I Am A Property Developer – Ask Me Anything!

Reply to the comment left by "Tony Atkins" at "28/01/2014 - 01:35":

Hi Tony,

Thanks for the response. We have 75% funding in place from a bank. We're likely to receive more once planning is in place. The site is a six bedroom house in London we are converting into four flats. 3) I found very useful.
Mark: We've purchased for £825k, build costs are £450k. Total cost £1,463,449 equity req £495k profit £450k build time 14months. Profit on costs 30.8% profit on equity 90.87%. Terms are negotiable regarding the split with the backer.
Many thanks,
Edward

Reply to the comment left by "Edward Eatock" at "28/01/2014 - 19:54":

Hi Edward

You do realise that it is now illegal to solicit for JV property partners via internet forums as of earlier this month don't you?

Please see http://www.fca.org.uk/static/documents/policy-statements/ps13-03.pdf

Let me know if you would like me to delete your post.
.

Reply to the comment left by "Tony Atkins" at "28/01/2014 - 19:37":

Thanks Tony, that's helpful. I'll need to tread really carefully if this one becomes possible. Cheers, Ed

Reply to the comment left by "Tony Atkins" at "28/01/2014 - 19:37":

Hi Tony. Great thread, I must say. Really interesting to hear about 'real life' development. The detailed answers are very interesting to read!

I have a few fairly random questions which I hope you may possibly be able to shed some light on if you happen to have the time. In no particular order:

Freeholders consent.

Scenario: You own a long lease to a ground floor flat in a house that's been converted into 3 flats. The whole of the garden is demised to you. No leaseholder owns a share of the freehold. You wish to carry out a rear extension into the garden.

Assuming that there are no clauses in the lease that would be considered unusual or peculiar, do you have any understanding as to whether or not freeholders consent would be required in order to build out at the rear?

And if so, do you think it is likely that the developer could demand a premium for this taking into account that the garden is actually demised to the leaseholder unlike a situation where say a leaseholder wishes to add a new level via a mansard extension and is legally obliged to pay a premium for the 'air rights' above the fabric of the roof.

I have heard conflicting opinions on identical hypothetical leases.

Reply to the comment left by "Tony Atkins" at "28/01/2014 - 19:37":

Another freeholder's consent question!

Example:

You own the leasehold to the top floor flat in a converted house. Loft is demised to you. Freehold is owned by a freeholder. None of the flats are 'share of freehold'.

You wish to convert the loft which is fine as it's demised to you and nothing in the lease forbids this. However, you would like to build 'velux' windows into the roof. The roof is owned by the freeholder.

1) Is consent required?

2) Is it normally considered reasonable for freeholders to demand a premium in this instance or would this fall under some sort of 'reasonable alterations' clause that allow for other such things alterations [such as leaseholder replacing windows or drilling into a brick wall to hang kitchen units etc]?

Reply to the comment left by "Tony Atkins" at "28/01/2014 - 19:37":

Question 3:

(This is not a test, I promise! I'm simply curious!)

NEW BUILD:
I've heard from a number of people that tenants / leaseholders of new build property are sometimes refused a local residents parking permit (London) by their local authority. I'd be seriously p****** off if I bought a new build to live and was discriminated against and refused a permit.

Have you heard anything about this? Is this a result of developer's promise to the local authority? Or does the LA simply decide this by themselves?

Thank you - Josh

Q4: Right to Buy

Are you aware of any LEGAL structure to... well... effectively 'joint venture' with a Right To Buy tenant? Essentially helping them buy their property in return for some sort of benefit down the line [e.g. option / delayed purchase etc?].

Q5: Structuring purchase of development site.

Realistically, how common / easy is it to carry out a development of a site using "no / little money down" and are there any financial models that you could share? I would be particularly interested to hear of any models that included selling some [or all] of the units off-plan in order to secure development finance.

Reply to the comment left by "Josh Taylor" at "02/02/2014 - 17:50":

Josh - blimey, the leaseholder queries sound like ones for the lawyers. My amateurish responses are:

Scenario 1: everything depends on the terms of the leases, but the leases will probably have been drawn up to protect the interests of the freeholder, whilst only granting enough permissions to the leaseholder to make the apartments sellable. Therefore I would be very surprised if you didn't have to get the freeholder's permission to build an extension. The extension is adding value, or maybe destroying it if too much of the garden is lost, so the freeholder is bound to have a view on this and an interest.

Scenario 2: the freeholder, and the other leaseholders, are going to be very interested if you start punching holes in the roof for Velux windows. What if they leak? If you have gravity-fed showers, what happens to the water tank? I would be extremely surprised if a lease agreement allowed you to make new interventions in the fabric of the building, especially when a roof is a common part that affects everyone and the very integrity of the building.

