Descripton

Offering Description

Loan Overview

This loan is to a company called Leeson and Hatch Limited owned by a group of international property investors.  They will borrow the funds to acquire the property which will be owned by their partnership Dublin Exclusive Properties. The partnership will provide the security for the loan which will consist primarily of a mortgage over the property to be acquired at 33 Bachelors Walk. These are high net worth (“HNW”) international investors who are becoming active in the Dublin property market. They have successfully acquired and renovated other properties in the city.  Their specific model is to take a property in commercial locations and to rejuvenate the upper floors into modern high-quality accommodation.

This approach is regarded as highly desirable by all political parties and planners are encouraged to allow these schemes to progress as they are a highly sustainable method of addressing some of the housing needs of the country.  

The investors have recognized a need for accommodation in central Dublin locations and have also recognized the fact that many older commercial buildings in the city center are underutilized and particularly underutilized in terms of their upper floors.

With that in mind, they have already purchased a building in Thomas Street which they are converting into accommodation and they have now identified a building right in the center of Dublin at No. 33 Bachelor’s Walk. which they wish to convert into 4 apartments on the upper floors and they will also renovate the commercial spaces in the basement and ground floor.

The cost of acquisition is a minimum of €1,200,000 (the property was listed at a guide of €1,300,000) and the cost of renovation is €440,000. 

We are proposing to lend an initial €650,000 towards the acquisition. The remainder of the acquisition price plus costs will be funded from the cash resources of the borrower (total €650,000).

The partners will also provide the borrower company with funds to pre-pay the first year’s interest on the loan of €50,000.

We will provide additional acquisition funding of €100,000 when planning for the specific apartment design has been received and finally, we will fund a portion of the renovation cost to bring total funding to €1.075m on completion.  This is the maximum loan amount  -  interest will not be rolled up and will be paid by the borrower upfront for year one and as it falls due thereafter.

The maximum loan will be €1.075m and any cost overruns will be funded by the borrowers.

Risk Warning

Property Bridges has compiled this report on behalf of our lenders and has taken reasonable care to ensure the information provided is authentic and accurate. Please be aware that returns are not guaranteed, and your capital is at risk. Please also note that the term is not certain and may be extended under certain circumstances. Investors should seek their own advice before investing. 

The Borrower

The borrowers are a group of high net worth individuals who have identified an opportunity in the Irish property market.  Specifically, they see that the current housing shortage creates an opportunity to convert relatively low-value upper floor city center commercial space into relatively high-value accommodation space which currently attracts strong rental yields.

Security

The principal security for this loan is a charge over the Secured Property and by a charge over the shares in the Borrower company.

The partnership will provide a cost overrun guarantee.

Property Location

The Property is in the absolute center of Dublin city being no more than 20 meters from O’Connell Bridge as marked by the red star on the map below.

Historically, the Property has been a tourist office and upper floors were used as a language school and translation service. The Property is in reasonable condition but will be completely renovated as part of the project.

The Property is in a special area of conservation and as such there are specific rules attaching to how it can be renovated. The borrowers are conscious of the rules and have already commissioned reports from the relevant professionals including a conservation expert.  The plan for the building accounts for all the necessary regulations and takes account of the existing structure and how best to allow for the creation of modern overhead accommodation while retaining the original period features of the property.

Any new commercial shopfront would need minimal signage and a clear showcasing of the historical fabric of the building. The creation of accommodation is specifically encouraged by planners as it brings vibrancy to the area.

There is an issue around the creation of a lobby for the upstairs accommodation which is not there now. The Conservation report attached in Appendix 1 makes it clear that this aspect will need to be applied for as part of the renovation but notes that where such separate access points already exist in neighboring buildings, it is a specific rule that they cannot be removed. Using that logic in reverse, they feel that it is likely there would be no objection to this aspect of the planning application.

Property Details

The Property is a 4-story over basement building constructed in the early to the mid-19th century and is of a type common all over the center of Dublin city. The building has been used as a tourist office at ground floor level and has had multiple uses for its upper floors.

Planning

The borrowers engaged a planning expert who has drafted a memorandum with a broadly positive conclusion around the prospect of achieving the desired planning outcome of 4 apartments. It is overriding local and national policy to use underutilized space above commercial buildings as additional residential property.  This helps solve the housing crisis and moves people back into the city center which brings many policy benefits.

