I Am A Property Developer – Ask Me Anything!

Reply to the comment left by "Josh Taylor" at "02/02/2014 - 20:33":

Josh, all these financial models seem viable to me, for an area like London where demand is off the scale and there are people prepared to buy off-plan. The exact model employed will depend on the development phase you are in: you need a willing seller of land, a good design, and a willing local authority to get planning permission in the first place, after which all sorts of options open up.

My problem has always been securing the land, and any developer with almost no capital who is trying to do a "no cash down" deal is going to struggle if the site has any kind of mortgage on it, because the local authority will want S106/CIL paid up front, before planning is granted, if the mortgage provider won't sign the S106 Agreement.

As regards using the capital from off-plan buyers to fund a project, I've never encountered a solicitor who is prepared to release their client's capital before the building is even built. You might be able to agree staged release or use the capital held in an escrow account to help back up a funding application, but it would depend on the willingness of the buyer and her solicitor.

I get the impression you have much more capital and are dealing with much larger sites than me, because in my experience small developers and builders *do* have to buy sites and tie up their money, because it's their only way to secure the site. If a buyer puts a property on the market, they usually aren't prepared to wait, unless you offer them a co-development deal and a share of the proceeds. Another option is to approach site owners direct and ask them if they are prepared to sign an option agreement and sell at a later date, but this requires you to invest a lot of time in scouting out sites and being rebuffed.

Reply to the comment left by "Mark Alexander" at "03/02/2014 - 12:15":

Thank you Mark for confirming the structure for Property development. I do agree that the crucial difference is the long term BTL investment as opposed to the ongoing short term profits or even losses in property development activities, Ltd and LLP structures would be more suitable.

Reply to the comment left by "Thiru Vasagam" at "03/02/2014 - 09:56":

Tiuru - I agree in general with Mark, although it depends on your circumstances, in particular whether you have partners and/or investors who need a structure that protects their interest.

From reading Carl Bayley's Using a Property Company to Save Tax (published by Tax Café), which is aimed at new developers, I concluded that a limited company was the best solution for me, with "A"-class voting shares for the two main directors and "B"-class non-voting shares for the investors, which included me. A limited company gives you a straightforward way to set up a governance and dividend structure, and tax arrangements are relatively simple to understand. However it can be very difficult to obtain mortgages for a new company, so you may be buying using BTL loans in your own name and developing their sites via the company.

The tax treatment of sole traders is pretty poor in comparison: HMRC want their money sooner and you can get into tangles with having to pay Class 2 and Class 4 National Insurance. Many small developers instead run a limited company, pay themselves a small salary of just over the NI threshold (to earn their state pension entitlement), and pay no income tax or NI. Their income is largely earnt from dividends, on which you pay no further tax if your income is below the higher-rate threshold (the company has already paid corporation tax). You can also "earn" a decent sum in the form of pension contributions: provided the company pays you just over the basic-rate income tax threshold, it can make a large pension contribution on your behalf every year out of pre-tax profits, and you get the 20% top-up back from HMRC.

The main problem with a limited company is getting your profits out: the whole system is set up to encourage you to take a steady smaller income every year and grow the company over time. If you are in it for the long term, are profitable and don't need a 40%-rate income, the most tax-efficient mechanism of all is to be paid a very basic salary, take dividends up to the higher-rate threshold, have the company make pension contributions ditto, and grow the company, selling up when you reach the maximum amount for Entrepreneur's Relief and then starting a new company to seek another bout of Entrepreneur's Relief. However most people's lives are not that disciplined and you often need lump sums or extra income for all sorts of personal projects, so the tax man is always going to catch you from time to time!

Hi Tony,

Great discussion, learning lots from it.

I have a question in regards to a development I am trying to put together. I have just purchased the land (by raising finance from my other properties) in a inner city residential area and am looking to knock down the derelict building and build apartments that will be targeted at students. I know I will have to work with planners to get this through but there have been similar developments in the area so am confident of being able to do this.

