Proplend Launches New Lending – Effectively To The Government
Visit Proplend* has only ever introduced one new type of loan in its seven-year history. Everything it has done over the years shows that it prioritises quality lending that it understands above rapidly growing its own business.
For just the second time, it's just introduced a new type of lending: VAT loans.
I interviewed both Proplend's key people about these loans and I have my own comments that I shall intersperse below. But most of the following is simply a copy of an email that Proplend sent its lenders, because it's explanations are very clear.
I have made a couple of tiny punctuation changes for clarity.
My additional comments are shown in gold boxes like these.
Proplend's VAT loans
In addition to short term Bridge Loans and medium term commercial loans, Proplend has added a new product for both our Borrowers and Lenders, it’s called a VAT Loan.
VAT Loans are complementary to our existing loan products as they relate to commercial property but they differ by the fact that they are not secured or repaid in the same way.
In brief, if a commercial property investor purchases a property for £1m and the property is elected for VAT, then the investor needs to pay VAT at the prevailing rate (20%) on the purchase price plus the stamp duty. So on a £1m property purchase, the investor needs not only a c30% deposit but also needs to come up with an additional £207,900 of VAT at completion. This can have a major impact on the short term cashflow of the purchaser.
If the investor knows the property they are purchasing is elected for VAT, they will set up a new SPV (special purpose vehicle) and register that entity for VAT. What this means is, after purchasing the property and paying the VAT due at purchase, they can submit a VAT return to HMRC to have the VAT paid rebated. This process usually takes from 30-90 days and follows HMRC’s fundamental processes of VAT charging, VAT payments and VAT returns.
Proplend’s new VAT Loan product, enables the commercial property investor to borrow the VAT amount as a short term loan. It is structured the same way as a Bridge Loan, in that we lend a gross loan amount, deduct in this case 120 days of interest in order to pay Lenders their monthly interest, and then release the net amount to the Borrower.
As part of the due diligence process, the Borrower must appoint our nominated VAT Agent, who will work on behalf of the Borrower to submit the VAT return and liaise with HMRC to ensure a timely recovery of the VAT amount.
In short, business borrowers registered for VAT can reclaim VAT they have paid from HM Revenue & Customs. They can do this even when purchasing a property on which they pay VAT. The Proplend loan is to help the borrower pay the VAT that they can expect to get back from the taxman a month or two later.
The difference between Bridge / Term loans and VAT loans are
- VAT loans do not take a 1st legal charge over the underlying property
- Lenders are not relying on the property being refinanced or sold in order to repay the loan. The loan is repaid when HMRC rebates the VAT amount paid by the Borrower back to Proplend’s nominated VAT Agent
- Proplend* will still produce a Full Loan Request, it will just read differently to a bridge or term loan FLR. In most cases the Borrower will have a different Lender supplying a Senior Debt Facility, but this could be Proplend
- Lenders will rely on the Loan contracts, a personal guarantee from the director & shareholders of the Borrower for 100% of the loan amount and the HMRC process of VAT charging, VAT payments and VAT returns
- VAT loans are shorter in term, up to 90 days
- VAT loans will only have an additional one month’s interest reserve (loan term + one month)
- VAT loans are not Tranched given the short term nature of VAT loans, they will not be eligible for the PLE
PLE means Proplend Loan Exchange. See near the bottom of this page for more information.
You may or may not have read in previous communications that Peter Bloom has joined Proplend as a non-exec director. Peter’s background is not only as a commercial property investor with over 30 years’ experience but more importantly Peter founded the UK’s first VAT lending company, BloomSmiths. I have always seen VAT Lending as a complementary product for both our Borrowers and Lenders. When I met with Peter after he left BloomSmiths, the combination of his experience and our funding platform resonated between us.
Peter Bloom has a few years' experience as a VAT lender, lending many millions of pounds. He's also got a substantial property and development background, where he will have been the one paying the VAT. There probably aren't many people better suited for advising Proplend in its new, niche lending type.
I am pleased to announce that we have completed our first VAT loan at the end of last week. It was funded independently rather than via the wider platform, in order to ensure that our processes worked as envisaged before bringing future VAT loans to the wider platform.
