Advice on negotiating with other freeholder to develop the loft?

by Readers Question

4 years ago

Advice on negotiating with other freeholder to develop the loft?

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Advice on negotiating with other freeholder to develop the loft?

I’ve just exchanged on my first buy to let and it’s a purpose built maisonette. I’m upstairs and there’s another flat downstairs and we share the freehold. There’s a huge loft above my flat and I estimate that for around £70k – 90k I could build a 2 bedroom flat which would be worth around £200k when finished.

Obviously I’d need to negotiate a deal with the joint freeholder downstairs and as I’m new to this I wondered if anybody has any words of wisdom on how to approach this ? He seems a nice enough chap and I get on okay with him the few times we’ve met so I’m comfortable to approach him directly about this.

Questions going through my mind are, should I approach him early on or wait until I have tenants in the property so I’m not under time pressure for a decision from him ? (as I imagine it will take ages to get planning permission etc anyway so I’m going to be in for the long haul)

Also, I’m at a total loss on what my opening offer to him should be given that he doesn’t have access to the loft anyway and we both have our own front doors and I believe I could make the loft flat with it’s own front door (i.e. no disruption to him). Having said that there’s a potential £100k plus net profit on the table and he’ll know that he is the gatekeeper to that ! Opinions on what others would offer in this scenario would be greatly appreciated.

Thanks loads
Peterloft



Comments

Ian Ringrose

4 years ago

Why was the loft not used for a flat when it was built?

What is the downstairs flat worth?

Peter Johnson

4 years ago

Reply to the comment left by "Ian Ringrose" at "02/09/2014 - 16:03":

The property is a large house divided as a maisonete upstairs and maisonete, downstairs, downstairs which is worth 350K. The property was built in 1900's so at those times maybe lofts were not developed into flats.

matchmade

4 years ago

Does the loft belong to you, or is it owned jointly? This should be specified in your legal materials. I will assume it is jointly, so the other flat owner owns 50% of the "land"/space that is available for development, as well as joint control of the access and freehold. Therefore really you should go 50: 50 on the development.

One approach might be to set up a limited company, in which he is a director and has a 50% shareholding, as do you. You do the conversion, sell it, deduct all the costs, split the proceeds 50:50, then wind up the company. The reason for using a company is just to build trust between you, so everything is clear-cut, although there may be some tax advantages too, as you can phase the release of capital rather than receive it personally all in one go and pay a higher rate of capital gains tax.

You may feel hard-done-by if you put in all the project management work and finance, and he does nothing. The answer to that, with his agreement, is to charge everything to the company, i.e. legal fees, finance costs, a salary to you to compensate you for your time, and so on.

Another approach, especially if you own the loft, would be to regard this as a ransom strip situation. You own the development space, but this has limited value without the right of access. In this situation, ransom strip owners have historically felt entitled, via case law, to one-third of the uplift in value of the building plot when planning is achieved.

So, for a flat worth £200K, the loft space will be worth £0 initially but around £80K after planning is achieved, and the other flat owner will be entitled to one-third of that. However, this can be contested - building costs and infrastructure taxes are much higher nowadays, so the profits available to the builder are completely out of line compared with those achieved by the landowner, and the one-third rule of thumb no longer applies. You should at least deduct the infrastructure taxes from the value of the site, then multiply by a third. But ultimately it's all a question of negotiation.

Note if you do create a new flat unit, your local authority will probably be extremely interested in charging you S106 or Community Infrastructure Levy taxes for having the check to build a new residential unit. In my area CIL will cost £365/m2 from 6 April 2015, so a 64m2 two-bed flat will cost an extra £23,360 in infrastructure taxes. The 6 April 2015 date is being driven by the Government, which is changing the rules on S106 tax that day, to say that local authorities are only allowed to pool money from 5 small developments to deliver a particular piece of infrastructure. This means that if the LPA tries to charge you for a share of, say, a new classroom when you apply to build your new flat, they may have to return the money if they can't meet the classroom's budget from this and another 4 housing schemes.

You should find out what your local authority does as regards taxes on new housing, and get cracking if CIL is arriving soon and looks like it will be expensive. If you're going to do this, do it as soon as possible because LPAs are desperate for money and see CIL and new housing as a massive cash cow.

Peter Johnson

4 years ago

Hi Tony

Thank you so much for the detailed and highly informative reply. Just based on first impressions I suspect the chap downstairs will not want to go into a joint venture / limited company with me - just strikes me as a person who doesn't like complexity in his life and is not very entrepreneurial ( I could be wrong though). Having said that I don't mind going it alone as I've got some money sitting around that I'd be happy to sink into this project so paying him a 'ransom fee' would be fine by me as long as it wasn't too onerous. In my own mind, I was thinking that if he accepted something like a £30k payment then that'll be a nice stress free windfall for him and leave a good margin of safety for me should there be unforeseen problems with the development.

