Case Study: Title Splitting on Purchase Completion

In this interview-styled conversation, I speak to Motiul Islam, Director at Sotherby’s Asset Management

TM: With me today is Motiul Islam of Sotherby’s Asset Management. He is also the host of the Progressive Property Network in Stratford. We speak about a title split deal we worked on last year, which is a true No Money Left In deal - yes they still exist! It is a block of converted flats. Each floor has one flat with four in total. Specifically, we speak about how Motiul found this deal and the title split on completion of his purchase. 

Motiul, just to recap, you bought the freehold of the land and building, which is the deal that you struck with the seller-landlord, but we also created four separate leases to your Group company on completion, by way of title split, creating four new leasehold titles. The property is in Sunderland, just in front of the beach and the views are stunning. 

How did you come across this deal?

MI:  It was presented by somebody in Progressive Property - in what used to be VIP. They had this property with four flats but all on one freehold title. That meant only a few lenders would consider lending on it and most likely on a commercial mortgage, which meant low loan to value and valuation. That individual heard that it’s possible to split the title into four leasehold flats, thus enabling vanilla buy-to-let mortgages but having never done it before, wasn’t sure how to structure the deal or the mechanics or even if the numbers stacked. I discussed it with him, ran through the structure, mechanics and whether the numbers stacked. As a result of helping him out in that way, he basically asked if would mind having a look at it and possibly joint venturing on it? When I went through the numbers, it turned out to be a pretty good deal. When looking at a title split, you should assess what is the value of the flats together on one freehold title and what are the values if they were on separate leasehold title - who could the target buyer of these flats be, either all on one freehold title or separate leasehold titles. Naturally, if they are on separately leasehold titles, it opens up potential buyers considerably as they could even be sold to owner-occupiers, instead of just an investor-landlord if they were all on one freehold title. Doing this analysis helps determine whether the title split actually adds value - you shouldn’t assume it does, sometimes in certain circumstances, it simply doesn’t. In this instance, there was a major difference between the asking price by the current owner, selling all 4 flats on one freehold title and the value of 4 flats, each on its own separate leasehold title.

(We run through the numbers below so keep reading!)

TM:  What was the state of the flats - did they need a lot of work?

MI:  The flats were actually in really good condition. We didn't need to carry out any refurbishment or do any work to the properties themselves. They were converted some 20 or 25 years prior. We didn’t have to worry about planning permission or building control or do the physical work of splitting the flats themselves. The flats were all let on ASTs. The only thing that the seller hadn't done, because they had inherited the property and because they weren’t aware of the difference in values, was legally split the title for the flats into separate leasehold titles. I don't think everybody is aware of the process or the difference in values. They got a commercial valuation on the property, which was correct for it as 4 flats on one freehold then put it on the market and we took it from there. In terms of doing any work to it - no, we didn't have to do any physical work to it or refurbish the flats. It was only the paperwork of splitting the titles.

TM: Let’s talk about the ASTs for the flats. If I remember correctly, all the flats were let, except maybe one. In terms of arranging finance to fund the purchase, did the fact the flats were let make it easier to arrange the finance?

MI: Initially, the plan was to purchase all the flats with tenants in situ but we soon found that raised a few problems. When you're taking on someone else's tenants, you're basically acquiring their problems if there are any. What I mean is if the landlord-seller didn’t comply with all the regulations when letting the flats, then if there are any rent arrears or you want to evict the tenant, then you will need to fix the landlord-seller’s failings first before you could recover the arrears or evict the tenant. 

I personally feel when you know how someone has come into the property and you've done all the checks yourself, you know exactly what's happened and what's not. There are no unknowns. If you've taken on a tenant and somebody else has done the onboarding process, you might not know if weren’t thorough or made compromises in the vetting process. One prime example is where the tenant later says, ‘oh we agreed this with the previous landlord’ or ‘we agreed that with the agent’ but there’s no evidence of it. Regulations are so tenantly-friendly now that evidence must be comprehensive and thorough. To avoid those types of situations, I prefer, right from the beginning, to know the full onboarding process was done properly and the tenants vetted carefully.

TM:  Let’s run through the numbers - what did the landlord-seller market the property for? You mentioned this was a commercial valuation, i.e. one price for the whole block of 4 flats on one title.

MI:  They had it on the market for £380,000.00.

TM:  By title splitting it into four separate leasehold titles, by creating new leases, what valuation would you get? 

MI:  The valuation came in at £650,000.00

TM: Wow! That's a major uplift from the asking price of £380,000.00. Having done no work to it whatsoever. It’s just a paper exercise - create four new leases you get a valuation of £650,000.00. I feel I undercharged you on the legal work now!

Is that valuation based on buy-to-let mortgages or was it on a bridge finance value?

MI:  That's on buy-to-let mortgages.

TM:  Did you have to go with multiple buy-to-let lenders or was one lender willing to lend on all four flats?

MI:  We’re with one lender at the moment.

