I Am A Property Developer – Ask Me Anything!

Hi Tony
I have a question regarding rebuild values. I have a large portfolio and over the years I have made my own decisions regarding what I think it would cost to rebuild my houses, but after a bad experience with an insurance claim now where they said I was under-insured - want to play by the rules (however silly they may seem) - especially as a certain mortgage lender who will remain nameless is now sending out the annual statements with a sentence about making sure one has the correct rebuild values - I take this to mean that they might try and say I've broken a clause if I don't insure the houses for what they deem to be the correct amount (and then call in all the loans...)
So, I have gone back to 2010 before I started my independent valuations and added on the amounts one is supposed to for each year (e.g. 4.5%, followed by 3.5% etc.) up to 2015. I was just going to go ahead and up my insurance to these amounts, but just checked one of them on the BICs site, because the information from my sums is that I should insure it for £100,000, but on the BICs site it says I could get the basic rebuild done for £156,000 and a good quality one for £180,000. So if the rebuild on that one is wrong, then maybe they all are. On the other hand, it would have been the mortgage lender's surveyors who gave me my initial calculations on which to base my new assessments.
Any ideas regarding what I should do? Already by upping the rebuild values on the whole portfolio I am looking at an increase value of about £800,000 - which will cost me about £800pa. - and on some of the houses the issue goes the other way, with the rebuilds seeming really high and variable even within the same areas.

Insurance companies are a law unto themselves; you really need to check with criteria each firm uses to calculate rebuild values, and stick to that. There's no point in thinking you know better than them, as they are always looking for reasons to avoid paying out.

You don't say what your base figure for the rebuild cost was obtained, pre-2010. All I do is use the gross external area quoted by the building surveyor when I had each property first valued for mortgage purposes. I also cross-check this base value against my own measurements of the GEA, as instructed by BCIS. I have thought about further checking the BCIS rebuild figures against Homebuilding and Renovation's online calculator at http://www.homebuilding.co.uk/calculator, but I suspect that if the latter proved cheaper, an insurance company would say you must use BCIS, primitive though it is.

Would you post this query on the general Property118 board too, as I know there are insurance brokers who use this site, and they may have better advice than I can offer?

Hi Tony
I have another question. I am on this conversion of a house into three flats and have the first up for sale. I am planning to transfer a share of the freehold with each flat. Do you think that is the best idea? If I do, do I have to set up a separate company to deal with the freeholds, or leave it up the flat owners? Do I have to set ground rent and service charge or leave them to sort that out among themselves? And lastly, what length lease should I provide? As you can see, I'm new to flat conversions!

Hello Penelope,

Check with your solicitor, or ask her to ask a colleague if she hasn't much experience with leaseholds, but I would say:

1. You could retain the freehold for yourself, over a 125 year lease, and charge the leaseholders ground rent, typically £250 a year, index-linked to RPI and increased every 10 years. The ground rent could be more in London or if you are feeling ambitious. Without wishing to sound gloomy, that's an income of £750 a year which would cost you £25,000 in hard cash at 3% if you bought an index-linked annuity. It could come in handy in your retirement and for your beneficiaries or a charity after you pass away. Of course there is some administration involved with claiming ground rent but it's pretty minimal.

2. If you do give a share of the freehold to each leaseholder, make sure this is clear to potential purchasers and you could use it as justification for holding firm on your selling price. Leaseholders will naturally want to get a share of the freeholder for free, but the ground rent is a real asset and there's no need to give this up lightly.

3. Note the leaseholders are nowadays allowed to buy the freehold off you at some point if they choose, but a fair price must be paid to reflect the ongoing value of the ground rent to you. You will also be approached by companies offering to buy your freehold, usually for a pittance, so ignore them. Their business models rely on freeholders going for the easy lump sum, even though this typically only represents about 25 years of the 125 years of potential value.

4. A management company is needed to maintain and pay the utility bills for the common areas of the property on behalf of the leaseholders. Some of these management companies on old leased properties have a terrible reputation for over-charging leaseholders, so when I sold a block of four new flats, I felt it was fairest if the management company was owned by the leaseholders and run by them; their status as leaseholders guaranteed them voting membership and shareholder status in the company. They could of course outsource the maintenance work to someone else, but at least they would retain control and full visibility on costs.

Giving them control of the management company and hence their running costs will go a long way towards easing most people's concern over buying a leasehold flat, which will help your sales. I did my leaseholders a favour and set up and ran the management company for the first year, just while they found their feet.

