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October 2019

funding-property-development.

How to Refinance a Property Development Project to Avoid Fees

By Blog, Development Finance

There are a variety of things that can end up not going to plan when it comes to a property development project, even if you have planned the project well and manage things accordingly. For example, common issues that can cause construction site delays can be things such as extremely bad weather (for example, torrential rain) making it difficult for work to continue, an important supplier failing to deliver, or overbooked construction teams.

Unfortunately, these delays can lead to you incurring penalty fees if you have taken out development finance in order to fund the project. However, you  could look at development exit finance to help you avoid potential charges. Wondering how it could help you? We take a closer look.

Should you consider refinancing your development project?

Before going ahead and making the final decision as to whether or not you should refinance your build, you should carefully consider the options available to you.

For example, what are the terms and conditions of your current project, and would you have to pay additional fees for deciding to refinance that could outweigh any advantages when it comes to changing?

What’s more, is there room for contingencies: a general rule of thumb is to consider nine months into the project as the benchmark for potentially considering refinancing as an option (if you have taken out a 12-month development finance loan).

At this stage, it would be expected you were confident you were going to meet the exit deadline promptly, with most work having already been carried out by this point. If you are not confident that this will be the case, this would be when most developers would look at refinancing options available to them. 

Extending the borrowing term

In the majority of cases, property developers who decide to get development finance will have the term of this funding limited to just 12 months. This can make it very difficult timetable wise, should something go wrong with construction, or completing on sales.

This is why it is worth making sure you have arranged your development finance for the longest possible term either by doing it yourself or through an experienced broker. Furthermore, you should also find a provider who will not charge you fees for early repayment, in the event that you complete the project earlier than anticipated.

Reducing the cost of development finance

Exit finance rates can be cheaper than other kinds of development funding, meaning you can potentially save a considerable amount of money on the cost of lending if you are carrying out a construction project. In addition, interest that is accrued on exit finance is retained, which means that you can put all available capital on completing the construction project

Using refinancing to fund your next project

Not only can refinancing your development project reduce penalty fees should your project has delays, but it can also be useful for property developers looking to get their next project started, as refinancing can help fund this.

Many developers who are looking for cost-efficient ways to fund their project use refinancing in order to have site acquisition, design as well as planning all underway whilst currently finishing off a project. This means when the current project is finished, a property developer can immediately get started with the next construction build.

ashley-ilsen

The Government Need To Be Doing More For SME Builders and Developers

By Opinion

Ultimately the government need to be doing more for SME builders and developers who are facing what is already an uphill struggle. We regularly hear complaints from our clients about the rising costs of building new houses; anything from labour to supplies have been on a steady increase of late. When this is twinned with a flat property market all that leads to is a squeeze on margins, making opportunities for developers scarcer.

There needs to be a bigger push from the government to incentivise people to build homes again. We all know we’re a long way away from the targets that we are supposed to meet and this is not going to improve without drastic changes to both the demand and the supply side.

I was a big fan of help-to-buy when it was first introduced however this was only supposed to be a temporary short-term fix, and not long term dependency as it appears to have morphed into. There is a distinct lack of dynamism and forward thinking from our government when it comes to housebuilding and sadly I don’t see this changing anytime soon.

Paul Israel

Beware of the mast gift horse – be wary of what lies beneath…

By Opinion

Lucky landowners with properties in the right spot have been able in the mobile phone revolution of the past 20 years, to rent out land for phone masts, over 40,000 now in the UK. With the telecom provider obtaining planning in place, surplus land has been able to help the owner from helping these big corporations and putting in place a phone mast. Historically, these values have been between £4.5k to £9k annually under 15-year leases, depending on location.

With the coming of 5G and the need for another 40,000 new phone masts, the new Electronic Communications Code contained in the Digital Economy Act 2017 and introduced on 28 December 2017, is as a result likely to sharply reduce landlords’ income from these agreements and leave them with less control over their properties. The government in a bid to help roll out new phone masts for 5G had the bright idea to change the way mast contracts were negotiated under this new code so that instead of mutual negotiation the value was changed to alternative land use. No doubt the big telecom corporates were involved in its drafting.

