Why are Special Purpose Vehicles (SPVs) used for Property Finance?
Where property purchasers/developers want to obtain finance for projects, an SPV is typically used as it reduces risks and liabilities for the lender.
One of the primary reasons for the growth in limited companies being registered for buy-to-let purposes is the tax treatment. Instead of paying income tax as an individual, a limited company pays corporation tax.
What is an SPV?
An SPV is a legal company that is formed for a defined special purpose.
For property investors, an SPV is usually formed in order to purchase buy-to-let properties or for property development projects. The SPV is a separate company with separate assets and liabilities.
An SPV for property investment is usually formed as a private company limited by shares.
How to set up an SPV in Ireland?
An SPV limited company is straightforward to set up and is no more complex than setting up a standard limited company. You can direct your solicitor or accountant to set it up or alternatively you can set this up yourself through the Companies Registration Office (CRO) at a cost of €50.
As per a normal limited company, you must appoint a director, register an address and you will be given the relevant reference numbers.
Process:
Form A1 - This is the application form for the company formation. Furnish the necessary details about the company, directors, secretary, shareholders, and share capital.
Company constitution - Compose the company's constitution, which includes information about the company's purpose, internal regulations and governance.
CRO - Submit the completed Form A1, along with the required €50 fee, to the CRO electronically through the CRO Online Registration System (CORE).
Tax Registration – Irish SPVs need to register and pay tax to the Irish Revenue Commissioners through Revenue’s Online System (ROS).
Bank account – Required; company documents Including the certificate of incorporation, the company constitution, and the A1 form.
It is a straightforward process and alternatively you can engage an accountant to incorporate an SPV for as little as €120 including the CRO fees.
Why use an SPV for property investment?
An investor may choose to form an SPV to obtain finance on a property with limited liability.
They may also do so for tax purposes. This is because one of the key advantages of holding a property through an SPV is the propensity to attain a lower overall effective tax rate on the rental income generated from the property.
SPVs, Limited Companies and Mortgages: What you need to know
For property investors who decide to operate their business through a limited company, however, the reason for setting up an SPV is a little more complicated.
The lending policies of most mortgage providers mean it can be more difficult for a trading company (i.e. one which, in addition to owning property, conducts other trading activities) to obtain mortgage finance. It is usually far easier for a limited company whose sole business relates to the property to obtain finance. So, in order to access mortgage finance, it is usually necessary for property investors who use the limited company format to also set up an SPV for property investment and development.
Many investors use bridging loans as a short-term financing solution when establishing SPVs for property transactions. Bridging loans offer quick access to capital, allowing investors to secure deals before arranging longer-term financing.
In practice, the use of SPVs for limited companies has two main benefits: firstly, it makes obtaining financing more achievable and, secondly, it offers them the chance to claim mortgage interest tax relief.
Why alternative lenders prefer SPVs
Alternative lenders tend to prefer limited company SPVs because it is easier to understand the lending risks involved. For example, a new SPV for a property project will be a new business with no previous trading history. It will be free from any pre-existing obligations, debts, charges, and legal claims, which may otherwise affect a lender’s decision on an application.
How an SPV works: A case study
Assume that you are a building contractor and are already trading as a limited company. It may seem to make sense to purchase buy-to-let properties with a mortgage through this company, particularly as you would be able to claim mortgage interest tax relief as a result.
However, as this is a trading company with existing assets and liabilities, debtors and creditors, employees, etc., it may be difficult to find a mortgage lender willing to lend to you.
In this case, setting up an SPV for this purpose should enable you to access commercial property finance more easily.
Some other advantages of using an SPV
SPVs can have several other possible advantages, including:
Placing a property within an SPV can be used to separate and reduce business risk. If, for example, a trading company you own fails (or you wish to dissolve it), this will not affect the property assets within the SPV. Similarly, if a property SPV is unsuccessful it will not affect your trading company.
SPVs can provide a practical and safe way of working with other investors on a specific property project while keeping it separate from your other property projects or other businesses.
SPVs offer flexibility. It is possible to form several SPVs if you wish for different projects to remain independent of one another. An SPV can be formed for one or several related projects. The SPV can be dissolved when the property is sold and new SPVs formed for any further projects.
Placing a property within an SPV means that the property can be sold or transferred by selling or transferring ownership of the SPV.
It is important to note that the property in the SPV is subject to any future changes in legislation, including tax legislation, that may affect this kind of entity.
Summary
In summary, if you are considering your next property purchase or property development venture then using an SPV can offer many advantages. However, it is essential to take professional advice on the overall implications of using an SPV before going ahead so it is tailored and specific to your individual needs, risks, and opportunities. In a nutshell, the process involves setting up an SPV after you find a development, in order to isolate the asset and any risks involved with the purchase. After the property/development project is completed, you either sell it or you keep it, at which point you go through a formal process with your advisors to – if so desired – close that SPV down and possibly establish a new one.
This article was written in conjunction with Tom Heelan, Principal at Thrive Financial . For more information, please contact 087 9344655/info@thrivefinancial.ie.
To contact Onate about property finance, please contact John Ring at john@onate.com / 0878305276 or Michael Gavin michael@onate.com / 0851454200
