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INNOVATIVE FUNDING SOLUTIONS

Consider the acquisition and development of a brown field site with existing planning permission for sixteen 3 storey detached houses of size approximately 1, 500 sq  feet and "end value" say £360, 000

Suppose the costs of acquisition are:-

£

£

Land Cost

Stamp Duty Land Tax (4%)

Legal Costs

Section 106 Agreement

1, 600,000

      64,000

      10,000

      85,000

1,759,000

In addition there will be the further acquisition costs:

£

Valuation

QS Report

General Disbursements

        3,000

        3,000

        2,000

       8,000

1,767,000

What will be the likely construction costs?
Assume a 16 month build period, and a construction cost of £95/sq. foot, then,

ft2       Rate ft 2

24,000

x         £95

£2,280,000

Say contingency is 10%

   £228,000

+

Assume site manager costs of

     £75,000

+

Demolition costs of

     £50,000

+

Management & Professional fees/costs

     £70,000

£2,703,000

£4,470,000

There is hence a total cost of £4,470,000 before loan interest is payable

Assume the sales value of the site is as follows:-

ft2        Rate ft2

Gross sales

24,000

               £240

£5,760,000

(G.D.V)

Less

Marketing agency & legal costs of sale

   £110,000

£5,650,000

There is clearly a healthy profit but how do you fund the acquisition and construction costs?

Banks generally will lend something of the order of70 -75% of the acquisition and construction costs.  Applying this to our case study - will mean that:

Acquisition Costs

£

Acquisition costs in the example

Say the Bank funds 75%, this equates to,
(1,767,000 x 75%)

Shortfall

1,767,000

1,325,250

441,750

Construction Costs
Construction cost in this example

Say the Bank does fund 75%, this equates to,
(£2,703,000 x 75%)

Shortfall (25%)

£
2,703,000

2,027,250

£675, 750

Total shortfall

How do you make up this shortfall?

£1,117,500

ROS JAMES INNOVATIVE SOLUTIONS may be able to help you to:

• "Top up" your funds to acquire (and develop) the site
   

• If you have already paid your legal fees, Stamp Duty Land Tax, Quantity Surveyor and Planning Costs then RELEASE back to you some or all of these monies

WE CAN RECOMMEND THE MOST SUITABLE PRIME LENDER TO PROVIDE THE "SENIOR DEBT" AND BLEND THIS WITH A "TOP UP" SOURCE.  THIS GIVES AN IMMEDIATE BENEFIT:-

The "top up" source may be able to reimburse your :-

• Stamp Duty Land Tax
   

• Legal Fees
   

• Quantity Surveyor Costs
   

• Planning Costs

Giving an immediate cash injection TO YOU

How does it work?

• You and the "top up" source become jooint venture partners
   

• The project remains YOUR project and the "top up" will have a monitoring role
   

• Rather than being repaid interest on its "top up" loan the source lender will receive a negotiated percentage of the anticipated profit

SO WE MAY BE ABLE TO ARRANGE 100% FUNDING OF YOUR DEVELOPMENT PROJECT AND AT AN EARLY STAGE REINBURSE YOU YOUR LEGAL COSTS, STAMP DUTY LAND TAX,PLANNING AND QUANTITY SURVEYOR COSTS!

In our example the sale revenue (GDV) is:

The cost of acquisition and construction is:

Assume the total Bank funding costs are (to include arrangement fees and costs)

Profit

Typically your net profit might be 60%

The "Top up" funder's profit
(after the reimbursements of their Capital Costs)
might be 40%

 £5, 650, 000

(£4, 470, 000)

 £1,180, 000

   (£250, 000)

    £930, 000

  £558, 000

  £372, 000

   £930, 000

  £930, 000

So you have borrowed all the costs of construction and acquisition your profit is

£558, 000!

Performance Measures

Profit on cost

Profit on GDV

20.80%

16.46%

Note:

You may have heard of lenders who will lend a higher percentage of the cost of acquisition and construction than say high street banks.  The problem here however is that such organisations will generally only lend up 65% of GDV.  In our case study this would be £3, 672, 500 - this is hence considerably less than could be borrowed under the "top up" scheme, in fact a shortfall of £797, 500!

Ros James is a founder member of the National Association of Commercial Finance Brokers

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©Ros James 2007