In the city this value may be higher, but in the country some of these spots have very low alternative use values, as a result existing phone mast locations at the end of their contracts have seen offers from the telecom companies for annual lease values plummet from an average £6k annually to sometimes now offering as low as £32 pounds only a year.

So, in that instance you would then think the landowner could just give the telecom mast company notice, and tell the provider they can take their £200k of equipment elsewhere, but no, in the new code, the mast provider can go to Tribunal and have the value and mast site protected and withheld.

Loss of control is much greater, although, there is no right to “add” equipment, which may give landlords room to negotiate for more negligible rent. However, new rights include, to connect to a power supply; interfere with or obstruct an access route; and to lop trees have been added as well as right to keep the site, so land value could be potentially affected.

So, what’s actually happened since the new code came in? Mutual new mast agreements have now crawled to a standstill and there are cases now going to court to test the legislation, which surely needs significant amendment.

In the code there is scope for compensation in addition to rent for:

Faced with the prospects of a lower consideration, landowners are likely to claim compensation for their loss, as they can be entitled to do. Typical heads of claim will be:

  • Land taken – this will vary between each site (such as between farmland/woodland, farmyard/car park etc);
  • Injurious affection – this allows a landowner to claim for any drop-in value to his retained property (say to a house within sight of the mast);
  • Disturbance – this ought to cover the landowner’s time and trouble in dealing with access requests, which at say five requests a year per operator could equate to well over £2,500 per annum; and
  • Fees

If approached, where until recently a new mast was a potential positive for land, we understand is don’t agree any offer for a mast offer without proper advice first.

How to Finance Your First Property Development

By Development Finance, Lending, Uncategorized

Getting started on your very first property development project is most likely an exciting but also slightly daunting prospect, especially with so many potential options available in terms of funding. To make the decision process a little easier, we’ve broken down the main ways in which you can finance your foray into the property development sector.

Buy-to-let mortgages

If you intend to buy a single property and renovate it with the intention of then renting it out to a tenant for a number of years, it could be well worth your time investigating if a buy-to-let mortgage would be worth considering.

What makes a buy-to-let mortgage is different from a residential one? In many respects, they are similar: you will have certain eligibility criteria you will need to meet in order to qualify for this kind of mortgage. For example, a certain level of income will usually be necessary as this will determine the amount of capital you can borrow from a lender. Buy-to-let mortgages are also limited to one single property too.

The fact that most buy-to-let mortgages are limited to one property means that it is likely you will need to look for funding elsewhere in addition to the mortgage if you would like to expand your portfolio further than one property, or develop a number of properties at once.

Auction finance

Another viable option to getting finance for your very first property development is auction financing. Property auctions are usually considerably more affordable than if these very same buildings were listed in the traditional way, but the caveat is that they often require a lot of work to be carried out on them before being able to sell them on.

Whilst houses at auction tend to be cheaper, you will need to have all the money available to purchase it outright within a month of the auction ending (and your bid was successful). This can pose a problem for some property developers, who may not necessarily have access to all the finance upfront, but at the same time do not want to miss out completely on the possibility of the perfect property to develop.

Auction financing helps to solve this problem, as it a short-term bridging loan that can be arranged very quickly and helps property developers that cover the cost of the building until funds become available at a later point. It can also be agreed in principle before the auction.

Development finance and bridging loans

One of the most popular funding options for property developers tends to be property development finance and bridging loans. But how do these financing options work? This type of short-term funding can help with not only the purchase of a building but also help with the cost of renovating it too. It can be arranged quickly, and funds can be released to you within a very short period of time (within 4 weeks), meaning that it gives developers a great deal of flexibility when it comes to getting access to capital.

For more information about development finance and how Magnet Capital can help, contact our team directly.

Commercial mortgages

Are you or your company looking to expand primarily into the commercial property sector? Then a commercial mortgage may be your best bet instead. However, it is important that you keep in mind that this kind of funding will be limited to commercial properties only: for example warehouses, offices, and shops. In all other respects, it works very similar to a residential mortgage, which also means that if you are looking to develop residential properties or need additional funding then a commercial mortgage may not necessarily be the best option for you.