My question is around the process of financing, design and specification and the actual construction; of which I have no experience so no idea where to start.

My thinking is;
1) Get design done and plans approved
2) Approach financial institution for the funds to build
3) Hire contractor to carry out build
4) Mortgage the new building to extract invested funds.

I am currently talking to architects to get an idea of costs and viability. What I am unsure about is how do I set a budget which all architects seem to ask if I have no experience in doing such a build.

Also I would need to approach a bank for the build financing so I am also unsure what kind of analysis/documents they would require to lend the funding for the build - one architect estimates build costs at approx £1m. I assume the bank would want to know what the finished building would be worth. And I would also need to know this to then work out what the mortgage would need to be on it and if its viable. Would I just look at similar apartments in the area and extrapolate prices?

My aim is to keep the build long term rather than sell. There are probably 100 other questions I should be asking but its difficult to know what they are since I have never done a new build project. Thanks M

Reply to the comment left by "nikesh chauhan" at "03/02/2014 - 11:18":

Nikesh - I'm afraid I agree with Mark - in my view refurbishment isn't really development unless you are having to obtain planning permission for something more substantial.

Bridging finance is all very well, but it gets expensive and will quickly eat into your profits unless you can turn the project around very quickly or are buying a bargain. And that's not just getting the refurbishment done quickly: it can take a long time to find a buyer and wade through the sale process. A two month renovation can quickly become six months or more in a slow market.

Buying a property and refurbishment for no money down is virtually impossible and a high-risk strategy if you start taking loans on top of a mortgage. I suggest you need to accumulate capital on your BTL properties over time, use your cash in the bank productively rather than sit on it, and find yourself a partner or some investors who are prepared to back you.

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Reply to the comment left by "Mic Singh" at "03/02/2014 - 12:52":

Hi Mic,

One of the things I like to do is help P118 readers with their initial commercial finance questions when they call in on the phone.

With any sizable development there will always be 100 questions, but like eating an elephant you need to do it one step at a time and get the business plan right first then the finance will follow.

First key questions a lender will ask are:

What is or was the purchase price
How much will the development completion cost
Gross development Value (GDV) - final value when finished.

If there is not what a lender thinks is a significant percentage of net profit then they will consider the deal too high risk and decline the application straight away. Probably a good thing!

Planning permission is also key, and this is where you are at risk of incurring costs for no reward. You will obviously need an architect for this to submit plans to the council, but it does not seem like you have spoken to the right architect for you yet as you need more guidance and time than has been shown to you thus far. Keep searching for someone you feel confident in. You will not get an agreement from a lender without planning permission and the above figures

As a rule of thumb for a development project you would try to aim for as close as possible to one third purchase price, one third build costs and one third profit.

Therefore without knowing the situation is the land also worth about £1million and the GDV £3million ? or close

If you are keeping the building long term it is important to understand how long the project will take to manage the expectations of the development finance lender and also set up a long term exit strategy such as a commercial mortgage. What will the rental income from the completed project be and will it be enough to service the finance required?

At this stage I would strongly recommend you do not contact any lenders other than possibly your own bank who know you as it is your inexperience in development projects that will cause concern. An expert/experienced commercial finance broker will know how to answer all the lenders questions truthfully but in a way that will convince them of your professionalism. Many times a client has answered a lenders question directly to save time and it has caused the whole application to be declined at a very late stage so please do be careful.

If you do need to chat and want assistance at this stage just email me on npatterson:property118.com or call 01603 428560 and leave a message if I don't pick up straight away.

Reply to the comment left by "Mic Singh" at "03/02/2014 - 12:52":

Hello Mic - firstly, you've done well to get this far with no experience of new-build: it takes guts to take on this kind of project. I hope your confidence about the viability of your site is correct. I trust you have looked in detail at similar local projects and are aware of what new buildings are already in the pipeline, both by the university and private developers, so you understand the competition from new-build, conversions and BTL landlords, and have a realistic sense of achievable rents.

