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Seeking an Agreement in Principle with a prospective lender puts an applicant in a stronger position. In essence the borrower and/or developer is more in control knowing they qualify with the lender prior to taking the full application forward. Having an Agreement in Principle puts a purchaser in a stronger position when negotiating.
Costs to ‘acquire’. Incidental costs incurred when purchasing buildings or land as part of your development project. These costs are typically, but not restricted to, stamp duty, legal fees, surveys, agent fees and valuation fees.
Area of outstanding Natural beauty. Land protected by the Countryside and Rights of Way Act 2000 ( CROW Act ). Securing a successful planning application in an Area of Outstanding Natural Beauty is potentially fraught with restrictions and resistance. A pre planning application should be strongly considered for a property Development Application within an AONB.
Bridging is short term finance and can be used to raise funds quickly. Bridging loans are often used to secure property and land at auction. Also as transition finance towards arranging longer term development finance.
Computer generated images providing a realistic representation of a development project or property that us incomplete and/or yet to be built. CGIs bring plans to life with visual representation while allowing a potential purchaser to imagine themselves living within the development.
CGIs can also create 3D sitemaps illustrating the layout of the property. The interior and exterior of the property can also be generated together with fly through videos and the layout of each floor.
A smaller more agile and pragmatic breed of retail bank. Following the recession, challenger banks came in to their own and filled the financial void and began to dismantle the monopoly of the big 5. As with the effects of post recession parallels can again be seen as ‘post Brexit’ saw the softening of property values. High Street lenders took an overly cautious approach to development finance. Once again the challenger banks proactively stepped forward to fill the void and meet the industry’s ongoing demand for development finance. These Challenger banks such as Paragon, Aldermore, Oaknorth and Shawbrook with others continue to fuel British House building.
Supporting evidence which confirms sold prices for local properties. These comparable prices can be put forward in support of a development project presentation.
This refers to the total build costs of the project. Average construction costs per SQ/FT vary by region. Typically costs range from £100 to £340/SQFT. Other factors include property type and standard of finish.
Assets such as property pledged by the borrower which act as security for bank funding and facilities
A warranty given by a third party beneficiary (an interested party involved in the development) such as an architect, professional consultant or contractor. Under the warranty terms lenders can sue the third party if they fail to satisfy or comply with their professional appointment (terms), sub contract or building contract.
Collateral warranties also, importantly, provide for a duty of care to contracted parties not party to an original contract. These warranties originated from court decisions that building defects were non recoverable in tort being an ‘economical loss’. This economic loss only recoverable via a contractual relationship. Collateral warranties make provisions for direct contractual relationships between interested parties that would not normally prevail.
Community infrastructure levy (CIL) is typically developer costs to assist in developing the local area. It is recognised as an important tool to deliver infrastructure. Amendments to the Community Infrastructure Levy Regulations were effective from the 1st September 2019. Community Infrastructure Levy (Amendment) (England) (No. 2) Regulations 2019 saw a number of changes to regulations 9, 40 and 50. These amendments in relation to a chargeable development. That being the calculation of social housing relief and chargeable amounts. Changes do not apply to planning permission granted prior to 1st September 2019.
land deemed unfit for development due to pollution or contamination. The National Planning Policy Framework (NPPF) encourages the regeneration of existing resources, this includes converting existing buildings and effective re-purposing of previously developed land (Brownfield land). The NPPF also promotes utilising land with a lower environmental value for development. The framework supports the redevelopment of potentially contaminated plots/land.
Development of, and re-purposing, contaminated land is a proactive way to improve the environment towards a safe development for both the environment and human well being. The NPPF confirms that the planning system is there to encourage sustainable development that is viable and deliverable.
Developers must familiarise themselves with the history of a site. Understanding the existing and previous use of a site will greatly assist the developer and the local authority. Not only in decision making but also, ultimately, saving costs.
Land contamination remains a material planning consideration. Where a plot and/or parcel of land is contaminated responsibility lies with either the landowner and/or developer to secure a safe development.
Typically used in structured finance contracts such as development loans and commercial mortgage loans, a form of credit enhancement. The subject security for the initial debt is further utilised as security for another debt with the same lender/creditor. More often than not when sales (equity) are being realised on an ongoing project and that equity is available to part-service the next project.
A debenture is a written agreement which gives protection to a creditor lending to a business/limited Company/SPV. It prioritises a lenders position should a company become insolvent. The agreement is filed at Companies House thus preventing other interested parties gaining access to identified assets. There may also be a Deed of Priority where more than one lender has an interest in the company.
