Onate’s Guide to Pre ‘63 Investment Property

Prospective purchasers of Pre ‘63 investment properties in Ireland regularly come to Onate.

Whilst Pre ’63 properties often make attractive investments, owing to their high rental yield, they can be difficult transactions to execute. So what follows is our guide to ensure buyers are aware of the key issues and common pitfalls to look out for along the way.

Onate has the experience and can-do attitude to work through many of these issues, and is ready to support experienced borrowers in this area.

What is a Pre ’63 investment property?

The term “Pre ’63” or “Pre-63” is used to describe a property that was sub-divided into multiple units prior to the introduction of the Local Government Planning and Development Act of 1963 (the “Act”). The typical Pre ‘63 Property is a large two or three storey Georgian property, containing multiple flats, or bedsits. Following the introduction of the Act, a property owner wishing to convert their property into multiple units required planning permission to do so.  This permission is often difficult to secure for older buildings, hence Pre ‘63 properties are frequently in high demand with investors.

What do you need to consider before embarking on the purchase of a Pre ‘63 property?

Pre-1963 declaration

A purchaser acquiring a Pre ‘63 property (and their Lender) will require evidence that the property was in use as multiple units before the introduction of the Act.

This evidence will generally take the form of a “Pre ‘63 Declaration”, or, as the case may be, multiple declarations. This declaration (or declarations) is required to confirm the use of the property for the period commencing on or before October 1st 1964 to date.

Ideally, the declaration should be provided by the owner(s) of the property for the entire period. If declarations from the owner(s) are not available, the person providing the declaration would need to demonstrate a credible basis for their knowledge of the use of the property during the relevant period.

In order to satisfy a prospective purchaser, the declaration should be accompanied by supporting evidence such as:

(i) reference to multiple flats / bedsits in descriptions of the property in title deeds

(ii) confirmation of multiple use by previous owners’ solicitors in replies to requisitions on title

(iii) historic tenancy schedules

(iv) evidence of separate metering and any other documentation that proves the legitimacy of the declaration.

Often a declaration will confirm that the property was in multiple use prior to the introduction of the Act, but will not specify the exact number of units contained from 1963 to date. This means previous owners could have further subdivided the property, or amalgamated existing units. Depending on the nature of such works, they could firstly constitute unauthorised development for the purposes of the planning acts. Secondly, if works were carried out since June 1st 1992, it could fall within the scope of the building regulations, including the requirement for a fire safety certificate.

Prospective purchasers, and in particular, lenders, will take an extremely narrow view when it comes to any potential fire safety issues, which highlights the importance of detail when it comes to such declarations.

NPPR charge

NPPR (Non-Principal Private Residence) tax was in place from the years 2009 to 2013 for properties that were not resided in by the owner(s). Each unit within a Pre ’63 property is considered a residential property for the purposes of the charge and any purchaser will require a certificate of discharge for each unit.

Previous owners may have considered the entire property one residential unit for the purposes of the charge, when in fact the property holds multiple units. If this is the case, it can lead to significant costs in a resale situation. It is worth asking the seller or sales agent from the outset if NPPR has been paid in respect of all units contained within the property.

 Is the property vacant?

Pre ‘63 properties often come to market in a tired condition, in need of some modernisation.

If the buyer is looking to undergo works on the property, it will likely need to be vacant.  This can pose two problems:

(1)   The income will drop or cease for a period;

(2)   Problem tenants unwilling to vacate may frustrate the process.

Where these issues arise, they can, in certain circumstances, present obstacles to obtaining finance and so, a pragmatic approach from Lenders is required.

Conclusion

Pre ‘63 properties can be a great opportunity to buy and lightly refurbish so they satisfy current living standards and provide essential rental accommodation. But it is important to be aware of all of the potential challenges when embarking on a Pre ‘63 project.

 The financing of these properties can be challenging for the reasons set out.  Onate stands ready to back experienced operators in this area.

This article has been written in collaboration with Eoin Dennehy from Gordon Judge Solicitors.

