Category: Development Finance

Case Study – Prospect House – Development Finance Joint Venture Partnership

One of our long-standing clients Gary Morton at Morton Group Ltd approached ourselves to assist in raising finance to purchase the former Council Offices known as Prospect House in the Northumberland market town of Hexham. The long-term vision that Gary and his Team had for this site was to develop the Listed Building into residential properties consisting on a town house, four cottages and eleven apartments.

As a result of the development having no planning permission for a residential development it restricted the number of lenders that would provide funding at the required loan to value. We therefore introduced Gary to into one of our equity partners. This partner was prepared to lend funds on a short-term basis to allow the purchase of the site. Thus, enabling our clients to then complete the planning application and obtain planning approval for their development.

Prior to planning permission being granted we had discussions with Development Finance Lenders and Joint Venture Partners about refinancing the site and providing ongoing development finance.  Several development finance lenders were interested in supporting the scheme. However, on this occasion our clients decided to work with a Joint Venture Partner.

There are pro’s and con’s to working with a joint venture partner and it’s vitally important that all parties feel that they can work together on a project. On this occasion the partnership was a good fit as the JV Partner loved the property and location; liked the Morton Group Management Team; and the scheme was also commercially viable for all involved.

Upon planning permission being granted the JV Partner introduced their finance allowing the removal of the equity partner and redevelopment to commence.

We all look forward to seeing this completed development.

Property Development Funding Options

Despite everything that’s currently going on in the world and the battering that the UK economy is taking. June 2020 was a busy month for Development Finance Loan enquiries.

What’s been particularly interesting is the mixture of Property Developers that have approached Orchard Business Finance to assist them in raising finance to purchase and develop residential sites.

We are seeing a lot of new entrants into the market who are looking to purchase property at Auction or are canvassing their local areas for properties prior to them being listed by estate agents. The focus of these Developers is to purchase properties under market value, complete renovations and sell the property.  The financing requirements vary significantly dependent on the funds that the Developers have available. However, we are seeing funding requirements that range from £45,000 to £135,000 plus additional funds to complete a refurbishment. In most cases we’ve looked at bridging finance to help secure the property and additional funds. It’s not always possible to raise 100% funding but in certain circumstances this has been possible. To achieve 100% funding the lenders will use other security and, in some circumstances, lend against the market value of the property and not the purchase price.

More established Property Developers are looking at stepping up their activities and taking on larger schemes and ground up developments. The developments being presented to us have land/property purchase prices of circ. £500,000 and the development costs range from £500,000 to £1,500,000 including costs. These Developers in many cases don’t have assets of a high enough value to offer up as additional security or available cash reserves to offer a deposit of 30% to 35% on the land/property purchase. As a result, the traditional Development Finance Lenders find these schemes unattractive as the financial risk profile is to high.  That doesn’t mean to say that these schemes can’t be funded, they can via a Joint Venture Partner. A Joint Venture Partner will introduce up to 100% of the land/property purchase price and development costs but they do like to see some ‘skin in the game’ from the Developer. Therefore, you might need to introduce 10% of the costs or offer some additional security. A Joint Venture Partner will normally charge interest on the funds that they introduce in the same way that a lender would. Then on completion of the development any profit that is made from the sale of the development will be split with the Joint Venture Partner.

Established Property Developers are approaching us with some fantastic schemes that include luxury apartment developments in city centers through to multi property housing developments. These developments require significant funding and in most cases these Developers have funds that they can introduce therefore de-risking the scheme for the lender. The lenders that we are approaching to fund these schemes include High Street Lenders and Specialist Lenders who are comfortable funding such schemes.

Development Finance – Case Study

Overview

Clients approached Orchard Business Finance on a Saturday morning informing us that they required a bridging loan or development finance to purchase a derelict residential property at auction the following Tuesday. This was no ordinary property, it had an interesting history and was being sold under the Proceeds of Crime Act 2002.

The guide price was £480,000 and the clients, due to time scales hadn’t conducted any of the due diligence that we would recommend when attending an auction. Including obtaining an independent valuation report; completion of structural surveys; legal searches; obtaining refurbishment/development costings; speaking with an architect; speaking with local estate agents to obtain comparable selling prices.

As a result there where lot’s of unknowns with this property and to make the situation more complicated the clients also required Planning Permission for one of their potential development schemes.

Action

We needed to produce a professional lending proposal that would be acceptable to potential lenders. This proposal need to include…

Financial Information

  • Build Costs
  • Professional Fees
  • Contingencies
  • Financial Appraisal
  • Cash Flows
  • Client Funds Available

Client Backgrounds

  • CV
  • Examples of Previous Developments
  • Credit History
  • Asset & Liability Statement (personal & business)
  • Details of Professional Team (solicitors, accountant, QS, architect, construction company)

Purchase Property 

  • History
  • Overview of Development
  • Structural Concerns/Issues
  • Planning Permission – What is Allowed

Funding Requirements

  • Funding Required for Purchase
  • Funding Required for Development Expenses
  • Exit Strategy

All this information was collated over the weekend and signed off by clients for presentation to lenders on the Monday morning.

Due to covid-19, remote working and current economic climate we approached an number of lenders initially by phone and then followed up with the lending proposal. It was explained that a quick yes or no funding decision was required along with level of funding that would be made available if the lender was happy to support the deal.

Outcome

As a result of the well presented lending proposal and credibility of the clients five lenders agreed to fund the purchase of the property. This allowed us to present the clients with a number of funding options, this helped them make an informed decision on how to proceed at auction.

The clients were able to attend the auction knowing the upper limit that they could bid for the property along with the financial implications of bidding over this limit. Sadly the clients were outbid by £5,000 as they had set an upper limit of £500,000.

On this occasion the client couldn’t proceed but I know that we have provided these clients with the highest levels of service and advice. This will ultimately result in them asking ourselves to help with any future development finance requirements.

Contact

If you are a property developer or prospective developer and would appreciate professional guidance and assistance in raising funds contact Orchard Business Finance on 01257 543013.

 

Privacy settings

This website stores cookies on your computer. These cookies are used to improve our website and provide more personalized services to you, both on this website and through other media. To find out more about the cookies we use, see our Cookie Policy.

Save and close