I've never tackled something like this, but to assess your budget, I suggest you contact the developers (or the builders, or the architects) of the other local schemes, be friendly, say you are thinking about something similar in another city, and ask them about their experiences. You might be brushed off because they claim to be too busy, but equally people like to talk if you say how much you like their scheme and butter them up a bit!

While you are about it, this would also be a good time to ask for recommendations about architects, planning consultants, surveyors, lawyers, sources of finance, builders etc.

In addition, the plans for these other schemes will be on the council's website. Get large A0 copies made and ask a project manager, quantity surveyor or builder who handles this scope of project to estimate the build cost and other costs. if you have to pay them a few hundred pounds for their time, it will be worth it.

You should also familiarise yourself with the layout of these schemes (try and walk round them too), to understand why they are laid out this particular way, what the constraints are, and so on. You don't want to get a design done that reflects your inexperience, because you will come to regret this. Dedicated student accommodation is a specialist market and you need to pitch it right: the balance of room size versus common areas, does everyone get their own bathroom, are the telecoms going to be good enough (and easy to upgrade in future), does the building feel secure, what are the fire safety rules, is there space for storage, waste, bicycles etc? My understanding is that dedicated student housing tends to rent to wealthy, often overseas students (and their parents) who are nervous about negotiating the wider rental market and want a mix of quality and security, but you need to understand what they are looking for. The best place to start with this is the existing housing schemes and what occupants feel about them.

As regards financing, the banks will tell you what information they need, so just ask them rather than try and anticipate. I doubt you can extrapolate value from apartments, as these are specialist units and in exchange for planning permission the council may require you to keep them as student housing rather than later concert them into residential use. You best model on value is, again, the existing schemes nearby.

To conclude I would advise you to get some good people on your side: you can't and don't need to be an expert in everything, so look at who has done this kind of project before and rely on them. Also, don't do everything in a strict sequence: it will pay huge dividends if you get a builder and QS involved during the design phase, so they can suggest improvements and cost-savings to the architects, and enlist the interest of some financial institutions during the design phase, not just after you obtain planning. They can offer ongoing advice on financial planning and help you sharpen up your budget and its constraints before you have committed yourself to an over-specified and expensive scheme on which you have planning permission but lack the funds to build.

Reply to the comment left by "Mic Singh" at "03/02/2014 - 12:52":

Hi Mic

My thoughts on a project like this would be to approach the larger builders in the area. An example for me was an office development I was doing and I approached RG Carter's, a Norfolk based company. The development was offices adjacent to Norwich airport. They are now sat in my pension scheme 🙂

RG Carter's were very keen to get the building work and as we had purchased the land for cash we were able to offer them a first charge on the land in exchange for a fixed cost fixed term build contract which got paid as soon as we signed off on completion of the building (AKA a "turn-key" arrangement). It meant we didn't have to put any more time or money into the deal during construction as they did everything including the provision of funding. Having said that, it was during the boom of 2003. A decent building company will also be able to put you in touch with a decent architect.

My thinking here is that a variation on a theme of such a contract may well suit you. For example, if you do need funding, as Neil has said the lenders funding the project will consider track record. If you have a major builder taking staged payment on a fixed price, fixed term contract that may well make your funding proposition a lot more tempting.

I also agree with Neil about established open market valuations of the capital and rental valuation of the project post completion as this will enable you to get a agreement in principle for long term funding, hence being in a position to show a development financier that you have one or more viable exit routes.

Good luck with your project and please keep us updated 🙂
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You, say you raise finance overseas. What is overseas, what kind of financial institutions do you raise the finance from ?, what collateral is taken by these financial institutions keeping in mind the cross border collateral hurdle,

Do you raise the finance in sterling or other currencies ? How does the revenue treat this facilities, what documents do they ask from you and do they translation for the same ?.