Overview
Our client was an experienced builder but a relatively new developerAn individual or entity that buys and improves property, or builds entirely new properties, that are typically sold at completion of the project. as an individual. He was looking to build out his fourth site but didn’t have the equityThe difference between the debt and the asset value; the part that the Borrower actually owns. The equity value can increase in value over time, if debt is reduced and / or the property increases in value. The reverse can also happen. See Negative Equity. to do it alone. Despite having a network in place to help provide investment, it meant offering a large profit shareNormally used by a business to incentivise employees and typically expressed as a percentage. In property transactions it could be the share of profit between equal or unequal partners in a JV scheme. Or, a Developer may offer their team a Profit Share if they perform to time or budget. We most often see it if a Developer is deemed by the Lender not to have the necessary experience for that particular scheme. Rather than not lend, the Lender may suggest that they incentivise the main building contractor via profit share., so he was seeking a way to fund the scheme on his own and maximise his profits.
LocationUsed by us to distinguish where the property is that the loan will be made against. Lenders can be location agnostic, and believe that different locations should attract different Underwriting Criteria and pricing : South-East London
LoanWhen something is borrowed by one person / entity from another. Normally it refers to money, and a rate of Interest is charged whilst the debt remains outstanding. More Type : Bridging FinanceIn Real Estate a Bridge Loan is a short-term loan that is used to cover a funding need until a longer-term arrangement can be put in place. People bridge for a number of reasons; to purchase an asset quickly (perhaps at auction), to re-furbish a property (add value), to purchase a property from a receiver / foreclosure, or if a property is not yet financeable by a traditional lender (fire damage is one example). Bridging is more expensive, due to its shorter term nature, and perceived higher risk. The repayment source or Exit Strategy, is normally sale of the asset or Re-finance (once value is added / works are completed). and Development FinanceSpecialist funding, specifically used to fund a Development Project. Lenders predominately use a combination of LTC and LTGDV to assess how much they are willing to lend. Other factors also come into consideration; Property Type, Location, Development Experience, Profit Forecast, etc. A lender will determine the total Gross Loan they are willing to advance, and then deduct Lender Professional Fees, Lender Interest, Lender Arrangement Fees, and 100% of the Build Costs. The Residual Loan is then available to draw against the Land, so is often referred to as the Land Loan.
LoanWhen something is borrowed by one person / entity from another. Normally it refers to money, and a rate of Interest is charged whilst the debt remains outstanding. More Size : £1.19m (BridgeIn Real Estate a Bridge Loan is a short-term loan that is used to cover a funding need until a longer-term arrangement can be put in place. People bridge for a number of reasons; to purchase an asset quickly (perhaps at auction), to re-furbish a property (add value), to purchase a property from a receiver / foreclosure, or if a property is not yet financeable by a traditional lender (fire damage is one example). Bridging is more expensive, due to its shorter term nature, and perceived higher risk. The repayment source or Exit Strategy, is normally sale of the asset or Re-finance (once value is added / works are completed).) and 5.32m (Development FinanceSpecialist funding, specifically used to fund a Development Project. Lenders predominately use a combination of LTC and LTGDV to assess how much they are willing to lend. Other factors also come into consideration; Property Type, Location, Development Experience, Profit Forecast, etc. A lender will determine the total Gross Loan they are willing to advance, and then deduct Lender Professional Fees, Lender Interest, Lender Arrangement Fees, and 100% of the Build Costs. The Residual Loan is then available to draw against the Land, so is often referred to as the Land Loan.)
LoanWhen something is borrowed by one person / entity from another. Normally it refers to money, and a rate of Interest is charged whilst the debt remains outstanding. More to Value : 75% LTVThe ratio of debt to property value, expressed as a percentage; for example a Borrower that obtains a Loan of £ 6,000,000, against a property value of £ 10,000,000, would be expressed as 60% LTV. (BridgeIn Real Estate a Bridge Loan is a short-term loan that is used to cover a funding need until a longer-term arrangement can be put in place. People bridge for a number of reasons; to purchase an asset quickly (perhaps at auction), to re-furbish a property (add value), to purchase a property from a receiver / foreclosure, or if a property is not yet financeable by a traditional lender (fire damage is one example). Bridging is more expensive, due to its shorter term nature, and perceived higher risk. The repayment source or Exit Strategy, is normally sale of the asset or Re-finance (once value is added / works are completed).) and 70% LTGDVTypically used in Development Finance as a ratio, to measure the Loan granted in relation to the overall end value of a development project. A Lender may offer 60% LTGDV and 80% LTC, and it is the lower of these two ratios that will determine the final loan size advanced. The Loan advance will include an allowance for Lender interest and fees as these are normally rolled up (See Rolled-Up Interest). (Development LoanSee Development Finance.)