To start with, given the fact that they are not structured by way of legal charges, VAT loans will be made available to only Lenders using Self-Select. For more information on VAT loans please read this article here and these FAQ’s here.
What is a VAT Loan?
A VAT loan is a loan made to the purchaser of a commercial property which is elected for VAT in order for them to pay the VAT element of the purchase at completion.
What does it mean when a property is “elected for VAT”?
The owner of that property has elected to charge VAT on the rent and services they charge their tenants and to recover any VAT incurred on goods and services which they have been supplied with.
How much VAT is due at property purchase?
VAT is charged at the prevailing rate on the purchase price plus the stamp duty.
Are VAT loans secured by a first legal charge?
No, the borrower will most likely be taking out a senior debt loan to purchase the property and they will take the first legal charge.
How is a VAT loan repaid?
Once the property purchase is complete and VAT paid, the Borrower (or their VAT Agent) will submit a VAT return to HMRC to have the VAT paid repaid.
How long does this take?
Submitting a VAT return and having the monies repaid takes between 30 to 90 days.
How can Proplend ensure that the VAT repaid from HMRC to the Borrower will be used to repay the loan?
In order to qualify for a VAT loan, the Borrower must appoint Proplend’s nominated VAT Agent. The VAT agent will check the VAT status of the property and the Borrower, submit the VAT return to HMRC and work with HMRC to have those funds repaid. HMRC will repay the VAT claim into the client money accounts of the VAT agent and then the VAT Agent will transfer them to Proplend for distribution to Lenders.
These loans are niche and none of 4thWay's specialists have experience assessing them. Indeed, very few people have.
However, I can't see fault in Proplend's processes. By taking control of the agent and VAT claim process, Proplend holds the cards needed to obtain the VAT to repay lenders the money they have lent.
Initially, Proplend had proposed to allow the borrower to appoint a VAT agent. With Proplend always choosing the agent, this closes the only loophole to fraud that my team and I had identified.
Does Proplend Security Limited instruct valuations and legals on the property?
No, we are not relying on the underlying property asset to redeem the loan but we will have sight, but no reliance, on the valuation and title report for the senior debt lender.
In plainer English, this means that Proplend won't value the property or do any legal aspects of the borrower's property loan, which is separate to the borrower's VAT loan through Proplend. However, Proplend will at least be able to see those legal documents.
Proplend* ensures that the borrower does own the property and can claim VAT back, and conducts the other checks that it does for property loans.
Could Proplend also be the senior debt lender?
Yes, we could, depending on the transaction, but the underling senior debt loan and the VAT loan would be two totally separate loans.
Secondary Market (PLE)
Given the short term nature of VAT loans, Lenders will have to hold them to term. VAT Loans will not be eligible for the PLE.
Proplend is referring to the Proplend Loan Exchange (PLE), which is what it calls its secondary market. A secondary market is where people can buy and sell existing loans, rather than waiting for new loans to buy or rather than waiting till a borrower repays all outstanding money plus interest.
VAT loans typically being under three months, there's little point in being able to sell them early.
My final thoughts and comments
Proplend* doesn't do development lending, but these VAT loans enable lenders using Proplend to take part in developments, without the risk that the loan can't be recovered in full because the development is a disaster.
Proplend's agent will receive the tax back from HM Revenue & Customs, regardless of the development's success. This VAT can then be disbursed back to Proplend lenders.
These aren't property loans, but VAT loans, which means that you can't so easily force the borrower to sell the property to get your money back. Yet the VAT debt is possibly more comparable to government debt, since it's the government that is legally obliged to pay back the VAT.
Most people lending to the government (in a type of loan – or bond – called gilts) earn less than 1% per year. In contrast, Proplend has told us it expects interest rates on these loans to be around 10%.
That looks to me like potentially a very good return for lenders. It'll be very interesting to see how these loans perform. I expect satisfactory results.
It's also cheap for borrowers. Borrowers elsewhere typically pay around 15%, with those higher rates possibly driven by low competition from lenders. Proplend also offers borrowers better terms and conditions than we've seen elsewhere.
I asked the key people at Proplend how it will manage these very short-term loans from a lenders' perspective, since lenders want to ensure their cash is being lent out as much of the time is possible. I didn't get a direct answer, so it's probably the biggest question mark at this stage.
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