No Money Down Property Development Finance – Case Study
We provided development finance, structured for a client to acquire a piece of land and develop nine new houses when his own capital was locked up in a recently completed project.
This was the scenario faced by that client who had completed a development of five houses and had only just released them on the sales market BUT wanted to acquire another piece of land he’d identified to commence another development of nine new build houses. He could have achieved the purchase with a bridging loan but this would not have allowed him to develop the property and he couldn’t take money out of his previous project as that still hadn’t sold.
However, he hadn’t sold his previous development which is a problem familiar to many property developers as his capital was tied up in the recently completed project and his ability to purchase a new site and commence the new build was highly constrained.
In order to allow him to secure the new piece of land and to commence with the next project whilst he waited to recover his money from the sale of the completed houses, we structured a cross-collateralised facility to release his equity from the last project plus fund the costs on the new project.
Combined this facility was good enough to meet all acquisition and development costs for the new project – meaning the client could leverage even more value out of his own capital.
Essentially this facility provided 100% of the funds that the client required to get started on his next project and as he had adequate security across both development sites, we could use suitable debt finance that avoided the client having to enter into a profit share arrangement.
As each helps in the recent project was sold, the money could be used to pay down a portion of that facility and release the charge over that completed development, as the new development continued to get out of the ground.
We’ll look at three elements in this case study.
- An overview of the property and the case study itself which as we’ve said, is nine houses. This comprised four detached houses and five terraced and semi-detached houses.
- We’ll look at the key numbers and the margins in what is a fairly highly leveraged facility.
- Finally, the return that the property developer can expect to achieve from this project.
When the client first applied for development finance with us, looking at the overall site plan, we see the four detached houses that we mentioned is in this scheme plus five other properties: a pair of semi-detached and a run of three terraces. Looking at the plans and elevations, those are the four detached and there we see the elevations of the two semi and the three terraced houses with one of the detached to the left.
Secondly, looking at the numbers involved in this project first, we take the GDV (gross development value) or the sales value that was determined by the developer when the project is completed.
We also run appraisals to make sure these numbers stack up and we work our numbers backwards to make sure the project will work. So we applied an end value (GDV) of £2.455m when we’re looking at nine houses in this scheme that comes to an average of £272,000 per property.
There are of course other costs involved; selling fees, legals and agents fees involved in selling the houses on which gives us a net development value of just over £2.4m pounds. For the developer to acquire the new site to develop the new houses, there was a purchase cost of £654,000. In this case there was no CIL (community infrastructure levy) or section 106 affordable involved but of course there’s stamp duty and there are legal costs involved in acquiring the site.
So, those fees in total comes to just under £700,000 for acquisition costs for the new site.
Then we look at the construction costs
We start off with a figure for the main build for the main construction which in this case was £990,000 according to the developer’s cash flow analysis for the overall project. It is worth noting that this project was being built under Permitted Development Rights which allowed the borrower to get his planning application accepted almost immediately.
There were ground works and services to be run into the development site and those totalled £100,000.
There are generally professional fees (architects, project managers, quantity surveyors, etc) to be attached to such projects. In this case the developer had factored these in to his overall cash flow and his £990,000 costs.
We applied a 5% contingency to this to be sure and that came out to overall construction costs of £1.14m.
In terms of the finance costs on this project, bearing in mind that the developer didn’t have cash so he therefore needed essentially two separate facilities, one for the development of the new site and the other being a facility to release the equity that he had in his recently completed project.
He had a small amount of debt sitting on that recent project but there was equity that we could pull out of it as well. So, we’ll call this facilities 1 & 2 for simplicity.
On facility 1 the development facility we had an agreed seven-and-a-half percent, however the 14-month development term that equates to 8.75% on all of that money.
In this case it equates to a full figure of £160,000, now that would be the peak interest charge, in reality as the development is phased as they are tranched drawdowns, that interest figure would be slightly lower than that.