Debentures invariably are referred to as “all monies” which refers to security over existing, current and present loans as well as future loan facilities. Debentures are more popular with lenders than borrowers. Other terms synonymous with debentures are fixed and floating charges. For property developers trading as a ltd company a floating charge may include fixtures and fittings, stock, cash and book debts. A floating charge allows a Ltd company to carry on it’s day to day activities without seeking the lender’s permission.
This only ceases if the borrower defaults and an administrator/receiver is appointed. At this point the floating charge crystallises (becomes fixed). Floating charges are less popular with lenders than fixed charges as they rank behind preferential creditors. The types of debenture are ‘redeemable’ which is subject to a specified repayment date. An ‘Irredeemable (perpetual) debenture’ do not carry a redemption date and there is no specific time or date the loan must be redeemed. When a borrower’s assets are leveraged for security by the lender this is termed a ‘secure debenture’.
Should the borrower default assets will be sold as collateral in order to cover the debt. Advantages to a limited company/SPV is that a debenture provides security and is a cost effective way of raising finance. Disadvantages are that it can assert an imposition on the company’s earnings. If redeemable the specific payments have to be met and this could be at a time of difficult trading conditions. ‘Fixed charge debentures’ a borrower does not have control over leveraged assets.
A design and access statement (DAS) supports a planning application. They explain design principles and concepts applied to the specific development. It also demonstrates how the development’s ‘context’ influences the design. The DAS defines access and how relevant local planning policies have been accounted for. Together with any or all consultations around access issues along with it’s bearing on the proposed development. The DAS should also tackle specific issues around the development access and how they have been addressed. They are required for both full and outline planning permission. There is a lower threshold for World Heritage Sites, Conservation areas and listed building consent.
A Design and Access statement must accompany the following application types:
Applications for major development, as defined in article 2 of the Town and Country Planning (Development Management Procedure (England) Order 2015
Applications for a development in a conservation area, where the proposed development consists of one or more dwellings or a building(s) with a floor space of 100 sqm or more
Applications for listed building consents.
A detailed assessment examining the viability of a development project (with or without planning permission) This includes but is not restricted to location, opportunity, planning and legal constraints, physical characteristics, development and appreciation potential, risk, market analysis in short potential v risk. A development appraisal will also examine any third party property rights along with building regulations in respect of an existing development plan. Guided by market analysis results will be collated and presented to the developer together with a valuation of the land or plot. Furthermore concepts and ideas to realise maximum return on investment (on GDV or cost). Development appraisals can be carried out with either spreadsheets or software such as ARGUS Developer.
This is a fee charged for managing and administering a project. The calculation and assessment of the development management fee and is included in the Development Management agreement (DMA). The fee can be calculated a number of ways. On key dates and/or construction milestones a lump sum fee is payable (Fixed Fee).
This fee can also be expressed as a % of the development costs. The fee can also come (as a percentage) from the proceeds of sale as income or capital. A fee can also be agreed in relation to the profitability of the development typically when a certain threshold has been achieved. A development Management Fee can also be a mix of the above.
As an example arguably the most common calculation is that the development management fee is linked to the development cost as a percentage. This is seen as an incentive and as a result does not reward inept developers.
An indispensible tool to track income against expenditure in order to effectively plan cashflow over the project duration. A Discounted Cash Flow model is similar to Net Present Value (NPV) and Internal Rate of Return (IRR). Expenditure against anticipated future income determines as to whether the project is viable. In that the level of return during the project period satisfies the lenders/investors required rate of return.
A report provided to the lender by an Independent Monitoring Surveyor (IMS), sometimes also referred to as a PMS (Project Management Surveyor). The surveyor advises the lender on works progress and approves the draw down of funds. The IMS is typically appointed by the lender, site inspections need to be scheduled with sufficient notice. The development project manager must anticipate critical progress points as a report by an IMS can take 4-7 days to submit to lender.
If there is evidence or support towards a more effective use of land. This determines whether the re allocation of land to a more deliverable use would be more effective. Factors to consider would be the length of time since allocation in to the development plan. The planning application history (incl: pre-application enquiries and planning applications). Whether evidence suggests the site itself has been actively promoted/marketed for the intended use for a reasonable period and price.
Are there material changes that affect the intended use of the site (take up) as opposed to what was originally intended. Where an alternative use is proposed, it is relevant to consider the extent to which evidence would suggest the alternative use would address an unmet need, together with the implications for the area’s wider planning strategy and other development plan policies.