Paul Israel

It’s the worst of times, it’s the best of times: Happy First Year Magnet Capital

By Opinion

While British politics remains mired in continual and it seems perpetual uncertainty or lack of resolution; there still remain such absolute certainties; the British weather has kicked in, there is a new season of Strictly Come Dancing, Labour and Conservatives MP’s don’t get on, new political parties don’t seem to last very long, the tube goes wrong,  and every Monday morning in the Magnet Capital office the dynamics begins with critical analysis of whoever’s footie team is (temporarily) in the ascendancy before analysis of the new episode of Peaky Blinders and onto the day’s loans business…

Some things do change though; England finally won a Cricket World Cup this glorious Summer; opening a bank account does take just a bit longer than 5 years ago,  and the government might be looking at reforming the stamp duty system that from 2015 that along with other issues brought to an end the UK’s 20 year property boom

For all the political unknowns, and threats of tax changes and economic slowdown the UK economy remains the 6th biggest in the world and economic growth in Britain in the current year for all the talk, growth is the same as the average in the Euro zone (1), and we are way ahead of Germany and Italy this year, the Government is (so far) in control of the Budget deficit, and with historic low interest rates, and a lot of money waiting to be deployed (liquidity) the ability to re-bound with confidence can be quick – should certainty in the market return

Making predictions in current times on Brexit, the property market, Manchester United’s next score and what happens to Stamp Duty may appear a mugs game at the moment, is an election coming? We seem in a waiting period.

Stamp duty changes proposed have included the seller paying, instead of the buyer, which we think is impractical, sharing the payment (also difficult), raising the minimum charge, cutting the rates at the top (obvious, but looks like it is helping rich people), but something will have to move eventually, as like in all taxes if the take drops then a rethink is needed.

Property business issues may be the same, interest rates, stamp duty, the costs of build changing, but the fundamentals of build haven’t – Most developers just want to get on and build, find the next project and move on…

However, here at Magnet Capital we operate in the engine room of the property world, deals still happen, so we don’t feel the slowdown as some have on higher unit prices, particularly in parts of the South East – and a year in since we started we are very proud the map of England and Wales in our office, is now ablaze with green dots of ongoing projects we have signed up and after 12 months showing our first 6 yellow redemptions where we have lent which have successfully completed.

The team has grown with two new starters this month and a bigger office, roll on Year 2….

getting-most-out-of-land-sale

How To Get The Most Out of a Land Sale

By Blog, Development Finance

Getting the most out of a land sale

With the housing crisis affecting people nationwide, it has had a knock-on effect on agricultural land by inflating its value, and it is thought that it will continue to increase further if the government follows through with its promise to build and provide over 300,000 new properties each year.

When it comes to privately owned agricultural land is estimated to be worth approximately £20,000 per hectare on average in the UK. However, this could rise to as much as £2 million per net developable hectare if planning permission has been gained for housebuilding in certain areas across the country.

Consequently, the potential to capitalise on land profit is encouraging many individuals to look at getting planning permission for land assets to then sell on to house builders. However, there are some important aspects to take into account that can affect a land sale, as well as the process of selling and tax implications too.

Things to consider when selling land

  • Land assemblies: most landowners often pool their assets into what is otherwise known as a ‘land assembly’ to make it more profitable to sell land. This is because individually, small amounts of land will not be as lucrative for property developers, who are generally less interested in small sections of land.
  • The time and cost involved: it is worth remembering that it can take some time to get planning permission alongside selling land as there are many different stages that can be involved. On average, this could take 18 months but can take years: the larger the site, the longer it will take.

The process of selling land

It is typically a three-step process when it comes to getting planning permission and selling land to a property developer. This works as follows in most cases:

  • The Local Plan: prior to getting planning permission, you will need to make sure that your land has formed part of the council in your area’s Local Plan: which means the document that refers to your local area’s housing strategy. It may take some time before this is achieved.
  • The application: as soon as you’ve managed to get the land included in the Local Planning you can get planning permission.  To apply, you will need to draw up a housing development scheme, which the land promoter can do on your behalf. This scheme is then put to public consultation.
  • Sale: if the public consultation goes well land your planning permission has been granted the land agent and land promoter can broker the sale of your land.