 If you have any further queries or to see how our lending process works, visit www.onate.com/bridging-loans

In The Media: Onate’s John Ring in IPAV’s Property Professional Magazine

Onate’s Senior Lending Manager John Ring is featured in the latest Property Professional Magazine from IPAV (The Institute of Professional Auctioneers and Valuers).

Read John’s article on page 24 here

In The Media: Onate CEO Dan Gandesha in the Kilkenny People

Our CEO, Dan Gandesha was featured in this week’s A Day In The Life.

Dan spoke to Siobhan Donohoe for her popular column in the Kilkenny People.

Read the article online here

Onate’s Tips for Choosing the Right Solicitor

One of the key aspects to ensuring property and lending transactions complete efficiently is making sure that you have engaged a solicitor that suits your needs.

There will be solicitors with experience in alternative lending and others without that familiarity. This can be the difference between a successful and unsuccessful transaction.

 Here are some of our tips to consider when choosing a solicitor:

1. Choose a solicitor with the right expertise

Choose a solicitor that specialises in property lending and conveyancing. Ensure that they have completed similar types of transactions previously with alternative lenders, executed through a company structure (SPV). For example, if you have used a solicitor previously to draft your Will or for family law matters, they may not have the right expertise to represent you when it comes to property lending.

  2. Look for recommendations

Leverage your contacts and establish who might be in a position to suggest a solicitor for your requirements. Recommendations from friends, family or colleagues can also help you to make an informed decision. People who know or have worked with good solicitors are often happy to refer them to others.

3. Ensure the solicitor has capacity

At Onate, we like to close deals swiftly. You want to be sure that your solicitor has capacity to carry out the work required and that your requirements are high on their priority list. If you have chosen a sole practitioner that works across various legal areas, they may not have the resources to get what you need done. This can impact speed and efficiency in executing documentation. Mid-size firms often have a larger workforce and a higher workload capacity.

We like to hold all-party calls to close deals in order to ensure a swift transaction. We recommend broaching this with your solicitor at the outset. If they are too busy to join an all-party call, they may not have the capacity to get a deal done quickly (less than two weeks).

4. Agree the fee from the outset

Ensure you know the full cost of the solicitor’s services from the beginning so you don’t get a surprise at the drawdown stage.  That said, solicitors with the above experience and capacity are likely to be more expensive than general practitioner solicitors - this is an investment worth making.

5. Don’t delay

Speed is key when getting these transactions across the line. Having a solicitor in place and ready to engage with the lender and their legal representation as soon as possible means the process runs more efficiently. Legal delays can cause knock on delays to the whole transaction.

Once you have engaged your solicitor, ensure the property deeds and associated information pack are sent to Onate’s solicitor immediately. It means our solicitor can raise any questions early. Your solicitor (or accountant) will also need to set up an SPV (Special Purpose Vehicle) in a matter of days.

For more information about how our lending process works, visit https://www.onate.com/blog/our-lending-process-and-how-it-works

Should I own investment property in Ireland in my own name or via a company?

When acquiring property, an important question at the outset is whether to hold it personally (in your own name) or via a company structure (often termed SPV or Special Purpose Vehicle).

Holding property via a company offers the following key advantages:

• Flexibility of retaining profits for future investment, without having to pay marginal rates of tax on income realised;

• Possibility of using a holding company structure and segregating property assets from cash;

• Limited liability if borrowing for development.

Depending on your personal circumstances and future intentions, a corporate structure can be more advantageous.  An overview is set out below.

Personal Ownership

Rental income

In principle, rental profit earned on Irish property will be subject to income tax, USC and PRSI. For marginal rate individual taxpayers therefore, based on current 2021 rates, your net taxable rental income could be taxed at rates as high as 55%.

Future sale

In most cases, the individual investor will be liable to 33% CGT on any gains made on a sale of their property. However, there are anti-avoidance rules in the Irish tax code which can recharacterise the capital gain into an income tax receipt (liable to the higher income tax rates) in certain circumstances. These rules need to be carefully considered at the outset.