Development loan exit fees Fees are payable on the redemption of the Property Development loan amount (net or gross) or the end value of the project (GDV). This should be confirmed at the outset and before any contract is entered in to as the 2 figures can, of course, vary especially on larger loans. Exit fees vary from lender to lender, typically an exit fee is 1>2% though not every lender will levy the charge. An exit fee does not attract any interest charges.
Various local authorities offer fast track options for planning applications. The fast track option will attract a higher fee which will be clearly displayed on the local authority site under guidance notes and fees schedule. This option can be extremely useful should planning be required on a new project and/or an option agreement has been entered in to.
The fast track option will not affect the consideration of the application itself. The fast track process also typically includes advise on applications, advice requests and planning recommendations. Most fast track applications are preceeded by a pre application and a local authority will always reserve the right to refuse a fast track request subject to resources and availability.
Most local authorities, once they have accepted a fast track application, will expect to have the application submitted to them within 5 working days. Fast track charges are over and above standard application fees. Fees are payable under the Town and Country Planning (Fees for Applications, Deemed Applications, Requests and Site Visits) (England) Regulations 2012.
A first legal charge is a means by which a lender can enforce rights over a property. The first charge holder has the right (legally) and/or priority over an asset should the borrower default. There will likely be a first charge over a development project by either the land and/or portfolio assets. A charge can be registered on the same assets by more than one lender. Any further development funding by a further lender can registered as a second charge against the same assets. The second charge will only come in to effect once the first charge is discharged/satisfied.
The government’s national policy offers robust protection for the green belt from development. The National Planning Policy Framework states Green Belt boundaries may only be altered in ‘exceptional circumstances’. Any proposal would be subject to a consultation with locals and thereafter an independent and rigorous examination by a Planning Inspector of The Local Plan. Should the loss of Green Belt be unavoidable the local authority will be expected to offset the loss by access and environmental improvements to the remaining Green Belt. The loss of Green Belt is also contra sustainable property development as it affects the environment negatively. Any Green Belt lost brings to an end the ability to capture new carbon.
Gross Development Value (GDV). GDV is one of the most important and critical metrics when considering a development project. GDV is a measured approach together with a forecast of anticipated revenue from a completed development project. This figure then determines percentage profit/levels and a corresponding appetite for investor funding.
GDV is a simple calculation i.e a development has 9 apartments expected to realise £195,000 each therefore the GDV will be £1,755,000. While the development project may well be finished in 12 months the development lender will want property valuation comparables and/or the more widely used terminology ‘Real estate comparable evidence’.
This can be collated in a number of ways the most straightforward is to use a data driven comparison tool and secondly the good old fashioned route of asking 3 estate agents. Take the mean average of all for a realistic value. Detailing these comparables will enhance and complement your development loan application.
A valuation concept referring to a property (improved property or vacant land) valuation derived from market value should the property be used in the most optimal way possible. This, in order, to produce highest market value but must be financially feasible, physically possible and supported legally.
A house in multiple occupation, occupied by more than one household with shared facilities. The relevant local council will advise if the property requires an HMO license together with advice/contact details regarding fire safety regulations. An HMO can be defined as a building where more than one household lives and shares facilities.
Joint Contracts Tribunal offer a range of off the shelf contracts for use in building contracts/construction projects. JCT contracts are typically between an ’employer’ and a ‘contractor’ in order to facilitate the process of delivering a building project. The contracts set out all relevant terms and conditions, including the obligations of the parties together with costs and specification of the development project.
A joint venture is an initiative to work together on a project involving either individuals or companies. Either the individual/s and/or business/es have committed resources, time, funding and expertise. However when property development finance is required it is critical that legal advice is sought. It may seem a straightforward option but what has to be an overriding consideration is that the lender will, of course, need to be comfortable with the arrangement. How the joint venture will be structured as this will have a bearing on the terms and security of the property development loan.
There are two recognized joint venture types both of which have pros and cons. Lenders prefer an SPV (Special Purpose Vehicle) as this is a clean entity with no existing security or debt. The limited nature of a company or partnership (LLP) will typically see the lender request a form of personal guarantee as surety for the loan.
A contractual joint venture will see will see each party controlling their own assets. This allows for easier identification of respective obligations. However while flexible it does affect security such as floating charges. A floating charge will cover bank account/debtor assets which, in turn, will affect the available property development finance.
Key terms will have to be agreed once the method of joint venture has been determined. These will be identified in the shareholders’ agreement, a separate joint venture agreement or a partnership agreement. The joint venture terms need to be carefully considered to avoid conflict with the lender’s criteria.