Thank you for alerting me to CIL too - wow, I had never even heard of it but had a quick check on my local authority website and seems that they plan to introduce it in April 2015 so I'll need to get my skates on ! The rate appears to be £120 /m2 which would add about £8k to the cost - not nice but as you indicated for your local area at £365 /m2, it could be worse ! Hopefully I'll be able to slip under the fence with it and get this deal done before then !

All the best
Peter

matchmade

4 years ago

Thanks Peter. Please note to get this through Planning, you and your architect (though an architectural technician should be adequate and will cost much less) need to be very attentive to the provision of enough natural light and head height in the new flat. Make sure you use an AT who can show he or she has experience of flat conversions and the relevant building regulations. Also, do you have identifiable space for parking a car?

The construction cost will probably be considerably more than your estimate, because building regulations are very hot on noise and safety nowadays. The new flat will be have to be separated from yours, with all gaps sealed with high-quality 60-minute (I think) fire- and smoke-retardant materials. All doors will have to be fire doors, and the stairwell completely protected. This is not a simple loft conversion, but the addition of a complete new residential unit independent from yours. I therefore suggest that you get building regulation-quality drawings drawn up asap, and get it costed out by a quantity surveyor or one of the self-build quotation services offered by the likes of Housebuilding and Renovating Magazine.

I don't want to sound negative but you will regret it if you embark on this without understanding the full costs involved.

Philip Savva

4 years ago

I think if you have £70-£90k to invest, why not buy another 1 or 2 properties instead?

Peter Johnson

4 years ago

Reply to the comment left by "Tony Atkins" at "03/09/2014 - 16:16":

Thank you Tony - you've been very generous with your excellent advice and I much appreciate it.

I had planned to do everything by the book and since I have no idea what the rules are I had thought about appointing a planning consultant with experience of this type of project and ideally experience with my local borough (Enfield) to help me jump through the various hoops.

I do have just one car parking space for the flat already (not that I need it), and I had anticipated the loft flat to not have parking - would that be a thumbs down for the Planning dept?

You're absolutely correct, I had mistakenly been doing a rough estimate of the cost of building based on just a regular loft conversion and for just the reasons you state I can see it will be significantly more to make a whole new dwelling. I suppose if I win the agreement of the chap downstairs in principle then perhaps I'll have to speculate on spending some money to cost out the project then I'll be in a position to talk turkey with him about how much I could pay him to make the deal good for both of us. My concern is that how do I gain some commitment from him before spending the money because he can't agree to do the deal until I tell him how much I'll pay him and I can't do that until I've spent some money and when I have spent the money he might just change his mind anyway because he was just curious to see how much he could get. I wonder if you might have any suggestions for me on this ?

Once again, thanks so much - I'm really glad I posted this up as you've got me thinking about things at this early stage that will really help.

Kind regards
Peter

matchmade

4 years ago

Hello Peter,

You should check Enfield's Planning Design Guide. They will almost certainly want a parking space for a one-bed flat, unless this is a town centre location with good public transport. Also think about it from a buyer's point of view: will they expect at least one parking space? How are they are going to get to work? Are there any off-site parking options?

Also see or speak to the Duty Officer at Enfield Planning: they offer free initial advice.

Re. the other freeholder. You have to speculate to accumulate. Sound him out first on the general idea, then put some figures together if he seems genuinely interested. He won't pay for it unless you are offering some kind of equity share in the project, and then most people are innately cautious. It's your idea, so he'll expect you to woo him and pay for the upfront costs. What would you do if the situation were reversed?

I'm afraid you are at the mercy of the whims of a member of the general public here, and they usually want maximum cash for minimum effort, and even then can display all kinds of eccentricities. At least with the planners you know they have to follow a script to a large extent, and you can win through provided you play their game.

Peter Johnson

4 years ago

Hi Philip ....My thinking was to invest the money into the property to build the flat and then remortgage with the hope of extracting my original investment back and rent the loft flat out. Then I'd go ahead and do as you say and invest in another property or two. Regards Peter

Peter Johnson

4 years ago

Hi Tony ....Fortunately the flat would be minutes from the rail station but I take your point that a buyer probably would like the optionality of a parking space. As it happens there is off street / resident permit parking but as I wasn't planning to offer a parking space I down estimated the flat's value at around £200k when built. I would think the equivalent flat with a parking (and maybe a garden) would go for around £240k.

You're absolutely right of course about the chap downstairs and that I'd need to speculate with him. I think I'll take your advice, sound him out then see how confident I feel about spending some initial money depending on how motivated he seems. I might try to make him a stakeholder along the lines of what you previously suggested if he seems wishy washy.

Thanks again for your input - it's very kind of you...Rgds Peter

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