Tax implications of a land sale

There will be implications with regard to liability on your sale proceeds as well as inheritance tax applications. The exact tax implications will be depending on the type of land being as well as how you intend to sell it.

Main residence land sale: if it part of your main, long-term residence it can qualify for Principal Private Residence Relief (PPR) this will exempt you from paying capital gains tax (CGT) at 28%.

Land assemblies land sale: the tax implications if selling as part of a land assembly can vary, therefore always seek specialist advice for further details.

Separate land from main residence: this will incur income tax up to 45% in total, or capital gains tax at 20%. The tax you will need to pay will depend on the intention when acquiring the land – for example, whether it was a family asset or a long-term investment.

ground-rent

What is Ground Rent?

By Blog, Development Finance

Ground rent explained

The ground rent is the monthly fee that a homeowner pays to the holder of the leasehold property. So if the property you are living in has a leasehold, you can expect to pay a ground rent every month for essentially living on that land.

This is different to if you are freehold, because them you essentially own the land. But you are required to pay ground rent even if you have a mortgage and own the property.

How much ground rent will I need to pay?

The exact amount you need to pay will be specified in your lease, but you can expect this to be around £370 per year. In the majority of cases, ground rent is an amount of money paid either in one instalment or can be asked for on a quarterly or half-yearly basis.

If there is more than one leaseholder, then regardless of whether or not they own the property as tenants in common or joint tenants, every leaseholder has the responsibility to pay the ground rent.

Any details regarding your responsibilities to your freeholders, such as ground rent or other potential liabilities are detailed in the lease. To make sure you are fully aware of the responsibilities you have and to avoid problems at a later date, it is important that you make sure you have the asked a leasehold qualified solicitor to look over the lease before moving in.

How can I avoid ground rent increases?

Making sure you have taken on a qualified solicitor is one way to avoid the potential increase, or at least be aware of them and factor them into consideration when purchasing a house, as many buyers can get caught out, being unaware that it is possible for ground rent to potentially double every few years. This has become very hot in the media recently.

It is vitally important that you know about ground rent increases before trying to purchase a property or trying to gain access to development finance, as it could impact your ability to get a mortgage or other kinds of funding.

What is meant by fixed or escalating ground rent?

There are two different types of ground rent, and these are known as fixed and escalating.

Fixed means that the amount you will be required to pay will not change for the duration of the lease, whilst escalating ground rents mean it will increase over the course of the lease. Whether the ground rent is fixed or escalating will be confirmed in the lease.

What is a ground rent review?

A ground rent review is when the freeholder is looking to increase the ground rent. If a ground rent review is requested, then it mostly works in the way mentioned below:

  • The freeholder informs the tenant that they would like to increase the ground rent, whilst stating what they want this rent to be. It is necessary for the lease to designate how long before the new rent will then become payable if the notice is served (for example 6 months or 12 months).
  • The leaseholder can either agree to new rent or suggest a different offer.
  • If the leaseholder and freeholder fail to make an agreement it will usually be passed onto an arbitrator that has been appointed by the Royal Institution of Chartered Surveyors (RICS).

When is the ground rent paid?

Unless it has otherwise been stated in your lease, this is usually paid at the end of the year or bi-annually.

What happens if you do not pay the ground rent?

There are two scenarios that may result in you not paying the ground rent. This is either because you cannot afford to pay the rent, or you have not been asked by the freeholder of the property to pay the ground rent.

lease-ground-rent

If you cannot afford to pay ground rent and the freeholder demands it, it is possible for them to take legal action to settle the cost.

What do I do if the freeholder has not asked for the ground rent?

Unless your freeholder asks for the ground rent, it is not required for you to reach out and pay. This is because any demand for ground rent by the managing agent or freeholder needs to provide notice. This will need to include:

  • The duration that the ground rent demand covers
  • The name of leaseholder
  • The name of freeholder and address
  • Amount of ground rent required for a period
  • Name of the managing agent if applicable
  • When payment is required

Is it possible to reduce your ground rent?

Yes, there are two ways to decrease the amount of ground rent you pay. You can either extend the lease under the formal process or by collective enfranchisement.