You do not need to set the level of service charge after, say, the first year: that is for the leaseholders to agree amongst themselves. As freeholder though you should have it written into the terms of association of the company that you have the right to inspect the books and check they are managing things properly, taking out insurance, and hopefully setting money aside for replacing the roof one day. Your solicitor will advise on the exact wording, but you need to make sure that you as freeholder have the power to force the leaseholders to maintain the property if they are failing to do this. This can happen if a leaseholder refuses to cooperate, moves abroad, claims to have insufficient funds, and so on, or the leaseholders fail to communicate. It's surprising how a building and its grounds can fall into neglect if no-one is looking after it properly.

Let me know what you decide to do - I'm sure Property118 members will be interested.

Reply to the comment left by "Tony Atkins" at "03/11/2015 - 15:51":

That is such useful and detailed information and I am so grateful. I'm going to make an appointment with the solicitor to discuss it, although I think I may change to one who specialises in leasehold. We once, a long time ago, owned a house converted into 8 flats, where the leases were so badly drafted that we couldn't enforce payment of the service charge. It was a nightmare.
Anyway, I am definitely now minded to retain the freeholds on this one and I'll certainly let you know the outcome.

Reply to the comment left by "Penelope Poore" at "03/11/2015 - 17:50":

Penelope - I note from an earlier post that you are actually converting two flats into three. Won't the original flats be leasehold and have some kind of ground rent and management company arrangements which you can use as a model? Or maybe not, if they were drafted decades ago: things have moved on. For example, leaseholders now have the right to buy out freeholders, and there is more awareness of abuses by third-party management companies, so leaseholders are pressing for the right to run their own maintenance, insurance and so on.

I forgot to add: make sure you have to-scale site and floorplans with the access routes, common areas, allocated parking (if any), shared garden and so clearly marked. These will be needed to submit to the Land Registry, where they will be checked and signed off as valid for their purposes, to minimise the risk of future disputes. Try and do this as soon as possible, otherwise you will be fighting fires with your buyers' solicitors demanding answers on X, Y and Z during the conveyancing process, all of which delays the sales and can discourage the buyers.

I also found it useful to state very clearly to buyers and their solicitors that in Year 1, the management fees will be, say, £500 per flat, and be firm on that. If you leave it vague, there will be endless questions. It doesn't matter whether £500 is a real-world figure or not, as long as it covers likely eventualities like a fence blowing down and the buildings insurance: if there's a surplus at the end of the year, that's fine - it will simply be handed over when you transfer responsibility for the management company to the leaseholders.

It will be easier to try and persuade one of the leaseholders to help run the management company from Day One, to train her up and to simplify the handover: banks can be a right pain in the neck if you want to change signing rights on a business bank account.

Hi Tony

After I read your post this morning, I checked the leases - something which hadn't occurred to me before, but should have done! I don't think I can use them though as they date from the 1950s and look pretty out of date. Sadly, I think I'll have to pay up for new ones.

I've found a firm called Lease Plans UK, who will measure up and provide a LR compliant plan quickly, and I'll get that off to the LR asap. Thank you for the tip.

I've asked the estate agents whether they think selling a share of the freehold will enhance the price, and the manager is supposed to be coming back to me on it. I'm not sure they know though - perhaps it's hard to pin down. I think I'm going to go with the plan to retain the freehold unless I come under pressure from a potential buyer to part with it. We have an open house on Saturday with 30 people booked in so far, so I have my fingers crossed.

Penelope - wow, 30 people, well done! If you can, I would suggest you brief the sales agent beforehand about the arrangements for leasehold, freehold and management, as people are bound to ask.

Also, do your own research to supplement what your agent tells you. Look at what your competitors are doing in other local flatted developments, Visit them and pretend to be an interested buyer. What's their marketing like compared to yours? How much are they charging in ground rent? What will the management fees be, and how are they controlled? Allowing the leaseholders to run their own management company at your flats is likely to be a bonus compared to the arrangements at larger developments, so emphasise that and resist pressure to give up the freehold - it's a valuable asset.

Hello All
I have just purchased a commercial property with a view to convert the upper floors to residential and refurb the ground and basement to remain office space. The ground and basement will be let out to another of my companies which is currently on flat rate VAT scheme. The property is purchased under a newly set up property development company which is currently being VAT registered so that we can Opt in and recover the VAT paid on purchase.
My query is that if I Opt in, does this mean that I will have to charge VAT on the residential part from residential tenants and VAT from the commercial tenants on rent?
Many thanks

Sorry Ankur, I've no idea: I'm a residential housing developer, so don't get involved in commercial letting, either to businesses or private tenants. This is a specialist area requiring proper tax planning; I suggest you talk with your accountant.