Development Finance

[Kudos]

Anyone got any recommendations for financing a development project? I haven't approached my IFA yet, wondering if anyone has any experience in advance.

I currently own a place alongside a friend who's business isn't doing great at present, so he asked if I could buy his share out (at well under market value). I'm looking funding to buy him out then go ahead with the original development plan - conversion to 5 apartments and 2 townhouses which needs funding.

Presently sitting at approx 50% LTV, and anticipate once development complete it should still be around 50% LTV (if I didn't sell).

Rental income currently covers mortgage easily.

[Scooby_snax]

Rental income from where? is this projected income once development is completed and the properties let?
Have you approached your Bank, I would have thought 50% LTV would have been attractive

[Kudos]

Rental income could certainly cover a fairly large increase in rates, if push comes to shove I can subsidise personally or more likely I'd like to sell off 1 or more of the properties to reduce outgoings.

I haven't been near current lender yet, wondering if anyone else has experienced similar to help me "go equipped"

[Scooby_snax]

If going to Bank and have to confess dont know what the N Ireland appetite is for this type of finance, would suggest you present a balanced view.
So my suggestion would be to cover the undernoted
So your plan as it stands.
Are the development costs fixed if not what are the terms of the contract
Do you engage a headline contractor who sub contracts
Are you engaging a project manager/architect to oversee

On what basis are you estimating the rental income
Are you going to manage or get a letting agency
what is your estimated non letted time

then you need to cover the downside what if scenarios
what if you dont get a tennant for 6 months (you could suggest to the Bank you will provide 6 months interest cover up front)
how long will it take to get a buyer if you need to sell
how reasonable will it be to sell 1 development if the others are let
to get the Bank interested you probably need to focus as much on the what if downsides and provide solutions
just my 2 pennyworth

[Kudos]

Not sure if you follow me.

We own it 50/50. As it stands, mortgage is currently 50% of what it's worth. I'd buy him out (need to borrow), convert (again, need to borrow this money). Once complete, the new increased mortgage would still be about 50% as the value of the property has gone up.

Currently let out casually to small businesses through word of mouth, I'll convert back to residential apartments - stunning sea views and high standard of fit out.

[Scooby_snax]

surely when you are developing you wont have the existing tennants so that income stream will dry up

[Scooby_snax]

agree with tonker...no matter what a professional will say re valuations it is only worth what someone will pay...that is the real value
it amuses me when someone says my property is worth £x and i am selling at a discount....the discounted value is the market value

[Kudos]

I'm all to aware of the mess property situation is in NI. Some people made a lot of money...but then lost it very quickly again. It does seem to be recovering a bit, hence why I'm even considering it.

I did make some money from it personally (bought my first Porsche based on gain of single off plan property bought/sold on the same day) but managed to avoid the worst of the drop.

My figures are down 40%+ from peak (given by valuer)and are based on similar sales nearby, I've even reduced a bit more "just in case". Rental figures are based on local estate agent.

I'll use a single contractor to do the build (my brother in fact). Current tenants will obviosuly move out, but we're talking about a 3 month refurb rather than a 6 month knock down and start again.

[Scooby_snax]

So how much do you need to do the development as a % of the current 'value'

[Kudos]

Scooby_snax said:

So how much do you need to do the development as a % of the current 'value'

50% of the current value to redevelop, this would take borrowings up to 100% of current value. Once developed borrowings would be back to 50% as the "value" has increased 100%. If that makes sense...

Present Value = £500k
Present Mortgage = £250k
Development finance req'd = £250k (Should do it for £200k, but adding in 25% contingency)
Future valuation = £1m (actually believe it's £1.1m, but in the interests of playing safe)

[cinque]

Kudos said:

Scooby_snax said:

So how much do you need to do the development as a % of the current 'value'

50% of the current value to redevelop, this would take borrowings up to 100% of current value. Once developed borrowings would be back to 50% as the "value" has increased 100%. If that makes sense...

Present Value = £500k
Present Mortgage = £250k
Development finance req'd = £250k (Should do it for £200k, but adding in 25% contingency)
Future valuation = £1m (actually believe it's £1.1m, but in the interests of playing safe)

Forgive me if i'm wrong here,

You and your partner "own" the place 50/50? 250k Mortgage on a "valuation" of 500k? So this i swhere you are getting the 50/50 LTV.

You are wanting to "borrow" the 125k it takes to buy your partner out? (You now have a 250k Mortgage to yourself on a 500k "valuation").

You then want to "borrow" a further 250k to "convert" (Taking your total borrow up to 500k)

You then feel the valuation "should be" £1m, giving you a 500k profit on paper, but with an increased exposure of 500k to yourself.

Is this what you are trying to convey?

[Kudos]

cinque said:

Kudos said:

Scooby_snax said:

So how much do you need to do the development as a % of the current 'value'

50% of the current value to redevelop, this would take borrowings up to 100% of current value. Once developed borrowings would be back to 50% as the "value" has increased 100%. If that makes sense...

Present Value = £500k
Present Mortgage = £250k
Development finance req'd = £250k (Should do it for £200k, but adding in 25% contingency)
Future valuation = £1m (actually believe it's £1.1m, but in the interests of playing safe)

Forgive me if i'm wrong here,

You and your partner "own" the place 50/50? 250k Mortgage on a "valuation" of 500k? So this i swhere you are getting the 50/50 LTV.

You are wanting to "borrow" the 125k it takes to buy your partner out? (You now have a 250k Mortgage to yourself on a 500k "valuation").

You then want to "borrow" a further 250k to "convert" (Taking your total borrow up to 500k)

You then feel the valuation "should be" £1m, giving you a 500k profit on paper, but with an increased exposure of 500k to yourself.

Is this what you are trying to convey?

Not quite. We own it (granted with a mortgage), value of £500k and mortgage of £250k. Once development is completed, additional lending of £250k (giving total borrowing of £500k) and valuation of £1m. The £250k additional borrowing needed for development includes buying partner out (I mentioned in OP I could get it cheap).

Potentially too many ""'s above, any figures are pretty much definites, as far as anything is definite these days.

I'm happy with my figures, they were provided for illustration. The OP was does anyone have any experience of funding such a thing before I approach IFA or bank.

[hamski]

I've arranged funding on similar deals in the past, but the current climate is different. If you have a good existing relationship with a bak then that is the best place to start. The general feeling with development finance is that the banks don't want stand-alone deals, but will look more favourably if there is other business to come acros as well.

If the figures all stack up, RBS are still fairly keen, as are Handelsbanken

[2 5HAN]

I think as Hamski has said the banks view development finance very differently in the current climate.

In today’s market i think the banks are much more interested mortgage or lending cover than valuations and projected valuations as they are just that, valuations.

You may therefore have a few problems without rent or income cover coming in during the development time.

If you have any other businesses or income the banks may be happy to add them to the equation as such.

As mentioned i think talking to your existing bankers is the best bet as they will at least know your history and banking trends which may hopefully count for something, although dont count on it

Edited by 2 5HAN on Thursday 28th January 22:36