The Situation
Our client purchased a mixed-use site, comprised of part residential and part commercial, for £1.7m, with outline planning for a knockdown and rebuild. Most of the properties were tenanted, which allowed him to earn an income and cover his loanWhen something is borrowed by one person / entity from another. Normally it refers to money, and a rate of Interest is charged whilst the debt remains outstanding. More costs, whilst he worked on the planning.
Within 6-9 months of the Bridge loanIn Real Estate a Bridge Loan is a short-term loan that is used to cover a funding need until a longer-term arrangement can be put in place. People bridge for a number of reasons; to purchase an asset quickly (perhaps at auction), to re-furbish a property (add value), to purchase a property from a receiver / foreclosure, or if a property is not yet financeable by a traditional lender (fire damage is one example). Bridging is more expensive, due to its shorter term nature, and perceived higher risk. The repayment source or Exit Strategy, is normally sale of the asset or Re-finance (once value is added / works are completed). completing, the client anticipated he would have his planning permissionOfficial permission from a local authority to build or alter a building. and would then build out the scheme.
The Challenge
Our client needed £510,000 plus costs to purchaseThe act of buying something from another person, or in property terms, buying a property from another person. the site, and therefore needed an investor to contribute. He knew however that he would increase the value of the site through the planning process, and we wanted to avoid an investor contributing a relatively small amount of equityThe difference between the debt and the asset value; the part that the Borrower actually owns. The equity value can increase in value over time, if debt is reduced and / or the property increases in value. The reverse can also happen. See Negative Equity., but taking a profit shareNormally used by a business to incentivise employees and typically expressed as a percentage. In property transactions it could be the share of profit between equal or unequal partners in a JV scheme. Or, a Developer may offer their team a Profit Share if they perform to time or budget. We most often see it if a Developer is deemed by the Lender not to have the necessary experience for that particular scheme. Rather than not lend, the Lender may suggest that they incentivise the main building contractor via profit share. on the full scheme. Our challenge was therefore to repay the investor as soon as possible, allowing our client to retain the bulk of the profit.
The Outcome
We arranged a bridging loanWhen something is borrowed by one person / entity from another. Normally it refers to money, and a rate of Interest is charged whilst the debt remains outstanding. More for phase 1 of the project; the acquisition of the site. Our client put in £210,000 and the investor put in £300,000 for a 50% share in the profits. Post-planning, the value of the site was expected to be closer to £3m. The build costs of the project were circa. £2.1m, with a GDV of £7.76m.
Our plan was to raise enough debt in the development loanSee Development Finance. phase, to repay the investor when we replaced the bridging loanWhen something is borrowed by one person / entity from another. Normally it refers to money, and a rate of Interest is charged whilst the debt remains outstanding. More with the development loanSee Development Finance.. The property was valued at £2.8m after full planning was granted, so the investor needed to be paid a profit shareNormally used by a business to incentivise employees and typically expressed as a percentage. In property transactions it could be the share of profit between equal or unequal partners in a JV scheme. Or, a Developer may offer their team a Profit Share if they perform to time or budget. We most often see it if a Developer is deemed by the Lender not to have the necessary experience for that particular scheme. Rather than not lend, the Lender may suggest that they incentivise the main building contractor via profit share. of £550,000 (50% of the £1.1m value uplift), plus his original £300,000, totalling £850,000.
We were able to raise a day one loanWhen something is borrowed by one person / entity from another. Normally it refers to money, and a rate of Interest is charged whilst the debt remains outstanding. More of £2.04m, meaning we could repay the investor entirely after nine months. If we had waited until the project was finished, his profit shareNormally used by a business to incentivise employees and typically expressed as a percentage. In property transactions it could be the share of profit between equal or unequal partners in a JV scheme. Or, a Developer may offer their team a Profit Share if they perform to time or budget. We most often see it if a Developer is deemed by the Lender not to have the necessary experience for that particular scheme. Rather than not lend, the Lender may suggest that they incentivise the main building contractor via profit share. would have been closer to £1.4m. Through working together, our client was able to retain more than £1m in additional profit, purely through taking the time to seek our team’s expert advice.