Ownership via a Company

Rental income

Rental profit for a company is subject to corporation tax at a rate of 25%. However, where a company is a close company (broadly, a company controlled by five or fewer persons), rental income may be subject to a surcharge of 20% if it is not distributed to the company’s shareholders within 18 months of the accounting period in which it was earned. The effect of the surcharge can mean that the overall effective tax rate on such income is as high as c. 40%, a rate which is still lower than the marginal income tax rate of 55%. Depending on the circumstances, it may be possible to manage the surcharge exposure.

Where sizeable rental portfolios are involved, the incorporation of a property management company (“ManagementCo”) can generate some advantages. ManagementCo would charge a management fee to the property holding company and would be a trading entity such that any income earned is taxable at 12.5%, whilst being tax deductible in the property holding company at 25%. Hence, an overall saving of 12.5% on such income is achieved. It also assists in relieving the impact of the close company surcharge.

Future sale

If Irish property is sold by a company, any gain on sale will be subject to corporation tax on chargeable gains at an effective rate of 33%.  

Extraction of income/gains

An obvious concern to an individual will be the reduced level of available income in his/her hands, given that the income now accrues to the company. The company will need to operate 25% dividend withholding tax on distributions made to the individual shareholder. That dividend will also be liable to income tax for the individual (potentially as high as 55% as mentioned above), with a credit claimed for the 25% tax already withheld at source by the company.

If, after a sale of the property, the individual decides to liquidate the company, any net proceeds received on liquidation should generally be subject to 33% CGT. There are always two layers of tax to bear in mind where a corporate structure is concerned.

A willing purchaser may be open to acquiring the property-owning company as opposed to the company itself, thereby eliminating the double tax exposure for the individual shareholder. However, most diligent purchasers will be educated on the “latent gain” that they will inherit by acquiring the company’s shares, and will seek a discount on the purchase price to compensate them for same.

Trading company for property development activities

A corporate structure is usually preferred for investors who intend to acquire property / land for full development and onward sale. This is because a 12.5% rate of corporation tax applies to trading income of a company generally. However, profits from certain “excepted trades” are taxed at the higher rate of 25%. This includes profits from dealing in or developing land, other than fully developed land.

In order to avail of the 12.5% rate, the land must have been developed by, or for the company, before it is sold (such that it would reasonably be expected that no further development would be required for another 20 years). It is important to review the proposed activities of the company in advance so you are comfortable  the “trading” threshold will be met.

Holding property via a company also offers the following advantages:

• Flexibility of retaining profits for future investment, without having to pay marginal rates of income tax on income realised from personally held investments, and opportunity to extract income as dividends or salary as the need arises;

• Possibility of using a holding company structure and segregating property assets from cash (however it should be noted that a holding company will not be able to avail of the “participation exemption” from CGT where the shares derive the greater part of their value from Irish land or buildings);

• Limited liability if borrowing for development.

There are additional administrative considerations associated with running a company. For example, the requirement to file annual returns and financial statements with the CRO and the requirement to file corporation tax returns with the Irish Revenue Commissioners.

Transferring property to a company

Where property is transferred by an individual to a company, the company will be liable to stamp duty on the acquisition of the property. The individual transferring the property may also be liable to CGT on the transfer, if the market value of the property at the time of transfer is higher than the individual’s original tax base. Any capital losses arising where property is transferred to a company owned by the individual are ringfenced, such that they can only be offset against gains on future disposals to the same company. Generally, the property will be transferred to the company for an amount owing (i.e. as a director’s loan) thereby enabling him/her to draw down the after-tax income within the company tax free up to the value of the property.

Conclusion

Depending on your personal circumstances and future intentions, it may be worth exploring the possibility of investing in property via a company, particularly if a long-term strategy is envisaged which can help reduce the overall effective rate of tax as described above.

When considering property investment through a company structure, timing can be crucial. Investors often need quick access to capital to secure properties or fund renovations before long-term financing is in place. In such scenarios, flexible bridging loans can provide the necessary short-term funding to move forward with investment opportunities, whether you're purchasing a property or releasing equity for further investments.