Question 3: I've heard of this kind of restriction, and it doesn't surprise me. Local authorities in densely-populated areas want to push all responsibility for providing parking onto the developer. The intensification of use represented by flatted developments just puts more pressure on public street parking, and authorities want to protect the interests of existing residents. In addition, contemporary received wisdom in most highways and planning departments, especially in cities, is "public transport good, cars bad". Many councils therefore impose restrictions on new developments so they only get one parking space per unit, or even none at all, and no parking for guests, visitors,or anyone operating a small business that involves a van. It's the modern way, so as ever, it's caveat emptor on the part of the buyer.

Q4. I'm sure there are plenty of such arrangements around, but have no experience of them. Why would they be illegal? If a council tenant can raise the funds to initiate the Right to Buy process, I suspect it is up to them how they raise the funds and what arrangements they make with a third party, whether it's a mortgage provider or a delayed option to purchase. I saw a TV documentary a couple of years ago about someone who was advertising for tenants prepared to buy the property and then give it up after a few months in exchange for a pittance, all of which sounded dodgy because I would imagine the Right to Buy agreements include a requirement that the buyer continue living in the property for X years. However, councils and housing associations find it administratively difficult and expensive to monitor what their (ex-)tenants are doing, so it wouldn't surprise me if this sort of sharp practice is still going on. My cousin's sister works in housing benefit fraud and he found that about 8% of a very large housing association's properties had suspect tenancies, where the people occupying the property had a different name from the name on the tenancy agreement. He investigated a few and in one striking case found a Polish tenant living with her mother in Germany and sub-letting her 3-bed HA house to some Polish builders for three times the official rent. Senior management then stopped his investigations because they claimed it was too politically sensitive and time-consuming to pursue further . . .

Q5. This I can speak to. "No money down" is unusual, but it might be possible via an option agreement. The developer agrees with the landowner to buy the site for £X if she secures planning permission. She gets planning, then quickly sells the option agreement and S106/social housing obligations to another developer or builder for a price that reflects the new higher value of the land. The new developer then pays the landowner as per the option agreement and starts construction; the original developer has only had to pay for the planning proposal.

A harder-to-achieve approach, due to the unwillingness of banks to lend money to, well, any small developers at all, would be to do co-development, perhaps with the landowner or another builder. You would get the planning, then sell part of the option agreement back to the landowner or another builder. You would then jointly approach a bank with your respective cash reserves and ask for a development loan. The original developer has put very little down and is progressing to construction on the back of the increased value of the site.

You are unlikely to be able to take the whole site with planning to a bank, because they will only lend 50% of the Gross Development Value, and unless you have got a bargain from the landowner, you will have to fund the rest of the land, construction and S106/social housing costs yourself. You are unlikely to get a loan that will cover the whole of the option agreement cost, because they usually at best will fund 100% of the construction cost (in arrears) and a small part of the land cost. Basically they want all the risks to be on you, and they only give you money when you have already invested your own money and built up the GDV of the site to a virtually-guaranteed level for them.

Selling units off-plan: maybe in London, but unlikely elsewhere unless it's a real hot spot or a very unusual in-demand development. Why would anyone buy off-plan nowadays, after everything that went wrong before the 2007-08 Crash? Perhaps if they are cash buyers, but few developers are going to rely on this.

Reply to the comment left by "Tony Atkins" at "02/02/2014 - 19:31":

Tony, thanks for the very prompt and informative answers which I read with much interest.

Regarding funding new build development, I was indeed thinking of London. My understanding is that the majority of London units are sold off-plan to overseas investors.

I also understand that some developers either use off-plan sales to leverage lending (by demonstrating the realistic GDV and demand) proven by having 'pre-sold' a number of units and I suppose I was wondering what established financials models are being used by developers building blocks of flats e.g.

London example:

1. Agree joint venture with landowner on development (if site is w/o planning , the obtaining of planning can be built into the agreement)

2. ‘Pre-sell’ units off-plan (often to overseas investors), thus firmly establishing GDV and demonstrating demand to lender).

3. Borrow 35% [appx.] of GDV from lender to fund build costs secured on site with planning.

4. Upon completion, lender is paid back and profit is shared with JV partner [landowner] as per agreement.

I’m assuming that if the developer were to obtain [or significantly] enhance planning via an option on the landowners site then this may make them more attractive to the landowner to JV with as the developer would have greatly raised the value of the security being offered to the bank and it could be seen as the developer then having some ‘skin in the game’ and making a valuable contribution to the project.

I was also wondering if some developers are able to use investors money received from off-plan sales to fund build costs or whether they have to wait until the development is actually built.

Just a few thoughts, really, as I'm sure that many developers don't buy sites outright and tie up money both on the site [whilst it's in planning] and then during the build stage. Essentially, just trying to get my head around what financial models are commonplace or if there are clever,creative strategies that are around that are not so obvious to those of us who do not involved in 'new build' day in, day out.