The first decision on a charity capital project is not how much to borrow or from whom. It is which legal entity signs the loan. Get that wrong and you lose weeks while the lender, the trustees and the auditor work out whether the debt should sit in the charity, in the trading subsidiary, or in a property-holding company. The answer changes the security, the tax position, and which lender will even look at the file.
Why the trading subsidiary often carries the debt
A charity refurbishing a building, fitting out a new service site, or buying commercial-use space frequently runs the borrowing through its trading subsidiary rather than the charity itself. There are practical reasons for that.
A trading subsidiary is a separate company, with directors who owe ordinary company-law duties, not the fiduciary duties that constrain trustees. It can take on commercial debt, repay it from trading surplus, and Gift Aid profits up to the parent charity without the lender having to navigate charity-specific consents. Where the project has a genuine commercial element — a café, a conference space, lettable rooms, a retail unit — putting that activity and its finance in the subsidiary keeps non-primary-purpose trading off the charity's books, which is where it usually belongs for tax.
It also ring-fences risk. If the venture underperforms, the exposure sits in a company the charity can, in the last resort, let fail without the charity itself defaulting. That separation is the point of the structure, and a lender will expect it to be real: arm's-length lending between charity and subsidiary on commercial terms, a written loan agreement, and no informal blurring of the two balance sheets. Where the charity itself lends down to the subsidiary, the Charity Commission expects that to carry a commercial rate and proper repayment terms — trustees cannot subsidise the trading arm with charitable funds and call it an investment.
The structure is not automatic. If the building is wholly for charitable use and there is no commercial trade, the charity is usually the right borrower and the subsidiary adds cost for nothing. Settle the purpose first; the entity follows from it.
The security picture is not a normal commercial mortgage
When a charity mortgages land it holds, the Charities Act 2011 bites. Under sections 124 and 125, before granting the charge the trustees must obtain and consider proper written advice on whether the loan is necessary, whether the terms are reasonable, and whether the charity can repay. The mortgage deed then carries a trustees' certificate confirming they have the power and have taken that advice. The Charities Act 2022 relaxed who can give the advice — a suitably qualified trustee, officer or employee can now provide it, not only an external adviser — but the duty itself stands.
For the lender, that certificate is the prize. Where the statutory steps are followed, a lender taking the charge for value gets a conclusive presumption that the facts in the certificate are correct, so the security is not later unwound because the trustees got their internal process wrong. A lender that knows the sector treats the certificate as routine. A high-street bank that does not will sometimes stall on it, or price the unfamiliarity in.
Permanent endowment changes the picture again. Land or funds held as permanent endowment cannot simply be charged or spent. Since June 2023 trustees have a statutory power to borrow up to 25% of the value of a permanent endowment fund by resolution, repayable within 20 years and without Commission approval — useful headroom, but a narrow and specific one, not a general licence to borrow against locked capital.
This is why property finance for a charity is rarely a standard commercial mortgage exercise. The freehold or long leasehold may be the anchor security, but its use can be restricted, the disposal and mortgage rules apply, and the lender's recovery route in a default is more constrained than it would be against a trading company's premises.
What a social-investment lender reads that a bank doesn't
Mainstream banks underwrite a charity capital project on the property and the covenant, and they are slow into the sector because both look unusual. Specialist social-investment lenders — Charity Bank, CAF Bank, Unity Trust, Social Investment Business, Big Issue Invest among them — read a different file.
They start with the reserve position and the income behind repayment. Only unrestricted income can service debt; grants tied to a specific project, restricted appeal funds and most legacy income cannot be assumed into a repayment line. A capital appeal that is half-pledged is an asset to the project but not a repayment source until the cash actually lands. They look hard at funder concentration, because a single commissioner or a single large trust can flip a stable file inside one budget round. And they look at governance — the trustee board, the finance committee, and the charity-to-subsidiary relationship — because that is where these structures succeed or come apart.
They will also lend against things a bank treats warily: a contracted income stream from a public body, a subsidiary's growing trade, a building with restricted but stable charitable use. Where the trading arm has plant, vehicles or fit-out to fund inside the project, that can come through asset finance in the subsidiary rather than loading it onto the property loan — cleaner security, and it keeps the term loan sized to the building.
Settle these before the application
- Which entity borrows, decided from the purpose of the finance, not from convenience. Charity, trading subsidiary, or a property-holding company each change the security and the tax.
- Is any of the land permanent endowment — if so, the charge and the 25% borrowing power need checking before anything else.
- What is genuinely unrestricted in the income that will repay the loan, separated from restricted, appeal and grant income that cannot service debt.
- Whether the trading subsidiary lending is at arm's length on commercial terms with a written agreement, so a lender does not unpick the structure mid-process.
Files that arrive with the entity, the endowment question and the repayment income settled get underwritten in weeks. Files that arrive without them spend the first month answering questions the trustees should have answered between themselves. The charities and non-profit sector page sets out where the rest of Bedrock's lending fits around a project like this.