold purchased, there is likely to be a marginal increase in annual costs above the existing ground rent, but this can be a small price to pay when compared to the overall gains.
See: leaseholders - why purchase |
