Following its introduction at the beginning of April 2008, the government's controversial tax on empty commercial properties was met with a volley of opposition from several major trade bodies representing the interests of property developers, landlords, retailers and a variety of other concerned professions. As we turn the corner into 2009 the deteriorating conditions in both the commercial property sector and the broader economy mean that the "Empty Rates Tax" could becoming increasingly important for finance brokers involved in the bridging and commercial sectors.
The empty rates tax requires that commercial property owners and landlords pay 100 per cent of the business rates on a property if it has been unoccupied for more than 3 months (6 months for certain kinds of industrial sites such as warehouses and factories). With the current commercial market survey from the Royal Institute of Chartered Surveyors telling us that occupier demand is now declining at the fastest rate since their records began, the empty rates tax is putting extra pressure on commercial property owners who are already faced with a struggle if they need to lease or sell their premises, exacerbating their troubles in what for many is likely to be the most challenging period they have ever faced.
Business rate hike
In November 2008 the chancellor announced that from April this year the tax threshold for empty rates would be raised to exclude properties with a rateable value of under £15,000, yet that same month also heralds the beginning of a new tax year and the biggest hike in business rates since 1993. The planned 5 per cent increase, based on the RPI inflation figures from September 2008, will only add to the woes of property owners facing up to hefty empty rates demands. Calls to abolish the tax altogether in acknowledgement of the current market conditions have so far fallen on deaf ears.
How does this affect the commercial broker? There are several possible repercussions arising out of the empty rates tax that brokers might benefit from being aware of. Firstly, they should consider that property owners tend to be handling the tax in one of two ways. Both of these have the potential to require access to finance, and in the current market environment it is highly likely that brokers will find themselves fielding enquiries from property owners whose banks say that they are no longer able to assist them.
Preferred response
Assuming that their business is basically robust then the preferred response for any commercial property owner presented with an empty rates bill is to pay it; however the sums involved on a large commercial site can easily run as high as six figures and many property owners will be unable to access this amount of capital within the kind of timescales required. In cases such as this, brokers may be able to assist by arranging a bridging loan, the funds from which can be used to cover the tax bill. Short term finance has traditionally been used for covering a variety of taxation costs such as corporation tax, and it is now being used to cover this new expense too.
Unfortunately, not all property owners are in a position to meet the increased demand on their finances that the empty rates tax represents. Those that find themselves over-faced are opting for a second and more drastic solution to the tax - demolishing properties to avoid incurring an empty rates bill for them. The fact that property owners are being forced into this position has been one of the principle causes of opposition to the tax, but there may still be opportunities for brokers to assist those who have taken the decision to knock down their properties. Again, they may not be able to raise the capital required for such an undertaking within the timescales required. Bridging finance can once more be employed to enable them to proceed with a demolition, although obviously in this situation the borrower must have other suitable security available in addition to the property that is to be knocked down!
In each of the above situations the usual prerequisites for a bridging transaction will apply, such as having an established exit in place. Provided these can be satisfied and the security offered is appropriate then short term lenders can and will consider advances for either of these purposes.
Lease or sell
The second issue which brokers should be aware of is the effect that the empty rates tax is having on the willingness of lenders to advance funds to businesses that need to use their premises as security. As stated above, the empty rates bill on a large site can be considerable and if a lender is forced to take possession of a commercial property from a beleaguered owner then they will need to lease or sell it in a market where values and occupier demand are both declining, or become liable for the empty rates tax themselves! In the current climate this can be a huge disincentive to lend against commercial property and the larger the property, the greater the potential liability. This means that from a lender's perspective deals which are otherwise attractive can become unworkable when the possibility of an empty rates bill is factored in.
For example, a recent case we looked at involved an industrial site of 84,700 square feet. We calculated that this had the potential to face the client, or a lender in a possession situation, with an empty rates bill of £126,995 per annum! Additionally, as a lender we would have to assume that if a possession situation arose the client is unlikely to have paid their empty rates tax, thereby passing the arrears on to us.
Here to stay
In a buoyant market the problem outlined above would be less pronounced, but given the current climate and the government's apparent zeal to encourage business lending its failure to pronounce moratoriums on the empty rates tax and the proposed 5 per cent rate hike is certainly perplexing. Nevertheless, it appears that empty rates bills are here to stay and brokers need to be aware that lenders who are still in the market will be taking them into account when looking at large deals.
It could thus be worthwhile for brokers to go the extra yard when establishing the viability of a business or site prior to approaching a lender. Whether or not extra evidence and documentation will actually be required is likely to depend upon the details of the case, but in a market where many lenders are "cherry-picking" deals, being able to allay any concerns they might have regarding empty rates could help to secure a better deal for your clients and bring cases to completion more swiftly.
