Market Value and Vacant Possession Value aren’t the same thing – and which one your lender uses can dramatically change how much you can borrow on a commercial mortgage. Lime Finance Solutions explains the difference.
Market value vs Vacant Possession. Take two lenders. Both advertising 70% loan to value. Both looking at the same property. And yet one will lend you £420,000 while the other only goes to £350,000. That’s a £70,000 gap – and no, one of them isn’t being more generous than the other. They’re just using a different number as their starting point.
This comes up more than you’d think. A client rings me frustrated, having been told by a high street commercial mortgage lender they can borrow a certain amount, then discovers another lender will go significantly further.
Or the opposite – they’ve budgeted based on one figure and then the actual loan offer falls well short. Nine times out of ten, the culprit is the same: they’ve been comparing loan-to-value ratios without understanding what value is actually being used as the baseline.
With more and more companies buying their own trading premises, let me explain what’s actually going on.
When a surveyor values a commercial property for lending purposes, they don’t always arrive at the same number regardless of how they look at it. There are two distinct approaches, and the difference between them can be substantial.
Market Value (MV) is what the RICS defines as “the estimated amount for which an asset should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing, where the parties had each acted knowledgeably, prudently and without compulsion.” Or, in plain English: what would a buyer in the open market reasonably pay for this property, right now, in its current state? This is typically the value the client perceives to be correct.
If a property has a good tenant in place – a strong covenant, a long lease, rent coming in reliably – then that income stream adds value. An investor buying it isn’t just buying bricks and mortar. They’re buying a going concern, a yield, a business. The market value reflects that.
Vacant Possession Value (VPV) takes a different view. Strip out the tenant. Remove the rental income. Forget the lease. What is this building worth if it’s empty and you have to start from scratch? This is sometimes called the “bricks and mortar” value, and it’s almost always lower than the market value – sometimes significantly so.
Why do lenders look at VPV? Remember when Woolworths were considered to be a good tenant? WH Smith, Blockbuster? You start to get the gist.
Think of it like this. Imagine you’re buying a curry house on a busy high street. It’s been trading successfully for years, the lease has twelve years to run, and the tenant is solid. An investor paying market value is partly paying for that stability. Now imagine the same building with the shutters down, the tenant gone, and the question of what comes next entirely open. Suddenly it’s worth less – because specialist catering fitouts appeal to a narrower pool of buyers, and a replacement tenant isn’t guaranteed.
The size of the gap between MV and VPV depends heavily on the type of property. An office suite in a good location can transition between tenants relatively easily – the fit-out is fairly neutral, the occupier market is broad. The discount for vacant possession on an office is typically modest.
A more specialist property is a different story. A petrol station, a car wash, a drive-through – these are operationally specific. The pool of buyers or tenants who want that exact use is smaller. If the current operator leaves, what happens next is genuinely uncertain.
Valuers apply a much larger haircut in those cases. According to Property Finance Group, the vacant possession value can sit anywhere from modestly to significantly below market value depending on the property type and how easily it could be re-let or repurposed.
Most commercial mortgage lenders are cautious by nature – and they should be. The loan they’re providing is secured against the property. If things go wrong and they need to recover their money, they’re not selling an investment. They’re selling a building, possibly (maybe probably), an empty one.
That’s why the majority of lenders – particularly on commercial owner-occupied deals – base their lending on the vacant possession value rather than the market value. They want to know what they can realistically recover if the worst happens, not what it’s worth to an investor while someone else’s business is running in it. As Advocate Finance’s case study neatly illustrates, the difference in which valuation a lender uses can directly translate to thousands of pounds in borrowing capacity.
For investment purchases – where you’re buying a tenanted commercial property as a landlord – some lenders will work to market value, because the income stream itself is part of what they’re securing against. But this is more common with specialist investment lenders than with mainstream commercial lenders, and even then they’ll look carefully at lease quality, tenant covenant strength, and the risk of void periods.
The practical upshot is this: two lenders both advertising 70% LTV aren’t necessarily offering the same thing. One might lend 70% of market value. Another might lend 70% of vacant possession value. And if those two numbers are materially different – which they often are – then the actual loan you can access is materially different too.
Take a mixed-use property: a retail unit on the ground floor with a flat above. The building has a tenant in the retail space on a ten-year lease. A valuer puts market value at £600,000, reflecting the investment appeal of the income stream. Vacant possession value – what it’s worth empty – comes in at £480,000.
Lender A works to market value. At 70% LTV, they’ll lend £420,000.
Lender B works to vacant possession value. At 70% LTV, they’ll lend £336,000.
Same LTV. Same property. £84,000 difference. If you’d budgeted for Lender A’s number and ended up with Lender B, that’s not just inconvenient – it can unravel a deal entirely.
