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Semi-Commercial Ground-Up Development on High Street

High Street Semi-Commercial Ground-Up Development

The Client: A property developer with past experience in out-of-the-ground projects, he’d completed his last development five years prior to this case.

The Property: A derelict semi-commercial property located in the centre of a popular town in the Southeast. Our client was looking to demolish and rebuild the property to consist of six flats and a retail unit at the base.

The Finance: Having already purchased the plot and secured planning permission, our client was hoping to source a property development loan to cover the £580,000 costs of work required.

The Challenge: Lenders typically like to see applicants have recent experience regarding out-of-the-ground projects. With low-risk tolerances, there is a preference for applicants with current active involvement in the market to prove they can complete a project to a suitable, modern standard. Also, those currently working on projects can clearly show they have the necessary contacts to aid them in their work.

Similarly, the pandemic has reduced lenders’ risk appetite for some commercial properties in general. Many retail units were vacated during the lockdowns whilst customers could not go out and spend, so there is still less favourability in offering to these types of businesses. There is also the challenge of finding a tenant to run the commercial unit. As our client was looking to build flats above, we also needed to consider the challenge of finding tenants happy to live above the retail shop on a busy high street.

The Solution: By compiling a strong CV and portfolio for our client, we demonstrated his vast experience and core knowledge of the market to lenders, and the key contacts he had access to to ensure a successful project.

We also proved that the residential flats alone would be a suitable exit strategy for the loan. Either through refinancing onto buy to let mortgages or the sale of the properties, our client would make enough profit to service the loan and repay the development lender. In the end, our client decided to sell four of the flats and keep two, due to the strong rental demand in the area. Having proven this exit strategy, our lender felt comfortable that the commercial element was covered financially and, therefore, happy to proceed. Unlike many development finance arrangements, this deal did not include an exit fee for our client, saving them c£8,500.

Here are the details:

Property Details

Gross Development value: £1,250,000

Loan amount: £582,000

LTV: 46%

Rate: 5.89% over BBR (Interest-only)

Term: 18 months

Lender arrangement fee: £ 8,730

Exit Fee: None

Application: SPV Limited Company

NB: ANY PROPERTY USED AS SECURITY, WHICH MAY INCLUDE YOUR HOME, MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE

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