Set out by the Royal Institution of Chartered Surveyors (RICS) and designed to guarantee the highest standard of procedures and processes. These procedures cover each stage, from initial inspections to the final presentation. It is hoped by outlining these standards, that the final document will meet the required specifications of all parties. Red Book valuations are accepted as being highly accurate and are relied upon by HMRC in property matters concerning capital gains tax and inheritance tax. A red book valuation is typically valid for three months.
Retained Interest (sometimes referred to as a payout penalty) is the unpaid interest of the loan that is requested for up front by the lender, as opposed to taking it at the end of the term. This means the borrower is not required to make monthly interest payments. The interest is added to the loan by the lender and pays out the interest as it falls due monthly.
This helps the lender determine whether the project is going to be ultimately profitable enough to be funded, and whether the project’s purchase price is viable and realistic. To calculate this, the projected profit is divided by the total costs of the project. The Return On Costs need to be 20%>25% or more.
This is a flexible credit facility that is issued by a financial institution and provides the developer with a range of finance options. The borrower can choose to repay the loan, draw down, withdraw, and withdraw again, depending on their cash flow needs. This type of credit facility allows a developer to draw down funds as and when they are needed. Development funding can be withdrawn in line and subject to cash flow needs.
The majority of development finance providers will roll up any interest, which will then be paid at the end of the loan term via a sale or by refinancing. In summary, it is added to the outstanding principal amount of the loan.
This is the graphical representation of the costs of a development project against time. However it isn’t solely confined to property development as it is often referenced to within any new project be it business or otherwise. The ‘S’ within ‘S-Curve’ actually stands for ‘Sigmoidal’, a mathematical term relating to how the curve is derived.
As an example when a business is created growth typically follows an S curve pattern. Products would be slow to sell not withstanding start up costs. Once the business gains momentum (sales + customers + popularity) it will see rapid growth. Eventually it slows to a more consistent pattern.
The Sales Rate measures how quickly units that make up a property development are being sold, most commonly measured in units per month.
This details all the units within a property development and their size. This will display both the gross and net internal area of the development in square metres (Sq.M) and square feet (Sq.Ft). The Schedule of Accommodation is required by the end user of the project. Developed typically by the consultant team and would include location, space and operation detail. A schedule of accommodation correlates to minimum space requirements and therefore can greatly help with initial cost estimates.
A Section 106 agreement is a legal agreement between the property developer and the party/local authority issuing planning permission, relating to the section of the proposal that benefits the community. This could refer to inclusions such as new transport links or public spaces.
A Section 73 agreement within the Town and Country Planning Act 1990 enables planning permission applications to be submitted even if they do not comply with a condition(s) that were previously imposed.
Senior Debt (also known as a Senior Note) refers to the highest ranking creditor that takes control if a loan repayment is defaulted. This is usually backed by a debenture, guarantee, or a legal charge over assets associated with the development. Senior debt is debt that is not subordinated.
Serviced Interest loans require the borrower to make an interest payment each month, however, only a small number of development finance lenders will allow this type of repayment due to the higher risk involved.
Price per square foot is extremely important when purchasing or developing an investment property as it is an effective way to determine the overall value of a property. It is the value of each internal square foot of a development, and can fluctuate depending on the size of the property, or its location.
Stamp Duty Land Tax (SDLT) is a payment that is made when land or a property is purchased in England or Northern Ireland. In Wales it is known as Land Transaction Tax (LTT), and in Scotland it is called Land and Buildings Transaction Tax (LBTT). Purchasing a second property incurs a 3% surcharge on top of the normal Stamp Duty rate. To calculate your stamp duty payable in either England, Northern Ireland, Wales or Scotland use our free stamp duty calculator.
This third-party contract allows one party to assume the rights of another party. This could occur when a developer becomes insolvent. This could also allow the lender to contractually take over the role of the developer if required.
The lender will initially take charge of the asset, similarly to senior debt development finance, however, the leverage can grow to the same level as both senior debt and mezzanine finance towards 70-75% LTGDV. Interest rates are higher for stretched senior debt than senior only debt.
This can be difficult to calculate and is the subjective assessment of the overall value of a developer’s hard work, or in some cases, the lack of work that is being put into a project. This is how the lender determines how committed to the project the developer is and how much effort they have put into the early stages of the development project. This is an important metric for a number of reasons and some lenders will factor this in to their decision to determine whether or not to move forward with an application.