This is exactly the kind of thing I find myself explaining fairly regularly. It’s not obscure or technical – it’s just one of those things that doesn’t get explained clearly enough upfront. Current RICS Q1 2026 commercial property data shows the market is starting to stabilise, with investment volumes broadly in line with recent norms. That makes it an interesting time to be looking at commercial property (especially with government supported schemes available) – but only if you go in with the right information.
Before you get excited about a lender’s headline LTV figure, ask these questions:
Which valuation basis does the lender use? Market value or vacant possession? This single question can reframe the entire conversation.
Has the property been formally valued yet? Sometimes borrowers and brokers spend a lot of time on a deal before a surveyor has even looked at it. Getting an early indication – even informally – of the likely MV versus VPV gap is time well spent. If the property is on sale via an agent then ask the agent, they will appreciate the question because it demonstrates an informed buyer.
What type of property is it? The more specialist the use, the bigger the likely gap between MV and VPV. A standard office or retail unit in a good town centre location is a different proposition to a roadside restaurant or a trade counter on a secondary estate.
Does the lender’s appetite fit the property type? Some lenders are comfortable with certain commercial uses; others simply aren’t, regardless of valuation. Knowing which lenders are genuinely active in the space – rather than which ones have a commercial mortgage product on their website – is where a good broker earns their keep.
I’ve been in commercial finance for over thirty years, and the deals that go wrong most often aren’t the complex ones. They’re the ones where someone made an assumption early on that was never properly tested. Getting clear on the valuation basis before you start the conversation with lenders is one of the simplest things you can do to protect yourself.
If you’re trying to work out how much you can realistically borrow on a commercial property – whether you’re buying to occupy or as an investment – I’m always happy to have that conversation.
David Farmer
Market Value (MV) is the price a property would achieve in an open market sale between a willing buyer and seller, assuming proper marketing and both parties acting with full knowledge and no compulsion. If a property has a sitting tenant on a good lease, that income stream typically supports a higher market value. The definition is set by RICS in their Red Book valuation standards.
Vacant Possession Value (VPV) is what a property would be worth with no tenant in place — sometimes called the “bricks and mortar” value. It strips out any premium from rental income or lease security and focuses on what the building itself is worth if empty. VPV is almost always lower than Market Value, and the gap varies depending on how specialist or flexible the property use is.
It varies by lender and by deal type. Owner occupied commercial mortgage lenders most commonly use Vacant Possession Value, as they’re securing against what they could recover if the business failed and the property had to be sold empty. Investment lenders who are financing tenanted properties may use Market Value, particularly where the lease and tenant covenant are strong. Always check which basis a specific lender uses – it has a direct impact on how much they’ll lend.
Because LTV is a percentage of a number – and if two lenders use different numbers (MV versus VPV), the same LTV percentage produces very different loan amounts. A 70% LTV on a £600,000 market value gives you £420,000. A 70% LTV on a £480,000 vacant possession value gives you £336,000. That’s an £84,000 difference from the same LTV ratio.
Ask – or work with a broker who already knows the answer (ahem, that’s us!). Different lenders have different appetites and approaches, and this information isn’t always prominently advertised. A good commercial finance broker will know which lenders are suited to your property type and what valuation basis they’ll apply before you commit time and money to an application. You can also read more about how lenders approach semi-commercial valuations at Advocate Finance’s guide.
Yes, significantly. Flexible, easily re-lettable properties – standard offices, retail units in strong locations – tend to have a smaller gap between MV and VPV. More specialist properties (petrol stations, drive-throughs, car washes, bespoke catering units) typically have a larger gap, because the pool of potential tenants or buyers is narrower and re-letting risk is higher. This is also why we see lenders having bespoke policies for Sui Generis property types.
Some lenders will consider Market Value on tenanted investment purchases, but they’ll scrutinise the lease terms carefully – length, break clauses, rent review provisions, and the financial strength of the tenant. The stronger the lease and the tenant, the more likely a lender is to lend against the full investment value rather than the vacant possession figure. A broker can help you identify which lenders are most aligned with your specific deal. Apparent smaller details such as this can have a big impact on what you can borrow.
This article is for general information purposes. It does not constitute financial advice. Commercial mortgage lending is subject to individual assessment and lender criteria. Always seek independent advice for your specific circumstances.
Over 30 years finance experience. Former credit underwriter, founder of Lime Finance Solutions in 2012. Multi Award winning business, featured in Sunday Telegraph, Parliamentary Review, Sky TV and others. Regular contributor to press and business associations. FCA Authorised, ALIBF Qualified. Specialist in Commercial Mortgages, Business Lending, Property and Development Finance.
Tel: 01293 541333
Email: hello@lime-fs.com
Tel: 0207 866 2102
Email: hello@lime-fs.com
Tel: 01293 541333
Email: hello@lime-fs.com
Tel: 0207 866 2102
Email: hello@lime-fs.com
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