This facility attracted a 1% arrangement and 1% exit fee which is also added to the total amount facility as we want to extract the equity out of his recently completed project of five houses that also attracted a rate of 7.5% and a 1% arrangement fee.
In this case crucially, there’s no exit fee which is what makes that facility particularly flexible as and when each of those five houses are sold, that facility can be paid down until it’s completely paid off without any penalty or without any exit fee attached to it. Also, because we are the original provider of no broker fee commercial mortgages, there wasn’t even an upfront fee on this either.
Now we can see that no interest charge has appeared here the reason for that is what we’ve done with that facility is essentially extracted equity that will go towards the new development project, so if we put that in here as essentially his equity contribution to the new development of nine houses, in this case we managed to pay down the outstanding debt on the recent project and extract £600,000 of equity.
When we apply that figure, it drops the development facility down to essentially a 67% loan to cost, which is in the end, a very good level of leverage.
Now the interest figures appear and that gives us in the end an indicative overall interest charge of £191,000, again this is a peak figure and in reality with the tranched drawdowns on the new development, we would expect that figure to be lower than that as long as the project runs to time schedule and runs to budget.
With our total interest charge and our total anticipated acquisition and development costs, we come to a figure of just over £2m.
That leaves against the GDV, a profit of £390,000. That’s a net profit for the developer.
Considering he’s not put any cash in at all, that’s a net return on total costs after finance, of over 19%.
In the end that that developer did really quite well out of a project where he had no money to go into it.
So if we look now at a very brief summary of that, the overall project value the GDV was anticipated on the new build of 9 houses at £2.245m pounds.
The total development cost; acquisition and build (pre-finance) was just over £1.8m.
The finance model that we structured for this client was to use collateral from his previous development to achieve 100% finance for the new project.
In the end that meant that the cash the developer put in was essentially zero as it was using collateral from that previous development there was no money going in.
From that he managed to achieve a net profit of just under £390,000, which is based on the maximum interest charge of £191,000, which in reality we would expect to be lower therefore achieving a higher net profit. If the borrower decides not to sell the completed property for now, he could decide to take up the option of refinancing the development loan to a longer term facility with one of the commercial mortgage lenders.
Latest Commercial Mortgage News
The Finance BusinessFollow
Part of the LPG Group from January 2019. Based in Crosby but offices in Liverpool and London. We can fully fund your property development project.
Joint Venture Property Finance is not as difficult as you may think. Here at The Finance Business, we are not only commercial mortgage experts, we are also JV Finance specialists too #jvfinance #jointventurefunding #commercialmortgages
Still receive a lot of traffic to the Ultimate Guide to Liverpool Commercial Mortgages https://www.thefinancebusiness.co.uk/liverpool-commercial-mortgage/
We can help property developers with various development tools, calculators and spreadsheets #propertydevelopment
We are looking to arrange a seminar for both budding and experienced developers. If you are interested then please let us know - we would love to see you! #thefinancebusiness
Nice simple bridging loan in Leeds for a couple of great guys who are smashing it in West Yorkshire #thefinancebiz #leedsproperty #commercialmortgages
If you were thinking of paying for a property training course, DON'T! Any good broker worth their salt (that's us btw) can share all of the information you would receive on one of those courses for free. #propertytraining propertycourse #thefinancebusiness
No broker fees. No upfront fees. Simple, honest knowledge for people looking to buy property and refurbish it #thefinancebusiness #propertyfinance #bridgingloans
Nice development finance loan completed in Woolton Village, Liverpool for a for the conversion of an old schoolhouse into 4 luxury apartments. £2.1m in total #thefinancebiz
What a deal!
A beautiful £2.7m bridge and development loan right in the middle of the beautiful city of Edinburgh. #bridgingloan #developmentfinance
A shed load of commercial mortgage lenders. A simple system for identifying who does what. Welcome to the future of commercial, bridging and development finance #thefinancebusiness #commercialmortgagecomparison #commercialmortgagebroker