Over the last decade we have seen a large number of public houses up and down the UK closing their doors. Unfortunately, once vibrant businesses have been decimated by rising business rates, lower profit margins and the emergence of new trends in the food and drink market. As a consequence, we have been approached by a number of clients regarding the conversion of closed down public houses into flats. On paper these transactions look fairly straightforward but in practice there can be significant competition amongst investors, very tight timescales and numerous challenges!
We were approached by a client who had identified a closed down pub which was attracting the attention of other property developers looking to convert into flats. It was obvious from day one that the funding timeframe would be very tight. The client not only required funding to acquire the property but also development capital for the conversion. Once the conversion had been completed the idea was to remortgage the four flats on the enhanced value, pay off the short term debt and bank a profit.
So, in basic terms the scenario for this case study was as follows:-
Nationality: UK nationals
Short-term loan: To acquire property
Development finance: Fund conversion into flats
Refinancing: Securing conventional mortgage on four flats
Securing purchase finance, development funding and a refinancing arrangement are all fairly simple in isolation. It is when you put the elements together under a bespoke package that the challenges begin to emerge. The fact that we were working against a timeframe of just 30 days meant there was no time for delay.
Issues to address
The issues we faced were fairly obvious, and touched on above, leading us to approach the bridging lender/niche funding area of the lending market. We would need a bespoke arrangement which would address a number of challenges such as:-
Purchase funding: Maximise LTV
Development funding: Maximise funds based on gross development value
Timing: Secure funding within 30 days
Remortgage: Four flats to be remortgaged upon completion
Even the most straightforward of pub conversions will likely encounter timing issues and additional costs. Therefore, we needed to secure sufficient funding to ensure the property conversion was completed while appreciating that lenders would require significant headroom. In light of the fragile UK economy, and negative comments regarding the UK property market, we were only too aware of the challenge of maximising funding.
As we touched on above, it very quickly became obvious that we would need to approach a bridging lender/niche lender to facilitate this bespoke arrangement. There was a need to address the project in separate stages, the purchase and development then the refinancing of the flats. Thankfully, using our contacts in the lending market, and our knowledge of their specific requirements, we were able to secure not only the purchase/development funding but the refinancing facility within the 30 day period.
The solution was as follows:-
Purchase funding: 65% LTV
Development finance: 90% of total development costs
Funding terms: 12 month term
Interest rate: 0.9% per month fully retained
Development finance release: Funding was released in tranches to protect all parties
GDV loan ratio: Combined purchase/development costs remained below 55% of GDV
We were able to present detailed project requirements to the lending party. These included purchase/development costs, projected property value enhancement and also demonstrated significant headroom between the total cost and projected end value. While the initial LTV was 65%, and lending facility up to 90% of building costs, the combined arrangement was still under the 55% loan to GDV ratio we negotiated with the lender.
Securing finance to begin a property development is only half of the challenge as short-term debt is more expensive than traditional mortgage finance. We were also able to arrange refinancing of the four flats upon completion. The terms were very attractive:-
Mortgage funding: Four flats
Funding parameters: 75% LTV
Use of funding: Repay short-term debt leaving additional cash for investment
As interest rates are still relatively low in the UK we were able to secure attractive mortgage rates. The funds were used to pay off the short term debt, on a higher interest rate than mortgage funding, crystallising a significant profit and releasing capital for future investments. We were aware from a relatively early stage that the client was looking at other projects and look forward to working with them in the future.
What can Enness do for you?
In theory, the conversion of larger properties into individual flats would appear to be relatively simple and something of a “goldmine”. In practice this can be very different with a whole array of issues to consider such as property markets, unexpected expenses, delays and changes in the lending market. Therefore, we were extremely pleased to be able to secure funding to acquire the property, property development capital to carry out the conversion and then immediately remortgage the flats upon completion. The fact that all of these transactions were carried out with one lender gave them added security and detailed knowledge of how the project was progressing.
If you find yourself in a similar situation, we would welcome the opportunity to chat with you about your plans for the future and funding requirements. This type of transaction tends to demand a bespoke arrangement which is our forte. We can put together a number of suggestions regarding structure, timescales and funding requirements, and obtain real-time market prices so you can compare and contrast cash flow demands. Our independent status, and breadth of partners across the lending market, ensures that when required we are able to secure bespoke funding often within very tight timescales. In the investment world, time is literally money……