This article has been written for Onate by Fergal McConnon, Solicitor and Colin Bolger, Senior Associate in ByrneWallace Tax Advisors

Please note that the content of this article does not amount to professional advice. Legal and tax advice should be sought in respect of specific queries. No person is entitled to rely, in any manner, or for any purposes, on this article.

In The Media: Onate CEO Dan Gandesha on That Great Business Show

Onate’s CEO Dan Gandesha is featured on this week’s episode of That Great Business Show Podcast.

Listen to the full episode here:

In The Media: Building Ireland Magazine

Building Ireland Magazine featured Onate’s launch this week.

Read the full article here, or copy paste the link below into your browser:

https://buildingirelandmagazine.ie/new-irish-start-up-onate-approves-29-residential-bridging-loans-totalling-over-e10m-in-first-two-months-of-2021/

In The Media: The Sunday Independent

Onate is delighted to be featured in this week’s Sunday Independent.

Access the full article here.

The Irish Housing Market; Demand Driving Real Investment Opportunity

Let’s start with the bottom line. Houses are homes and we need more homes in Ireland. These much-needed homes don't get built and vacant homes don’t get renovated and returned to the market if the investment case doesn't stack up. At Onate, we’re putting our money where our mouth is.

The rise in demand for housing in Ireland is creating significant investment opportunities in towns and communities all around the country. The state needs to build 36,000 houses annually over the next two decades to keep pace with demand, but in 2019 just 10,800 were built. That represents an annual deficit of 25,200.  

A number of factors are driving the demand; the population is growing, ‘naturally’ and from net immigration. Since 2015, half of Ireland’s annual population growth has come from Irish nationals returning to Ireland. And spending capacity has increased, in part due to the pandemic, as people who have stayed in permanent employment since the virus hit last March have racked up savings. An additional €12.6 billion has been put into bank and credit union accounts. This increased saving has meant more people can afford mortgage deposits, contributing to a surge in mortgage approvals; a total of 3,355 mortgages were approved in January, a 2.8% increase on the same period last year. 

This demand increase has not yet driven prices back to where they were pre-peak. From 1996 to 2006, Ireland experienced one of Europe’s longest and biggest residential price booms with average prices growing 300% through the decade. Following the 2008 recession, Ireland’s house prices fell 55% from their peak.

That prices have not bounced back to the levels of the peak is down in part to the Central Bank of Ireland limiting lenders with residential loan-to-values to 80% for owner-occupiers and loan-to-incomes of 3.5 times salary. Those limits are a long way from 2008, when loan-to-values reached 100% (and sometimes above) with loan-to-incomes above 4.5 times salary. 

These measures to control prices, coupled with continued wage growth, a lower interest rate environment and a relatively Covid-resistant market have meant that house-price affordability is now significantly better than pre-boom. Mortgage payments consumed 15% of household income in 2020. In 2007 the figure was 26%. 

Ireland’s acute undersupply of new residential property coupled with these lending restrictions impacting the prices buyers can pay, has driven rents up at a rate that has outpaced property prices. That means rental yields are up. Significantly. Gross Rental Yields have more than doubled in 14 years.

Strong rental yields like these result in additional demand for property from investors. Alongside owner-occupier demand this extra demand also adds to liquidity, providing a wider pool of potential purchasers. And in the case of assets which have come to market through a foreclosure it greatly assists the speed and ease of such a sale.

All of this adds up to an interesting time for us at Onate to be entering the Irish lending environment. We are here to help unlock the potential built up in the market and facilitate the availability of homes. That means giving property investors flexible, fast access to finance to enable them to acquire residential property and return it back to the mainstream rental or owner-occupier markets. You can read more about how bridging finance helps that process here.

Bridging lending, as misunderstood as it is vital

“Bridging loans, that’s one of those things like subprime mortgages and interest only personal loans, right? Boom stuff?”

Wrong. Fundamentally, totally, absolutely wrong.

In fact, it’s one of the most useful facilitators of a functioning housing market.