TM:  That's quite good going. Lets walk through the process to give a little more details of the way we went about it. 

Just to recap, your contract with the landlord-seller was to acquire the freehold. The creation of the four leases was done on completion. Walk me through the steps/process.

MI:  The way we structured it was for the leases to be granted on completion by my freehold buying company. So I have two companies: First company - lets call it Company A - purchased the freehold title and the second company - lets call it Company B - was granted the four new leases on completion by Company A. 

TM: I want to mention something here: Company A and Company B are in common ownership and directorship so treated as a Group company for tax purposes. This meant the intra-group company transaction relief could be claimed thus avoiding any Stamp Duty Land Tax liability for the grant/creation of the new leasehold titles. 

MI: Company A, which is the acquiring company, was a special purpose vehicle (‘SPV’)that we set up solely for the purpose of acquiring this property. We raised bridge finance through the SPV to fund the purchase of the freehold. Company B is a company that I had already owned for some time, and had some trading history/accounts so the credit profile made it easier to raise buy-to-let mortgages. 

TM: One crucial matter to recognise here is that when the end result is to create these new leases or titles by granting new leases, you ideally want to grant them to a company that's already been around for a while, maybe has got some trading history and has got a good credit profile. That way, when you want to refinance it away from bridge finance or go direct to a vanilla buy-to-let mortgage, it will be easier to obtain lending on it from lenders because it's not a new company. It's got some trading history, it's got a credit profile, so it makes it easier on the lending side. It’s still possible to raise finance on a newly incorporated company, but a long-established company with some trading history and accounts is going to make it easier.

How did you find the process - was it complicated or difficult in any way? I mean, I know there's a lot of documents to sign because it's four flats, therefore, four leases, and two sets of documents for each lease - one on behalf of your landlord company (Company A) and one on behalf of your tenant company (Company B) -  so you had to sign eight documents plus the freehold stuff as well. You also needed to have land registry compliant lease plans prepared and since the seller didn't already have those, you needed to arrange for someone to go around and prepare the Land Registry compliant lease plans.

MI:  That is correct. Since we did this during Covid-19 lockdown, particularly when we had all the restrictions of meeting up and social distancing, arranging for the leaseplan draughtsperson to attend the property to draw up the lease plans and even to sign the documents was the most challenging part. We had to do virtual signing of the documents, which was a little different but it was something that once we got through it, it felt good. Certainly, when we were going through it, it felt like a lot of work but I wouldn’t say it was particularly complicated or difficult.

TM: I remember you sharing a picture on your social media of all the leases laid out on your dining table - it pretty much covered your whole dining table! The value that was created is fantastic though - it's almost a 100% uplift in value or thereabouts from a mere paperwork exercise. 

A lot of people tend to think title splitting must have already happened before you buy it so that they can raise finance on it. The way it was structured here was that it was done at the time of completing the purchase of the freehold, i.e. simultaneously 

TM:  What have you done with the flats since buying them - did you let them again on new ASTs?

MI:  Because of their location, on the seafront, I've been letting them as serviced accommodation. Being so close to the beach with a few hotels next to the flats, it's in the perfect location to be used as service accommodation and its had high occupancy rates.

TM: That's interesting. The property is quite far away from where you live - in East London - travel time is about 5.5 hours from you. You're pretty much managing this completely remotely. How has that experience been - trying to manage a service accommodation business? Do you have a local manager or agent to help you or do you do it all by yourself?

MI:  I do have a local manager managing the property. They do everything in terms of putting it on the market, checking tenants in, having the cleaners in - basically everything. Prior to this property, I've not done service accommodation. I've done HMO, single lets, converted houses into flats, etc. but I've never done serviced accommodation. Looking at the location though, it just felt like it was going to work very well as service accommodation. Because we were in lockdown, service accommodation was one business that took a bit of a hit initially. I spoke to quite a few people, then found someone that had been running service accommodation for quite a while. They were also in the area, which really helped. I did some due diligence then signed up with them to manage the flats and it's been running pretty well.

TM:  It must be quite seasonal?

MI:  It is seasonal - during Summer and over the Christmas period, we were fully booked. During the other months, although it's not fully booked, it's still more profitable than letting it on single ASTs.

TM:  That’s great - so you’ve got a property with pretty much no money left in and it’s cash flowing very well. Any closing remarks you want to share - maybe some tips on title splitting and finding similar opportunities?

MI: There's plenty of opportunities like title splitting about and you don’t even need to look hard to find them. A lot of the times, the landlord or seller is having issues trying to sell these properties, for instance, like this one, if they have a property that's been split into flats and they tried to sell them, the problem they're going to have is they've reduced the market - they can't for example sell to a homeowner buyer. If you put yourself in that position looking for those properties, it's a brilliant opportunity. You're going to be fishing in a small pond so quite likely to have a good catch.

Great, thanks for that Motiul.

Contact

Reach out to Motiul on www.linkedin.com/in/motiul-islam