Much will depend on the quality of the building finishes etc. that are proposed and here the borrowers have a good record in that they complete to a high standard.

There is adjacent precedence given that no. 26 Bachelors Walk has already achieved a similar change of use planning.

The planning memo prepared for the borrowers by a qualified planning consultant which we have seen and read is clear that the proposed change to residential accommodation is a request that is supported by policy and consequently by the planning authorities.  The report notes that the most relevant recent decision was for No.26 Bachelors Walk not far from the subject property and here a favorable planning decision was received for a similar change of use proposal from commercial to residential.

Term and exit

It is proposed to have a term of 24 months on this facility with a minimum interest period of 9 months.

The exit will be by way of a refinance to a mainstream lender once the rental flow is established. 

Income and Repayment

During the planning and construction phase, the property will not generate the income  -  the borrowers will deposit funds sufficient to cover the interest for 1 year.

After the first year and once planning has been obtained it is expected that the commercial space will be fully let.  Interest will be funded by the commercial rent and the residential rents as each apartment come on stream.  Final rental levels are estimated by the valuers to be in the order of €115,000 per annum.  This covers interest 1.25 times.  This is based on conservative rental estimates both for the commercial units and the residential ones.  These rental levels would cover bank interest at say 5.5% per annum 1.94 times which is sufficient to allow for a straightforward refinance of the loan once the property is complete and fully let.

Valuation and LTV

The Property is being acquired for an amount of not less than €1,200,000 and an initial loan of €650,000 is required. 

The Loan to Value based on the current value is 54% which is comfortable.

Once planning for the apartments is achieved we will increase the loan amount by €100,000 thereby increasing the LTV to 62.5% based on the purchase price.  In reality, the grant of planning will enhance the property value to some degree so the actual loan to value may not change substantially at that point.

Following renovations, our final loan amount will be €1.075m and our valuation report has stated that the valuation at that point will be €1.56m giving a final loan to a value of 68%.

The valuation has taken very conservative assumptions in relation to the rental of the commercial space.  Historically this space has been rented for over €50,000 per annum and will be renovated and refurbished by the borrowers. The property is only yards from O’Connell Bridge so it has substantial passing footfall and is suitable for a wide variety of commercial uses.  The valuers, in order to be conservative, have estimated a very low rent level of €30,000 per annum for this space and that has driven the final conservative valuation of €1.56m.  While the loan is comfortably secured at that level we believe that post-pandemic there will be scope to gain a better rent than that predicted with a consequent positive effect on the property value leading to a lower actual LTV.

The borrowers will refinance the property once it is fully let and has had a steady income for a period of 6 months.  They have the financial clout and relevant contacts and banking relationships to allow this to happen.

Risks and Conclusion

The 2 key risks are;

Planning risk:  This is a risk and we address it by withholding €100,000 of funding until the planning comes through.  The Property is currently worth at least €1.2m and the LTV on this basis is 54% which is comfortable in this location.  Our loan will not rise above €650,000 in the absence of the grant of planning.

2.  There is a refinance risk however this is mitigated by a number of factors;
   1. At bank rates even the conservative rental estimate sees interest covered nearly 2 times.
   2. The borrowers are developing strong banking relationships in Dublin and have other properties with substantial equity this should make refinancing straightforward.
   3. The borrowers are high net worth individuals and could inject extra cash if they had to in order to affect a refinance.
   4. The property could be sold once let and this would see the loan repaid comfortably without the need to refinance.
   5. The rental levels used for the valuation are much lower than the historic rental levels for this property.

This is a development facility secured against a property. The following factors make this a strong investment.

• The investment is for 24 months but has a minimum term of 9 months estimating a minimum return of 6.4%.

• The Property is in the center of Dublin city, an area that is in demand from renters.

• The borrowers are high net worth individuals with experience of completing similar projects successfully.

• Our loan-to-value (LTV) rate is 54% pre-planning with a maximum of 68% on completion (assuming the property only rents for the conservative levels given in the valuation).

Please refer to the Facility Agreement for a full disclosure of terms.

Written by Paul Curran

Reviewed by David Jelly