Let’s look at the situation in Ireland right now; large property funds hold residential properties all over this country. If you’re in an office in Manhattan, you’re unlikely, no matter how hard you try, to be deeply intimate with a housing development in Termonberry, or Termonfeckin or Timoleague. It’s a line on a ledger, a row on a spreadsheet.

But in towns like those all across this country, there are people who know those properties intimately. The local builder, developer or investor. They know the history of the buildings, they know the potential value that could be unlocked, the opportunity to be seized. But they also know all the issues which make that opportunity a tricky proposition to ask a bank to fund.

It might be the wall which was built too far over on a neighbour’s land. The one house out of four which wasn’t finished, the extension that needs to be replaced, the permissions and certifications that need to be completed.

Banks hate those issues. They hate encumbrances. They hate complexities. That’s no criticism of them, it’s just the model for most banks is to systematise and complete in bulk. An opportunity might be wonderful, but if that opportunity comes attached to a deed with issues to be resolved, it rapidly changes from opportunity to obstacle.

Debt Settlement 

That’s where we come in. We give the breathing space for obstacles to be removed, complexities unwound. The local investor can go to the Investment Fund that owns the apartments off Main Street and buy them with our support. Then they fix the extension, or move the wall or whatever needs to be done, so they can go to the bank and say ‘it’s clean, simple, unencumbered. Let’s make it happen.’ Bridging.

Equity Release

At Onate, we can give you access to the equity tied up in your existing investment assets. If you don’t have the liquid capital to get started, we bridge that gap. Our loans are structured flexibly, with a term of up to two years, so our borrowers have the option - even the incentive - to repay. After 90 days all our bridging loans can be repaid early without penalty. Neither we nor our clients want bridging finance to be anything other than that. So, if one of our clients is in a position to move to permanent lending earlier than they expected, great.

Social Housing

In some instances, it is more than just our clients who benefit. Take for instance a person who has seen an opportunity in a block of flats that are in disrepair. They know that if it was renovated, the Local Authority could rent it for social housing. That’s not just an opportunity for them, it’s a chance to make a real community impact. But that impact can’t happen until the works are completed and the works can’t be completed unless someone will fund them. Onate can do that. We provide the oil to free the gears of the system; the investor gets to seize an opportunity, the Local Authority gets housing stock, and the people in the community get homes.

We act fast, handle complexity and underwrite with scrupulous attention to detail. And we lend up to 65% loan-to-value for social housing across Ireland, not just those in Dublin.

Residential Auction Purchase

We’re not competing with banks, we’re not a property fund. We’re a bridge. We get investors from here to there. And there’s never been a greater need for what we do. Apart from the properties where local knowledge and expertise can unlock potential, there are hundreds, if not thousands of properties in those ‘vulture fund’ loan books which will come to the market with no issues; ready to go, ready to house a family, or a student. The problems for the people who want to buy them is how they often come to market: auctions. And an auctioneer requires that you put your money where your mouth is; you bid; you buy.

Again, that’s not a situation banks enjoy. So, much of the stock that moves at auction moves to cash buyers. And that intrinsically shrinks the pool of purchasers. That’s where we come in. Our clients can go to auction knowing we are there supporting them, backing them.

When they secure the property, get the tenants established and have the revenues flowing they can take their time and go to the bank with an attractive proposition. One which is clear, simple and easy. Bridging; getting you from here to there. Auction to ownership.

 **

Good bridging lending requires a few things - the lender has to be fast; if you spot an opportunity you can’t waste time wading through bureaucracy to get finance. The lender has to be flexible; the best opportunities are rarely pretty, and rarely is the next one the same as the last, so you need to be sure your funder can adapt to match your needs. And the lender has to be prudent. You will not be served by a funder who isn’t careful; you need to be sure a deal stacks up and a good bridging lender must be able to tell you when it doesn’t.

That’s what we do. We’re fast, flexible and prudent. And we’re here to help; if you see an opportunity that needs time to make it right. An investment that needs initial cash to acquire, then we are here to provide what the name suggests - the bridge, to get you from here to there.