Commercial Re-mortgage of Factory Premises held in an Off-Shore Trust. Birmingham.

Becoming quite widely used for tax efficiency the off-shore company was a British Virgin Islands company, with nominee directors, held under a trust. The beneficiary of the trust was a director of the company occupying the Birmingham premises. This obviously meant that the borrower was the British Virgin Islands Company, a fact which immediately reduces the number of potential lenders. Our client’s company had been the tenant of the premises for a period of 3 years and held a lease for 21 years with 7 yearly reviews.

In assessing the deal our lender performed a ‘stress test’ of the rental payable under the lease against the future payments on the loan. As a further check on serviceability the lender asked the valuer for an opinion on the rental value of the premises to cover the possibility of the lender having to re-let the premises should a default occur simultaneously with the company vacating the premises. In arriving at the values required the valuer obviously took evidence from Birmingham and the Midlands. This stress test resulted in the offer being made with the additional condition of an interest rate hedge to cover the potential shortfall between the rental and a higher charging rate.

The interest rate hedge that the lender insisted upon resulted in much higher initial costs to our Birmingham based client. However, the commercial re-mortgage had to be offered considering all the prevailing circumstances. This factor is often overlooked by clients when setting up a way of owning property and avoiding taxation on future gains. The further advantage of this to our Birmingham based client was that his company had a friendly landlord and that the rental stream originating from the business was being used to discharge the debt owed by the British Virgin Islands Company.

Whilst tax efficient this system of ownership is costly and can be problematic when it comes to financing. In particular it is our experience, as with our Birmingham based client, that when the business needs more money there will be a need for a commercial re-mortgage, and the client may well have underestimated the difficulties and expense of arranging this finance.

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